<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 1998
----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-13814
-------
INTIMATE BRANDS, INC.
--------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1436998
- --------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Three Limited Parkway, P.O. Box 16000, Columbus, OH 43216
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 415-6900
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock Outstanding at November 27, 1998
-------------------- --------------------------------
$.01 Par Value 38,433,872 Shares
Class B Common Stock Outstanding at November 27, 1998
-------------------- --------------------------------
$.01 Par Value 210,000,000 Shares
<PAGE> 2
INTIMATE BRANDS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income
Thirteen and Thirty-nine Weeks Ended
October 31, 1998 and November 1, 1997.................................. 3
Consolidated Balance Sheets
October 31, 1998 and January 31, 1998................................... 4
Consolidated Statements of Cash Flows
Thirty-nine Weeks Ended
October 31, 1998 and November 1, 1997.................................. 5
Notes to Consolidated Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition........................... 11
Part II. Other Information
Item 1. Legal Proceedings............................................................. 19
Item 5. Other Information............................................................. 19
Item 6. Exhibits and Reports on Form 8-K.............................................. 20
</TABLE>
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTIMATE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
---------------------------------- ---------------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
-------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES $ 708,985 $ 689,978 $ 2,354,561 $ 2,220,593
Cost of Goods Sold, Occupancy and
Buying Costs 434,042 440,751 1,471,602 1,460,713
--------- --------- ----------- -----------
GROSS INCOME 274,943 249,227 882,959 759,880
General, Administrative and Store
Operating Expenses 204,325 183,566 616,006 526,452
--------- --------- ----------- -----------
OPERATING INCOME 70,618 65,661 266,953 233,428
Interest Expense (7,361) (7,564) (22,487) (22,690)
Other Income 2,870 1,037 12,650 4,892
--------- --------- ----------- -----------
INCOME BEFORE INCOME TAXES 66,127 59,134 257,116 215,630
Provision for Income Taxes 26,400 23,700 102,800 86,300
--------- --------- ----------- -----------
NET INCOME $ 39,727 $ 35,434 $ 154,316 $ 129,330
========= ========= =========== ===========
NET INCOME PER BASIC AND
DILUTED SHARE $ .16 $ .14 $ .61 $ .51
========= ========= =========== ===========
DIVIDENDS PER SHARE $ .14 $ .13 $ .42 $ .39
========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
INTIMATE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands)
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
-------------- --------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and Equivalents $ 25,587 $ 308,720
Accounts Receivable 13,873 34,639
Inventories 625,804 417,703
Intercompany Receivables - 12,457
Other 93,105 102,540
----------- -----------
TOTAL CURRENT ASSETS 758,369 876,059
PROPERTY AND EQUIPMENT, NET 403,331 392,504
OTHER ASSETS 73,214 79,137
----------- -----------
TOTAL ASSETS $ 1,234,914 $ 1,347,700
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 119,462 $ 94,498
Current Portion of Long-Term Debt 100,000 -
Accrued Expenses 160,606 224,380
Intercompany Payable 27,431 -
Income Taxes Payable 37,748 94,058
----------- -----------
TOTAL CURRENT LIABILITIES 445,247 412,936
LONG-TERM DEBT 250,000 350,000
DEFERRED INCOME TAXES 10,165 13,068
OTHER LONG-TERM LIABILITIES 13,581 10,901
SHAREHOLDERS' EQUITY:
Common Stock 2,527 2,527
Paid-in Capital 673,886 674,620
Retained Deficit (65,869) (114,465)
----------- -----------
610,544 562,682
Less: Treasury Stock, at Average Cost (94,623) (1,887)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 515,921 560,795
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,234,914 $ 1,347,700
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
INTIMATE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
------------------------------------
October 31, November 1,
1998 1997
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 154,316 $ 129,330
Impact of Other Operating Activities on Cash Flows:
Depreciation and Amortization 74,475 70,188
Changes in Assets and Liabilities:
Accounts Receivable 20,766 (1,324)
Inventories (208,101) (143,606)
Accounts Payable and Accrued Expenses (38,810) 18,480
Income Taxes (59,213) (41,014)
Other Assets and Liabilities 31,084 (37,096)
--------- ---------
NET CASH USED FOR OPERATING ACTIVITIES (25,483) (5,042)
--------- ---------
CASH USED FOR INVESTING ACTIVITIES:
Capital Expenditures (87,308) (93,967)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends Paid (105,557) (98,494)
Change in Intercompany Balance 39,888 78,785
Repurchase of Common Stock (106,046) -
Stock Options and Other 1,373 576
--------- ---------
NET CASH USED FOR FINANCING ACTIVITIES (170,342) (19,133)
--------- ---------
NET DECREASE IN CASH AND EQUIVALENTS (283,133) (118,142)
Cash and Equivalents, Beginning of Year 308,720 135,111
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 25,587 $ 16,969
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
INTIMATE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Intimate Brands, Inc. (The "Company") includes specialty retail and
catalogue operations which offer women's intimate and other apparel,
personal care products and accessories. They consist of Victoria's
Secret Stores, Victoria's Secret Catalogue, Bath & Body Works, and
Gryphon Development. The Limited, Inc. ("The Limited") owns
approximately 84% of the outstanding common stock of the Company.
