2. contents
the limited inc 1996 annual report
2 chairman’s letter
8 introduction to brands
22 victoria’s secret catalogue
22 abercrombie & fitch
22 express
22 galyan’s trading company
23 limited too
23 victoria’s secret stores
23 limited stores
24 henri bendel
24 structure
24 lane bryant
24 lerner new york
25 cacique
25 bath & body works
25 support businesses
26 introduction to financials
27 financial summary
28 management’s discussion and analysis
34 consolidated financial statements
37 notes to consolidated financial statements
43 company information
3. chairman’s letter
“the strategic plan
set in motion
in ’95...is having
an impact
at every level”
DEAR PARTNER
efore I sat down to write this letter, I solid sales and earnings growth. Abercrombie That’s my model. And my acid test for all our
B
re-read my copy of last year’s report. & Fitch had an outstanding year. Lerner New operating businesses.
I wanted to check something: Did I say York, Structure and Limited Too also made I told you last year we would continue to
what I meant? Did we do what I said? significant progress. close underperforming stores, and we have.
How does it all look, twelve months Unfortunately, a few businesses did not We closed 135 in ’96, and we expect to match
down the road? fare as well. Express, in particular, had a very or exceed that number this year. In fact, since
In 1995, I talked about the ways in which poor year. So poor, in fact, that its perfor- 1995 we have closed 213 stores.
we were fundamentally reinventing the bus- mance impacted the total progress made in Years ago, in our annual reports, I used to
iness: sweeping change, greater discipline, other divisions. comment about never having closed a store. I’m
more centralization and a plan to build Express’ problems are fixable. And, later in over it. The world changes. No more so than
brands, not just businesses. this letter, I’ll address the initiatives already in fashion. And we have to recognize what
Looking back now, nearly a year later, I’d underway to get Express back on track. works, including real estate, and get on with it.
say that, to a large degree, we did exactly what By now it’s been reported that The Limited, building brands
I was very clear with the operating busi-
we set out to do in 1996. The strategic business Inc.’s 1996 sales totaled $8.6 billion, with
nesses this year: the number and duration of
plan that we set in motion in ’95, a plan that operating income of $636 million. In March,
our price promotions were damaging the
essentially reinvented our core businesses and the Company repurchased 85 million shares
brands. It had to stop. Brands are not built
operations, is working. It’s having an impact through self-tender. Additionally, our Board
through price promotions. Brands are built,
at virtually every level, within the operating voted to increase the Company’s annual div-
money is made, wealth is created, on the sell
businesses, and in the support group. idend by 20% to $.48 per share.
side, not the buy side. This is never more true
We’ve rethought production, quality, pric- In 1996, we also completed another suc-
than in fashion brands.
ing, marketing, recruiting and brand build- cessful initial public offering, Abercrombie
Throughout the year, as competitors
ing. I’ve rethought my own role, the skills I & Fitch. The net proceeds from the 16% sale
bounced from one special offer to the next,
need from myself and those who support me. of Abercrombie & Fitch yielded $118 million.
my direction to operating presidents stayed
I’ve asked every member of my support group Most important, the business achieved a 62%
consistent: Keep your powder dry. Preserve
to look hard at their own efforts. What’s work- increase in net income in the fourth quarter,
your brand equity. Don’t overreact.
ing. What isn’t. And what they have to do to its first as a public company. Abercrombie is
The strategy worked. And, it’s still work-
get us to next. clearly a very profitable business. It is also an
ing. As a direct result, many of our businesses
Nearly all of our businesses made signifi- exceedingly powerful lifestyle brand that res-
have shown healthy margin and profit gains.
cant progress. The Intimate Brands group, in onates to an entire generation of young people.
Victoria’s Secret Stores may be the best
particular Victoria’s Secret Stores and Bath When I refer to apparel brands with a clear
example. In the past, there might have been
& Body Works, had an excellent year, with and vivid personality, think Abercrombie.