The consolidated financial statements include the accounts of the
Company and all significant subsidiaries which are more than 50 percent
owned and controlled. All significant intercompany balances and
transactions have been eliminated in consolidation.
The consolidated financial statements as of October 31, 1998 and for
the thirteen and thirty-nine week periods ended October 31, 1998 and
November 1, 1997 are unaudited and are presented pursuant to the rules
and regulations of the Securities and Exchange Commission. Accordingly,
these consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained
in the Company's 1997 Annual Report on Form 10-K. In the opinion of
management, the accompanying consolidated financial statements reflect
all adjustments (which are of a normal recurring nature) necessary to
present fairly the financial position and results of operations and
cash flows for the interim periods, but are not necessarily indicative
of the results of operations for a full fiscal year.
The consolidated financial statements as of October 31, 1998 and for
the thirteen and thirty-nine week periods ended October 31, 1998 and
November 1, 1997 included herein have been reviewed by the independent
public accounting firm of PricewaterhouseCoopers LLP and the report of
such firm follows the notes to consolidated financial statements.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The SOP requires that certain
external costs and internal payroll and payroll related costs be
capitalized during the application development and implementation
stages of a software development project and amortized over the
software's useful life. The SOP is effective in the first quarter of
1999.
Additionally, SOP 98-5, "Reporting on the Costs of Start-Up
Activities," was issued in April 1998. The SOP requires that entities
expense start-up costs and organization costs as they are incurred. The
SOP is effective in the first quarter of 1999.
6
<PAGE> 7
2. EARNINGS PER SHARE
Weighted average common shares outstanding (thousands):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
--------------------------------- ----------------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
-------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Common shares issued 252,700 252,700 252,700 252,700
Treasury shares (3,607) (127) (1,477) (150)
-------- -------- -------- --------
Basic shares 249,093 252,573 251,223 252,550
Dilutive effect of stock options
and restricted shares 1,071 1,222 1,707 836
======== ======== ======== ========
Diluted shares 250,164 253,795 252,930 253,386
======== ======== ======== ========
</TABLE>
Options to purchase 3.6 million and .1 million shares of common stock
were outstanding at October 31, 1998 and November 1, 1997, but were not
included in the computation of earnings per share because the options'
exercise price was greater than the average market price of the common
shares during the period.
3. INVENTORIES
The fiscal year of the Company and its subsidiaries is comprised of two
principal selling seasons: Spring (the first and second quarters) and
Fall (the third and fourth quarters). Valuation of finished goods
inventories is based principally upon the lower of average cost or
market determined on a first-in, first-out basis using the retail
method. Inventory valuation at the end of the first and third quarters
reflects adjustments for inventory markdowns and shrinkage estimates
for the total selling season.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of (thousands):
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
------------------ ----------------
<S> <C> <C>
Property and equipment, at cost $ 811,567 $ 743,786
Accumulated depreciation and
amortization (408,236) (351,282)
--------- ---------
Property and equipment, net $ 403,331 $ 392,504
========= =========
</TABLE>
7
<PAGE> 8
5. INCOME TAXES
The Company is included in The Limited's consolidated federal and
certain state income tax groups for income tax reporting purposes and
is responsible for its proportionate share of income taxes calculated
upon its federal taxable income at a current estimate of the Company's
annual effective tax rate. Income taxes paid to The Limited during the
thirty-nine weeks ended October 31, 1998 and November 1, 1997
approximated $162 million and $127 million.
6. LONG-TERM DEBT
Long-term debt consists of notes which represent the Company's
proportionate share of certain long-term debt of The Limited. The
interest rates and maturities of the notes parallel those of the
corresponding debt of The Limited. The 7-1/2% debentures are subject to
early redemption beginning in 2003 concurrent with any prepayment of
the corresponding debt by The Limited. Unsecured long-term debt
consisted of (thousands):
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
----------- -----------
<S> <C> <C>
7-1/2% Debentures due March 2023 $100,000 $100,000
9-1/8% Notes due February 2001 150,000 150,000
8-7/8% Notes due August 1999 100,000 100,000
-------- --------
350,000 350,000
Less current portion of long-term debt 100,000 -
-------- --------
$250,000 $350,000
======== ========
</TABLE>
Interest paid during the thirty-nine weeks ended October 31, 1998 and
November 1, 1997, including interest on the intercompany cash
management account (see Note 7), approximated $30.3 million in both
years.
7. INTERCOMPANY RELATIONSHIP WITH PARENT
The Limited provides various services to the Company including, but not
limited to, store design and construction supervision, real estate
management, travel and flight support and merchandise sourcing. To the
extent expenditures are specifically identifiable they are charged to
the Company. All other related support expenses are charged to the
Company and other divisions at The Limited based upon various
allocation methods.
The Company participates in The Limited's centralized cash management
system. Under this system cash received from the Company's operations
is transferred to The Limited's centralized cash accounts and cash
disbursements are funded from the centralized cash accounts on a daily
basis. The intercompany cash management account is an interest-earning
asset or interest-bearing liability of the Company. Interest on the
intercompany cash management account is calculated based on the Federal
Reserve AA Composite 30-day rate.
8
<PAGE> 9
The Company's proprietary credit card processing is performed by
Alliance Data Systems which is approximately 31%-owned by The Limited.
The Company and The Limited are parties to a corporate agreement under
which the Company granted to The Limited a continuing option to
purchase, under certain circumstances, additional shares of Class B
Common Stock or shares of nonvoting capital stock of the Company. The
Corporate Agreement further provides that, upon request of The Limited,
the Company will use its best efforts to effect the registration of any
of the shares of Class B Common Stock and nonvoting capital stock held
by The Limited for sale.
8. SPECIAL AND NONRECURRING CHARGES
During the fourth quarter of 1997, the Company recorded pretax special
and nonrecurring charges of $68 million related to closing the Cacique
lingerie business. Write-downs related to the $30 million noncash
component of the charge were recognized in 1997. Outlays for the cash
component of the charge are expected to approximate $34 to $36 million
during 1998. Cash outlays of $27 million during the first three
quarters of 1998 were principally related to store closings.
9
<PAGE> 10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Audit Committee of
The Board of Directors of
Intimate Brands, Inc.
We have reviewed the condensed consolidated balance sheet of Intimate Brands,
Inc. and Subsidiaries (the Company) at October 31, 1998, and the related
condensed consolidated statements of income and cash flows for the thirteen-week
and thirty-nine-week periods ended October 31, 1998 and November 1, 1997. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of January 31, 1998, and the
related consolidated statements of income, shareholders' equity, and cash flows
for the year then ended (not presented herein); and in our report dated February
20, 1998, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of January 31, 1998, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Columbus, Ohio
November 11, 1998
<PAGE> 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
During the third quarter of 1998, net sales increased 3% to $709.0 million from
$690.0 million a year ago. Third quarter operating income of $70.6 million
increased 8% from last year's $65.7 million. Net income increased 12% to $39.7
million from $35.4 million in 1997. Earnings per share increased 14% to $.16 per
share compared to $.14 per share in 1997.
Third quarter highlights include the following:
Victoria's Secret continued to strengthen its brand position through
new product introductions and national television advertising. The
stores reported a sales increase of 6%, comparable store sales increase
of 4% and a 7% improvement in operating income. As expected, Victoria's
Secret Catalogue net sales decreased 9% in connection with the
execution of its strategy of fewer, bigger catalogues (higher page
counts) and more focused mailings.
Bath & Body Works delivered a comparable store sales increase of 6% and
achieved a 17% increase in operating profits. The brand saw solid
performance across all product categories and good early customer
response to its unique product offerings for the holiday season. The
business also mailed its first test catalog featuring seasonally
inspired products.
Sales for the thirty-nine weeks ended October 31, 1998 of $2.355 billion
increased 6% from sales of $2.221 billion for the same period last year.
Operating income increased 14% to $267.0 million from $233.4 million a year ago.
Net income increased 19% to $154.3 million from $129.3 million in 1997. Earnings
per share grew 20% to $.61 per share, compared to $.51 per share in 1997.