2 the limited inc 1996 annual report
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($ in millions) (in thousands)
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1995 1994 1995 1994
1996 1996
4,282
18,780
4,294 19,235
4,318 19,247
1,031
835
3,572
729
3,146
2,997 2,420
2,517 2,108 5,047 4,230 3,419
335 1,006
235 166 541
792
Total $7,321
Total $7,881 Total 27,403 Total 25,627
Total $8,645 Total 28,405
number of stores
operating income
($ in millions)
1995 1994 1995 1994
1996 1996
244
64
54
3,038
68
3,093
149 203 3,087
859
458
812
386
676
338
1,609 1,293 1,037
46 24 127
14 100 67
Total $613 Total $799 Total 5,298 Total 4,867
Total $636 Total 5,633
OPERATING RESULTS
as many as a dozen price promotions in a Vic-
(Thousands except per share amounts) 1996 1995 1994
toria’s Secret store on any given day. No more.
$8,644,791 $7,881,437 $7,320,792
net sales Now, Victoria’s Secret is known for fashion,
$636,067 $613,349 $798,989
operating income
innovation and image. It has become the dom-
$118,178 $649,467 —
gain on sale of subsidiary stock
inant lingerie brand in the world. It is a brand
$434,208 $961,511 $448,343
net income
that sells for what it is, not where it’s priced.
net income as a percentage
Still, we must recognize that great fashion
q 3.7% q 4.0% 6.1%
of sales
$1.54 $2.68 $1.25 brands are more than a steady stream of new
net income per share
net income per share products or lack of promotional sale signage.
(excluding gain on
Great brands elicit an emotionally powerful
$1.12 $.87 $1.25
sale of subsidiary stock)
response from the consumer. They are sustain-
$.40 $.40 $.36
dividends per share
able. And customers remain loyal to them.
YEAR-END POSITION Clearly we’ve demonstrated in the past that
we know how to strike that chord: seeing mar-
(Thousands except financial ratios) 1996 1995 1994
ket niches that hadn’t existed before, as in the
$4,120,002 $5,266,563 $4,570,077
total assets
case of Victoria’s Secret; or finding a new rea-
$638,204 $2,018,960 $1,750,111
working capital
son to shop in a market where others couldn’t
1.7 3.5 3.2
current ratio
$650,000 $650,000 $650,000 see, or seize the opportunity, as with Bath &
long-term debt
34% 20% 24%
debt-to-equity ratio Body Works.
$1,922,582 $3,201,041 $2,760,956
shareholders’ equity To a large degree, those businesses started
return on average with my intuition, my sense of a market void,
17%
shareholders’ equity q16% q10%
and how to fill it. In truth, I daydreamed
about the possibility of a Limited-type men’s
q Excludes the effect on net income of the gain on sale of subsidiary stock of $118,178 in 1996 and $649,467 in 1995.
4 the limited inc 1996 annual report
6. WOMEN’S BRANDS
business nearly ten years before the first
1996 % of total sales sales per average Structure store opened, and saw the very large
selling square foot
(in millions)
void for a younger women’s business easily
1996 1995 1994 1996 1995 1994
49% five years before we opened the first Express
$4,282 $4,294 $4,318 $298 $323 $336
Express
in Chicago’s Water Tower Place.
49% 54% 59% $169 $155 $152
Lerner New York
$228 $231 $249
Lane Bryant I believe we have demonstrated that we can
1996 $209 $198 $197
% of total operating Limited Stores
invent businesses that are not only powerful
income (in millions) $904 $1,002 $904
Henri Bendel
brands, but ones that have great commercial
$225 $223 $224
10% Total
1996 1995 1994
potential. My criterion is simple: if it can’t be
$64 q $54 $244
10% 9% 31% at least a $1 billion stand-alone business in the
U.S. market, we shouldn’t be in it. Which is,
q 1995 includes a special and nonrecurring charge of $48 million, primarily for store closings and downsizings.
by the way, the reason we recently made the
EMERGING BRANDS decision to sell Penhaligon’s, a quality business
that, I believed, did not match this criterion.