11
<PAGE> 12
Financial Summary
The following summarized financial and statistical data compares the thirteen
week and thirty-nine week periods ended October 31, 1998 to the comparable 1997
periods:
<TABLE>
<CAPTION>
THIRD QUARTER YEAR-TO-DATE
------------------------------------ ------------------------------------
CHANGE CHANGE
FROM FROM
PRIOR PRIOR
1998 1997 YEAR 1998 1997 YEAR
--------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET SALES (MILLIONS):
Victoria's Secret Stores $352 $332 6% $1,127 $1,046 8%
Victoria's Secret Catalogue 130 143 (9%) 531 519 2%
Bath & Body Works 218 182 19% 677 572 18%
Cacique * - 22 N/M - 64 N/M
Other 9 11 N/M 20 20 N/M
--------- --------- ---------- --------- --------- ----------
Total net sales $709 $690 3% $2,355 $2,221 6%
========= ========= ========== ========= ========= ==========
INCREASE IN COMPARABLE STORE SALES:
Victoria's Secret Stores 4% 3% 4% 9%
Bath & Body Works 6% 9% 3% 13%
Cacique * - 16% - 11%
--------- --------- --------- ---------
Total comparable store sales 4% 5% 3% 10%
========= ========= ========= =========
*The Cacique business was closed effective January 31, 1998.
RETAIL SALES EXCLUDING CATALOGUE AND OTHER:
Retail sales increase attributable to
net new and remodeled stores (1998
change excludes impact of closing 7% 12% 8% 15%
Cacique)
Retail sales per average selling
square foot $101 $98 3% $327 $315 4%
Retail sales per average store
(thousands) $312 $304 3% $1,013 $984 3%
Average store size at end of quarter
(selling square feet) 3,080 3,111 (1%)
Retail selling square feet at end of
quarter (thousands) 5,716 5,624 2%
NUMBER OF STORES:
Beginning of period 1,799 1,719 1,710 1,609
Opened 59 93 161 213
Closed (2) (4) (15) (14) *
--------- --------- --------- ---------
End of period 1,856 1,808 1,856 1,808
========= ========= ========= =========
</TABLE>
*Includes sale of four Penhaligon's stores in April 1997.
12
<PAGE> 13
<TABLE>
<CAPTION>
Number of Stores Selling Sq. Ft. (thousands)
--------------------------------------- --------------------------------------
Change Change
From From
Oct. 31, Nov. 1, Prior Oct. 31, Nov. 1, Prior
1998 1997 Year 1998 1997 Year
---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Victoria's Secret Stores 812 784 28 3,662 3,533 129
Bath & Body Works 1,044 906 138 2,054 1,728 326
Cacique - 118 (118) - 363 (363)
----- ----- ---- ----- ----- ----
Total stores and selling
square feet 1,856 1,808 48 5,716 5,624 92
===== ===== ==== ===== ===== ====
</TABLE>
Net Sales
Net sales for the third quarter of 1998 increased by 3% over the same period
last year, net of a 3% decline from the January 31, 1998 closing of Cacique. The
increase was attributable to a 4% increase in comparable store sales and the net
addition of 166 new stores, excluding Cacique, partially offset by a 9% decrease
in catalogue net sales. Year-to-date sales increased 6% over the same period in
1997, net of a 3% decline from the January 31, 1998 closing of Cacique. The
increase, excluding Cacique, was due to the net addition of new stores, a 3%
increase in comparable store sales and a 2% increase in catalogue net sales.
Victoria's Secret Stores' net sales for the third quarter of 1998 increased 6%
to $352 million from $332 million a year ago. The sales increase was primarily
attributable to a 4% increase in comparable store sales for the quarter, which
accounted for 54% of the total net sales increase. The balance of the increase
was from the net addition of 28 new stores and 129,000 selling square feet, a 4%
increase in selling square feet over 1997.
Bath & Body Works' net sales for the third quarter of 1998 increased 19% to $218
million from $182 million a year ago. The sales increase was primarily
attributable to the net addition of 138 stores and 326,000 selling square feet,
a 19% increase in selling square feet over 1997. The balance of the increase was
from a 6% increase in comparable store sales for the quarter (representing 29%
of the total net sales increase).
Victoria's Secret Catalogue's net sales for the third quarter of 1998 decreased
9% to $130 million from $143 million a year ago. This decrease was primarily
attributable to execution of a strategy of fewer, bigger catalogues (higher page
counts) and more focused mailings; as a result circulation was down 26% in the
third quarter of 1998.
Gross Income
Gross income, expressed as a percentage of net sales, increased to 38.8% for the
third quarter of 1998 from 36.1% for the same period in 1997. The increase was
primarily due to a 2.6% increase in merchandise margins, expressed as a
percentage of net sales. The increase in merchandise margins, expressed as a
percentage of net sales, was primarily the result of: (1) reduced markdowns and
price promotions at both Victoria's Secret Stores and Catalogue; and (2) a
favorable shift in the mix of net sales to our highest merchandise margin
business, Bath & Body Works, which increased to 31% of net sales in 1998 from
26% in 1997, from our lowest merchandise margin businesses, Victoria's
13
<PAGE> 14
Secret Catalogue, which dropped to 18% of net sales in 1998 from 21% in 1997,
and Cacique, which was 3% of net sales in 1997.
The 1998 year-to-date gross income percentage increased 3.3% to 37.5% in 1998
from 34.2% for the same period in 1997. The year-to-date increase was primarily
attributable to a 3.6% rate increase in merchandise margins. In addition to the
shift in the mix of sales discussed above, the increase in merchandise margins,
expressed as a percentage of net sales, were the result of higher retail
markups. This increase was especially significant at Victoria's Secret Stores.
General, Administrative and Store Operating Expenses
General, administrative and store operating expenses, expressed as a percentage
of net sales, increased to 28.8% in the third quarter of 1998 from 26.6% for the
same period in 1997. The increase was primarily the result of the shift in the
mix of net sales to Bath & Body Works from Victoria's Secret Catalogue. Bath &
Body Works has historically recorded our highest general, administrative and
store operating expenses, expressed as a percentage of net sales, due to its
significantly smaller stores. Conversely, Victoria's Secret Catalogue has
recorded our lowest general, administrative and store operating expenses, as a
percentage of net sales, due to the nature of a catalogue operation as compared
to a store-based retail concept. In addition, the increase was due to additional
selling payroll for product extensions and new initiatives in Victoria's Secret
Stores as well as funding other company initiatives principally in information
technology, real estate and brand marketing. These increases were partially
offset by savings from the closing of Cacique.
Year-to-date, general, administrative and store operating expenses, expressed as
a percentage of net sales, increased 2.5% to 26.2% from 23.7% in 1997. In
addition to the reasons discussed above, the year-to-date increase was also the
result of increased national advertising spending by Victoria's Secret Stores in
the first half of the year.
Operating Income
Third quarter and year-to-date operating income, expressed as a percentage of
net sales, was 10.0% and 11.3% in 1998 compared to 9.5% and 10.5% in 1997,
respectively. The increase in the gross income rate, expressed as a percentage
of net sales, more than offset the increase in general, administrative and store
operating expenses for both the third quarter and year-to-date.
Interest Expense and Other Income
Interest expense decreased $.2 million from $7.6 million in the third quarter of
1997 and $22.7 million for the year-to-date period in 1997. The interest expense
is primarily for the Company's $350 million debt.
In the third quarter of 1998, the Company earned $2.9 million in other income as
compared to $1.0 million for the same period in 1997. Year-to-date, the Company
earned $12.7 million compared to $4.9 million in 1997. The increase is
attributable to interest earned on significantly higher average invested cash
balances managed through The Limited's centralized cash management system (see
Note 7).
14
<PAGE> 15
FINANCIAL CONDITION
The Company's consolidated balance sheet as of October 31, 1998 provides
evidence of financial strength and flexibility. A more detailed discussion of
liquidity, capital resources and capital requirements follows.
Liquidity and Capital Resources
Cash provided from operating activities and cash funding from The Limited's
centralized cash management system provide the resources to support operations,
including projected growth, seasonal working capital requirements and capital
expenditures. A summary of the Company's working capital position and
capitalization follows (thousands):
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
--------------- ---------------
<S> <C> <C>
Working Capital $313,122 $463,123
======== ========
Capitalization:
Long-term debt $250,000 $350,000
Shareholders' equity 515,921 560,795
-------- --------
Total Capitalization $765,921 $910,795
======== ========
</TABLE>
Net cash used for operating activities totaled $25.5 million for the thirty-nine
weeks ended October 31, 1998 versus $5.0 million for the same period in 1997.
The change in net cash used for operating activities for the Company compared to
last year is primarily the result of the timing of inventory receipts and the
cost incurred to close Cacique (see Note 8), partially offset by the reduction
of paper inventory at Victoria's Secret Catalogue and the increase in operating
income.
The decrease in working capital is primarily attributable to $100 million of
term debt due in 1999 (see Note 6) which will be repaid through cash from
operations. No additional borrowings are anticipated.
Investing activities were for capital expenditures, which were primarily for new
and remodeled stores.
Financing activities included the repurchase of approximately 4.5 million shares
of its common stock for $106 million, three quarterly cash dividend payments of
$.14 per share each and $39.9 million of net cash provided through The Limited's
centralized cash management system (see Note 7). The stock repurchase is
specifically reserved to cover shares needed for employee benefit plans.