1996 % of total sales sales per average
selling square foot
(in millions) nce we recognize a market opportunity,
O
and develop a brand to fill it, we put
1996 1995 1994 1996 1995 1994
12%
$1,031 $835 $729 $321 $308 $351 the full force of the businesses’ market-
Structure
12% 11% 10% $277 $273 $282
Limited Too
ing, merchandising, sourcing, store
$293 $184 N/A
Galyan’s Trading
1996 design, finance and distribution skills
(since 7/2/95)
% of total operating
income (in millions) $306 $288 $332
Total
behind it. And, once the concept has been test-
1996 1995 1994
11%
ed, refined, and its potential proven, we move.
$68 q $149 q $203
In fact, no one moves faster. Example? We took
11% 24% 25%
nearly two years to open our first hundred
q 1995and 1994 include 100% of WFNNB’s operating income before interest expense and 1995 includes the gain from Bath & Body Works stores. The last hundred
the sale of a 60% interest in WFNNB, partially offset by special and nonrecurring charges.
opened in just forty-five days. Invent the con-
cept. Prove its worth. Move forward fast.
INTIMATE BRANDS
Clearly, this ability to spot holes in the
1996 % of total sales sales per average
market, and develop concepts to fill them, is
selling square foot
(in millions)
one of our primary skills. Still, it became clear
1996 1995 1994 1996 1995 1994
35%
$2,997 $2,517 $2,108 to me that, if we were to reach our true growth
Victoria’s Secret
$458 $459 $479
35% 32% 29% Stores
potential, these branding skills had to be
Bath & Body
$684 $710 $705 rationalized and documented. An articulated
Works
1996 % of total operating
$240 $225 $278
income (in millions) Cacique
core process, a way to build vivid brands,
$494 $482 $486
Total
1996 1995 1994
with every detail spelled out. It’s not as sim-
72%
q $458 $386 $338
ple as it might appear. I don’t believe that
72% 63% 42%
any multibranded apparel company, certainly
q 1996 includes a $12 million special and nonrecurring charge in connection with the sale of Penhaligon’s in early 1997. not one of our size, had ever done it before.
The skills required to build powerful retail
&
ABERCROMBIE FITCH
brands have, I believe, unique aspects that
1996 % of total sales sales per average can’t be generalized. So we’ve begun docu-
selling square foot
(in millions)
menting the process over the past several
1996 1995 1994 1996 1995 1994
4% months, and we are using it rigidly to improve
$335 $235 $166 Abercrombie
and ensure brand execution.
$373 $354 $350
4% 3% 2% & Fitch
This is a major effort, and a fundamen-
1996 % of total operating
tal change in the way we do business. It rec-
income (in millions)
ognizes that brand management is a core
1996 1995 1994
7%
competency and a standardized, centralized
$46 $24 $14
7% 4% 2% process. One that takes constant vigilance.
One that is executed at the highest level.
the limited inc 1996 annual report 5
7. chairman’s letter
Now, along with the Support Marketing quality through lost sales. Part of that, cer-
In order to ensure Express’ rapid reemer-
Group, typically, I have monthly brand meet- tainly, could be attributed to rapid growth,
gence as a powerfully competitive young
ings with the individual operating businesses. but it’s no excuse.
brand, Michael Weiss left his position, as Vice
The President, the Marketing Director, the This is a large business with an enormous
Chairman and leader of the women’s busi-
CFO, the Head Merchant and Designer all base of supply. By 1995, our businesses in
nesses, to return to Express as its President.
attend. There’s agreement, and alignment, total were using more than 1,600 factories
ichael is a superb merchant, with a
M
around the core elements of the brand; ele- to manufacture the clothes that went into
great eye, and a passionate leader who
ments that are, basically, written in stone. our stores and catalogues. The sheer numbers
has demonstrated his ability to achieve
It’s a powerful tool. A terrific way to edit out alone worked against any possibility of con-
consistently strong sales and profits.
inconsistencies in the brand. A method of sistent quality.