Capital Expenditures
The Company anticipates spending $110 to $130 million in 1998 for capital
expenditures, of which $80 to $90 million will be for new stores, the relocation
and expansion of existing stores and related improvements for the retail
business.
15
<PAGE> 16
The Company intends to add approximately 481,000 selling square feet in 1998,
which will represent a 9% increase over year-end 1997. It is anticipated that
the increase will result from the addition of approximately 185 new stores and
the remodeling/expansion of approximately 50 stores. The Company expects that
future capital expenditures will be funded principally with cash from
operations.
Adoption of New Accounting Standards
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP requires that certain external costs and internal payroll
and payroll related costs be capitalized during the application development and
implementation stages of a software development project and amortized over the
software's useful life. The SOP is effective in the first quarter of 1999 and
the Company does not anticipate that this SOP will have an adverse effect on the
Company's reported results of operations.
Additionally, SOP 98-5, "Reporting on the Costs of Start-Up Activities," was
issued in April 1998. The SOP requires that entities expense start-up costs and
organization costs as they are incurred. The SOP is effective in the first
quarter of 1999 and the Company does not anticipate that this SOP will have an
adverse effect on the Company's reported results of operations.
Year 2000 Readiness Disclosures
The Year 2000 issue arises primarily from computer programs, commercial systems
and embedded chips that will be unable to properly interpret dates beyond the
year 1999. The Company utilizes a variety of proprietary and third party
computer technologies - both hardware and software - directly in its businesses.
The Company also relies on numerous third parties and their systems' ability to
address the Year 2000 issue. The Company's critical information technology (IT)
functions include point-of-sale equipment, merchandise distribution, merchandise
and non-merchandise procurement, credit card and banking services,
transportation, and business and accounting management systems. The Company is
using both internal and external resources to complete its Year 2000
initiatives.
In order to address the Year 2000 issue, the Company is participating with its
parent, The Limited, Inc. The Limited established a program management office to
oversee, monitor and coordinate the company-wide Year 2000 effort. This office
has developed and is implementing a Year 2000 plan. The implementation includes
five stages, including (i) awareness, (ii) assessment, (iii)
renovation/development, (iv) validation, and (v) implementation. There are
several areas of focus: (1) renovation of legacy systems throughout the Company;
(2) installation of new software packages to replace legacy systems at one of
our operating businesses; (3) assessment of Year 2000 readiness at key vendors
and suppliers; and (4) evaluating facilities and distribution equipment with
embedded computer technology.
(1) All five stages of Year 2000 implementation for renovation of legacy
systems are complete for significant IT systems at the Company
businesses.
(2) Replacement of significant legacy systems with new software packages
for the operating company is expected to be complete by year-end.
16
<PAGE> 17
(3) A vast network of vendors and suppliers located both within and outside
the United States provide the Company with merchandise for resale and
supplies for operational purposes. The Company has identified key
vendors and suppliers and has begun making inquiries to determine their
Year 2000 status. The Company has obtained assurances from a number of
its key vendors regarding their Year 2000 status and expects to
complete this process in mid-1999. In addition, the Company plans to
conduct on-site assessments of certain of its key vendors to further
assess such vendors' progress. Also, the Company, along with other
major retail organizations, is participating in a national industry
Year 2000 survey of over 80,000 suppliers and vendors.
(4) The Company also utilizes various facilities and distribution equipment
with embedded computer technology, such as conveyors, elevators,
security systems, fire protection systems, and energy management
systems. The Company's assessment of these systems is in process and
all stages of its efforts are expected to be complete in or prior to
the first quarter of 1999.
The Company believes that the reasonably likely worst case scenario would
involve short-term disruption of systems affecting its supply and distribution
channels. The Company is in the early stages of developing contingency plans,
such as alternative sourcing, and identifying the necessary actions that it
would need to take if critical systems or service providers were not Year 2000
compliant. The Company expects to finalize these contingency plans by mid-1999.
At the present time, the Company is not aware of any Year 2000 issues that are
expected to affect materially its products, services, competitive position or
financial performance. However, despite the Company's significant efforts to
make its systems, facilities and equipment Year 2000 compliant, the compliance
of third party service providers and vendors (including, for instance,
governmental entities and utility companies) is beyond the Company's control.
Accordingly, the Company can give no assurances that the failure of systems of
other companies on which the Company's systems rely, or the failure of key
suppliers or other third parties to comply with Year 2000 requirements, will not
have a material adverse effect on the Company.