He took Express from virtually zero
separation, and definition. That had to change. Now, the Presidents of
in 1982 to sales of $1.4 billion in 1993, mak-
The system shows every sign of working, each business are directly responsible, and
ing it our largest, most profitable business.
and working well. There’s much less possibil- accountable, for the quality of their gar-
So, when Express lost its way, Michael and
ity for one or two people to interpret or mis- ments. Vendor and factory lists are being
I talked about what to do, and mutually
interpret direction. No one goes off on their drastically reduced, and individual merchants
agreed he should go back to his home and
own flight of fancy. The core of the brand is no longer have the power to make signifi-
first love, Express.
rigidly defined. And it’s up to the operating cant sourcing decisions. Quality is a brand
Frankly, I don’t think I’ve seen him happi-
president to execute the direction. Flawlessly. issue. One the Presidents must take personal
er in years. And, I believe, Express associates
responsibility for.
and customers are already responding to his
fixing express
After years of consistent growth and solid In the past year, Limited Stores served as
clear and steady direction to recapture this
profits, 1996 was, by any standard, a very poor the pilot for a detailed new sourcing strategy.
brand’s market segment.
year at Express, with a particularly disappoint- Their major manufacturers went from sixty
The lessons learned at Express were, and
ing fourth quarter. to twenty; fit and quality control were tightly
are, painful. Much of it could have been
In hindsight, the problems seem obvious. regulated; and it’s begun to make an impact.
avoided had we kept them “on brand.” Had
The brand had abandoned its core customer, Customers don’t notice these changes over-
we taken action sooner.
central position and brand disciplines. night. But they do notice. I’m confident that
The centralized brand management pro-
Instead of being a current, young, inter- Limited Stores’ quality disciplines, married to
cess described earlier could, I believe, have
national fashion brand, Express lost their a well-articulated brand strategy, are already
prevented many of Express’ recent perfor-
“fixing express…
is our top
short-term priority”
focus and began to think of their customer helping them regain their position as a signifi-
mance issues. It is now in use. I have no in-
in generalized terms—somewhere between cant brand in the women’s sportswear category.
tention of repeating Express ’96.
eighteen and forty years of age. Without rig- consistent quality is a must importance of design
What do you call fashion that doesn’t fit? The businesses have gotten too big, and the
id disciplines, and edit points, in place, the
A markdown. world has gotten too small, for us to be suc-
fashion floundered, the clothes got boring,
Yes, we are in the fashion business, but cessful by merely imitating the best of what’s
the customer said “no.”
implicit in that is a consistent level of quality happening in the fashion world at large.
Let me make this plain: fixing Express, and
and fit. In the past, as you may know, that Great brands have a powerfully consistent
fixing it quickly, is our top short-term prior-
wasn’t always true. And clearly, in some in- view, an edit point, that makes them not only
ity. I am determined that it again become the
stances, we paid the price for inconsistent recognizable, but desirable, to customers.
significant contributor it must be.
6 the limited inc 1996 annual report
8. and his team clearly understand their brand,
and, more important, their customer. Aber-
crombie & Fitch’s fashion sensibility, coupled
with an intense customer intimacy and near-
flawless execution of everything from outside
graphics to garment labels, hang tags and
photography, makes it one of the great emerg-
ing retail brands.
There is so much potential in our business-
es. So much opportunity for growth and in-
creased profitability.
Lane Bryant is another good example.
Uniquely suited to serve the 40% of American
women who are size 14 or above, I believe Lane
Bryant has the potential to double in size.
I also see great potential at Limited Too,
where Mike Rayden became President less
than a year ago, and immediately began to de-
liver consistent, double-digit increases in com-
parable store sales. Going into ’97, Limited
Too is on a roll. And a big part of their success
Too often, our businesses have copied each They then reinforce that position through the is sound, fundamental business leadership.
other, with the only distinguishing feature Annual Victoria’s Secret Spring Fashion Show, That, too, is the case at Structure, where
being price point. which has become major news international- a dramatic brand redefinition over the past
No more. ly. And, as their product introductions have twelve months has brought significant pay-
Designers, and full-blown design teams, are become more sophisticated, their margins have back. Structure is realizing their market
now at work in nearly all of our businesses, increased. Clearly a brand-driven strategy. potential in the success of a number of core
helping to differentiate by designing fashion ictoria’s Secret Catalogue also intro- businesses. I believe that these successes will
V
around tightly defined brand positions. Good duced profitable, brand-enhancing new certainly lead to powerful brand wins across
for now. Even better for the long run. books this year. The oversized, special multiple categories.
Take Lerner New York. When Richard edition Christmas Dreams and Fan- When I reflect on the businesses today,
Crystal became President, he hired one of the tasies catalogue was a significant profit I can honestly say I don’t believe we’ve ever
fashion industry’s best designers, Charlotte producer, and hopefully a model for the fu- had a stronger group of leaders. They are
Neuville, to lead his design team. Together ture that reinforces the aspiration of the good business executives and passionate re-
they are delivering exciting, budget-conscious brand. Victoria’s Secret has great momentum, tailers who complement their businesses and
fashion to a very wide audience. And they’re in both Stores and Catalogue, with substan- their organizations. They are energized,
getting results. tial room for growth. and badly want to win, as do I. With every
I’ve often thought that if soaps were super- passing day, I am more confident that the
recognizing the winners
I said earlier that several of our businesses models, Bath & Body Works might be the direction we’ve taken over the past two years,
had excellent years, and they should be re- most famous brand in the world. BBW is sol- and the disciplines and structures we’ve put
cognized for their efforts. idly managed, and went through another year into place, are exactly what our Presidents and
Victoria’s Secret dominates the lingerie cat- of extraordinary growth. Their position, sim- this business need to succeed.
egory with powerful new product introduc- ple Midwestern values, strikes a powerful chord We are determined to build a Company
tions like the Miracle Bra, Second Skin Satin, with a large number of people domestically of powerful, differentiated retail brands that
Perfect Silhouette and, most recently, Angels. and will, we believe, worldwide. A precise maintain and strengthen our position as the
They support these launches with dynamic, position, consistently executed. And, again, a world’s dominant specialty retailer.
brand-consistent television advertising, which brand with much potential in front of them.
LESLIE H. WEXNER
extends their reach and cements their position I’ve already talked about Abercrombie &
chairman
as the world’s most glamorous lingerie brand. Fitch, but I do want to say that Mike Jeffries
the limited inc 1996 annual report 7
9. brands
brands
are built,
money is
made, wealth
is created,
sell
on the
side, not the
buyside
23. brands
with Abercrombie & Fitch becoming a pub-
INTIMATE BRANDS
victoria’s secret licly traded New York Stock Exchange com-
catalogue pany on September 26, 1996.
The industry-leading catalogue of women’s We are carrying our strong momentum
intimate and fashion apparel. into 1997. We will continue to gain share of
Sales in 1996 were below our expecta- the huge women’s apparel market by broad-
tions—up just 3%. However, we concentrated ening existing merchandise categories and
upon two important indicators of growth. enriching the brand with newness, excite-
First, we focused on sales-per-page produc- ment and therefore increasing productivity.
tivity, the catalogue equivalent of same-store We will open twenty-eight new stores in 1997,
sales; and we strove to improve the response consistent with our disciplined growth rate.
rate to our offering. Sales generated by our
specialty books, “Swim,” “Country” and “City,” WOMEN’S BRANDS
express
increased significantly and now account for
A lifestyle brand offering hot new interna-
just under 20% of our total. In particular, our
tional fashion to young women.
“Swim” specialty books have one of the high-
1996 was very disappointing for Express,
est profit contribution margins.
with a significant earnings decline. The all-
Sales-per-page productivity will be an
important fourth quarter was particularly
important focus as we continue to dev-
lackluster. We are now aggressively returning
elop and refine our circulation mod-
Express to its youthful roots. The ones that
els. We will further develop the
made it the hottest fashion growth business
shoes, personal care and accessories
of the past ten years.
categories, which increased in the
Express is targeted to young women in
previous year, as well as our cloth-
their early twenties. It is young and spirited,
ing sales, specifically sportswear,
fashions of good taste and quality, with a
in part through the hiring and
large potential customer base. We expect the
assimilation of in-house de-
Fall ’97 assortment to reflect the reposition-
sign and production teams.
ing of the Express brand.