Total expenditures related to remediation, testing, conversion, replacement and
upgrading system applications are expected to range from $20 to $25 million from
1997 through 2000. Of the total, approximately $9 to $11 million will be capital
expenditures related to acquisition and implementation of new package systems.
The balance, approximately $11 to $14 million, will be expenses associated with
remediation and testing of existing systems. Total incremental expenses,
including depreciation and amortization of new package systems, remediation to
bring current systems into compliance, and writing off legacy systems are not
expected to have a material impact on the Company's financial condition in any
year during the conversion process from 1997 through 2000. In addition, we have
incurred internal payroll costs (not separately identified) relating to the
Company's Year 2000 initiatives.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
this Report or made by management of the Company involve risks and uncertainties
and are subject to change based on various important factors, many of which may
be beyond the Company's control. Accordingly, the Company's future performance
and financial results may differ materially from those expressed or implied in
any such
17
<PAGE> 18
forward-looking statements. The foregoing statements as to costs and dates
relating to the Year 2000 effort are forward-looking and are based on the
Company's current best estimates that may be proven incorrect as additional
information becomes available. The Company's Year 2000-related forward-looking
statements are also based on assumptions about many important factors, including
the technical skills of employees and independent contractors, the
representations and preparedness of third parties, the ability of vendors to
deliver merchandise or perform services required by the Company and the
collateral effects of the Year 2000 issues on the Company's business partners
and customers. While the Company believes its assumptions are reasonable, it
cautions that it is impossible to predict factors that could cause actual costs
or timetables to differ materially from the expected results. In addition to
Year 2000 issues, the following factors, among others, in some cases have
affected and in the future could affect the Company's financial performance and
actual results and could cause actual results for 1998 and beyond to differ
materially from those expressed or implied in any forward-looking statements
included in this Report or otherwise made by management: changes in consumer
spending patterns, consumer preferences and overall economic conditions, the
impact of competition and pricing, changes in weather patterns, political
stability, currency and exchange risks and changes in existing or potential
duties, tariffs or quotas, postal rate increases and charges, paper and printing
costs, availability of suitable store locations at appropriate terms, ability to
develop new merchandise and ability to hire and train associates.
18
<PAGE> 19
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a defendant in a variety of lawsuits arising in the
ordinary course of business.
On November 13, 1997, the United States District Court for the
Southern District of Ohio, Eastern Division, dismissed with
prejudice an amended complaint previously transferred to that
court by the United States District Court for the Central District
of California. The amended complaint, which had been filed against
the Company, The Limited, and certain of The Limited's other
subsidiaries by the American Textile Manufacturers Institute
("ATMI"), a textile industry trade association, alleged that the
defendants violated the federal False Claims Act by submitting
false country of origin records to the U.S. Customs Service. On
November 26, 1997, ATMI served a motion to alter or amend judgment
and a motion to disqualify the presiding judge and to vacate the
order of dismissal. The motion to disqualify was denied on
December 22, 1997, but as a matter of his personal discretion, the
presiding judge elected to recuse himself from further proceedings
and this matter was transferred to a judge of the United States
District Court for the Southern District of Ohio, Western
Division. On May 21, 1998, this judge denied all pending motions
seeking to alter, amend or vacate the judgment that had been
entered in favor of the Company. On June 5, 1998, ATMI filed a
notice of appeal to the United States Court of Appeals for the
Sixth Circuit.
Although it is not possible to predict with certainty the eventual
outcome of any litigation, in the opinion of management, the
foregoing proceedings are not expected to have a material adverse
effect on the Company's financial position or results of
operations.
Item 5. OTHER INFORMATION
The Company's Certificate of Incorporation includes provisions
relating to potential conflicts of interest that may arise between
the Company and The Limited. Such provisions were adopted in light
of the fact that the Company and The Limited and its subsidiaries
are engaged in retail businesses and pursue similar opportunities
in the ordinary course of business. Among other things, these
provisions generally eliminate the liability of directors and
officers of the Company with respect to certain matters involving
The Limited and its subsidiaries, including matters that may
constitute corporate opportunities of The Limited, its
subsidiaries or the Company. Any person purchasing or acquiring an
interest in shares of capital stock of the Company will be deemed
to have consented to such provisions relating to conflicts of
interest and corporate opportunities, and such consent may
restrict such person's ability to challenge transactions carried
out in compliance with such provisions. Investors should review
the Company's Certificate of Incorporation before making any
investment in shares of the Company's capital stock.
19
<PAGE> 20
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
3. Articles of Incorporation and Bylaws.
3.1 Amended and Restated Certificate of
Incorporation of the Company incorporated by reference
to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended October 28, 1995.
3.2 Bylaws of the Company incorporated by reference
to Exhibit 3.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended October 28, 1995.
4. Instruments Defining the Rights of Security Holders.
4.1 Specimen Certificate of Class A Common Stock of the
Company incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (File No.
33-92568) (the "Form S-1").
4.2 Certificate of Incorporation of The Limited, Inc.
incorporated by reference to Exhibit 4.2 to the
Company's Form S-1.
4.3 Bylaws of The Limited, Inc. incorporated by
reference to Exhibit 4.3 to the Company's Form S-1.
10. Material Contracts.
10.1 Intimate Brands, Inc. 1995 Stock Option and Performance
Incentive Plan incorporated by reference to Exhibit B to
the Company's Proxy Statement dated April 14, 1997.
10.2 Intimate Brands, Inc. Incentive Compensation Performance
Plan incorporated by reference to Exhibit A to the
Company's Proxy Statement dated April 14, 1997.
10.3 Intimate Brands, Inc. 1995 Stock Option and Performance
Incentive Plan for Non-Associate Directors incorporated
by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (File No. 333-04923).
10.4 Corporate Agreement by Intimate Brands, Inc. and The
Limited, Inc., dated October 23, 1995 incorporated by
reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended October 28,
1995.
20
<PAGE> 21
10.5 Tax Sharing Agreement by Intimate Brands, Inc., and The
Limited, Inc., dated October 23, 1995 incorporated by
reference to Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q for the quarter ended October 28,
1995.
10.6 Services Agreement by Intimate Brands, Inc. and The
Limited, Inc., dated October 23, 1995 incorporated by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended October 28,
1995.
10.9 Employment agreement by and between Intimate Brands,
Inc. and Cynthia A. Fields dated as of May 20, 1998
incorporated by reference to Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended August 1, 1998.
10.17 Employment agreement by and between Intimate Brands,
Inc. and Grace A. Nichols dated as of May 20, 1998
incorporated by reference to Exhibit 10.17 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended August 1, 1998.
10.18 Employment agreement by and between Intimate Brands,
Inc. and Beth M. Pritchard dated as of May 20, 1998
incorporated by reference to Exhibit 10.18 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended August 1, 1998.
15. Letter re: Unaudited Interim Financial Information to
Securities and Exchange Commission re: Incorporation of
Independent Accountants' Report.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
None.
21
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTIMATE BRANDS, INC.
(Registrant)
By /s/ Philip E. Mallott
----------------------------
Philip E. Mallott,
Chief Financial Officer*
Date: December 11, 1998
- --------------------
*Mr. Mallott is the principal financial officer and has been duly authorized to
sign on behalf of the Registrant.
<PAGE> 23
EXHIBIT INDEX
Exhibit No. Document
- ----------- --------
15 Letter re: Unaudited Interim Financial Information to
Securities and Exchange Commission re: Incorporation of
Independent Accountants' Report.
27 Financial Data Schedule.
<PAGE> 1
Exhibit 15
Securities and Exchange Commission
450 5th Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
We are aware that our report dated November 11, 1998, on our review of the
interim consolidated financial information of Intimate Brands, Inc. and
Subsidiaries for the thirteen-week and thirty-nine-week periods ended October
31, 1998 and included in this Form 10-Q is incorporated by reference in the
Company's registration statements on Form S-8, Registration Nos. 333-04921 and
333-04923. Pursuant to Rule 436(c) under the Securities Act of 1933, this
report should not be considered a part of the registration statement prepared
or certified by us within the meaning of Sections 7 and 11 of that Act.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Columbus, Ohio
December 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements (unaudited) of Intimate Brands, Inc. and
Subsidiaries for the quarter ended October 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 25,587
<SECURITIES> 0
<RECEIVABLES> 13,873
<ALLOWANCES> 0
<INVENTORY> 625,804
<CURRENT-ASSETS> 758,369
<PP&E> 811,567
<DEPRECIATION> (408,236)
<TOTAL-ASSETS> 1,234,914
<CURRENT-LIABILITIES> 445,247
<BONDS> 0
0
0
<COMMON> 2,527
<OTHER-SE> 513,394
<TOTAL-LIABILITY-AND-EQUITY> 1,234,914
<SALES> 708,985
<TOTAL-REVENUES> 708,985
<CGS> 434,042
<TOTAL-COSTS> 434,042
<OTHER-EXPENSES> 204,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,361
<INCOME-PRETAX> 66,127
<INCOME-TAX> 26,400
<INCOME-CONTINUING> 39,727
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,727
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
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