The establishment of a
Japanese phone center will
help develop that market, EMERGING BRANDS
galyan’s
as we also plan entry into other
trading company
international markets.
The “coolest” destination in retailing for sports
abercrombie enthusiasts and “wannabes” of all ages.
& fitch In our first full year within The Limited,
Quality, casual, classic American sports- Inc., we exceeded our financial goals and sales
wear brand, targeted to the young, hip expectations while adding three new stores,
customer. averaging nearly 100,000 square feet each—
We met our 1996 financial goals by achiev- two in the Minneapolis/St. Paul area, and
ing a higher operating income rate through the third in Kansas City.
volume growth and merchandise margin. We expect the momentum to continue in
With our eighteenth consecutive quarter of 1997, as we plan to open two to three new
bottom-line profit improvement, we suc- stores, including our third in the Minneapo-
cessfully rolled out new merchandise and lis area and our second in Columbus. The
categories consistent with our powerful life- prototype Columbus store will introduce an
style brand. Additionally in 1996, we met exciting interactive concept. In addition,
our goal of opening twenty-nine stores. Our we will open a new, state-of-the-art Distri-
successes led to an Initial Public Offering, bution Center in Indianapolis this Spring.
22 the limited inc 1996 annual report
24. of distinctive heart logo items such as lingerie,
EMERGING BRANDS
limited too home accessories and gifts, and a rollout of
The complete American casual lifestyle store the Special Occasion line of luxurious, gift-
for girls to age fourteen. able items. We expect to continue the rapid
In 1996, we began to develop branded growth of Victoria’s Secret Bath & Fragrance
apparel using an in-house design team; nar- by improving sales force productivity and
rowed our base of suppliers and vendors to broadening assortment and presentation. We
ensure high quality standards; and focused on plan to open sixty-five new stores, and re-
fashion basics. By delivering positive compa- model another twenty-five, in 1997.
rable store sales and increasing merchandising
margin, we returned to profitability in the WOMEN’S BRANDS
limited stores
Fall season.
Casual American lifestyle fash-
We expect to continue the profitability mo-
ion for women in their twenties
mentum in 1997 by improving sales produc-
and thirties who desire great fash-
tivity through an expanded assortment of
ion and comfort.
products for girls only, by developing a com-
The year 1996 was marked by
prehensive, proprietary assortment of Amer-
comparable store increases of 3%, sig-
ican casual apparel, lifestyle, loungewear, and
nificant profit improvement and sub-
Girl Care products—thus becoming the
stantial merchandise margin pro-
leading destination for fashion-aware girls.
gress. We did this by continuing to
build on our strength in sports-
INTIMATE BRANDS
victoria’s wear tops; and by beginning to
secret stores develop a consistency in “look”
The most successful brand of elegant inti- and quality as Limited Stores re-
mate apparel, foundations and related prod- vamped its entire product dev-
ucts for women. elopment process to include
Victoria’s Secret Stores achieved a 13% complete in-house design and
growth in sales in 1996 and increased oper- production teams.
ating profit by over 14%. Core product cate- We believe comparable store
gory efforts included the continued success sales gains and improved mer-
of the “underware” line of basic cotton sepa- chandise margin will result
rates. Perfect Silhouette, a unique seamless from the efforts of our in-
bra, was launched during the year, and quick- house design, production
ly became one of the fastest-selling bras in and merchandising teams
Victoria’s Secret history. Victoria’s Secret Bath in 1997. These teams will
& Fragrance is becoming an increasingly sig- also build a substantial
nificant part of the business, as sales and prof- active business that en-
its accelerated in 1996. Solid progress was also compasses all aspects of
made in developing the VS hosiery business. sportswear and outerwear,
We believe 1997 offers significant oppor- and we will continue to
tunities to build brand equity and increase source through focused,
gross margins by delivering fashion right strategic vendor alli-
merchandise and integrating design and ances. Increasing our
production capabilities. Reflective of our goal bench strength in key
to dominate the bra business, one new bra positions throughout the
launch is planned for 1997. Other brand Company—both in the home office and
extensions include a further expansion of in the field—is another important objective
the “underware” assortment, a Signature line for the year.
