<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 July 31, 1999
-------------
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 past 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 August 27, 1999
-------------------- ------------------------------
$.01 Par Value 39,226,063 Shares
Class B Common Stock Outstanding at August 27, 1999
-------------------- ------------------------------
$.01 Par Value 209,799,538 Shares
<PAGE> 2
INTIMATE BRANDS, INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income
Thirteen and Twenty-six Weeks Ended
July 31, 1999 and August 1, 1998........... 3
Consolidated Balance Sheets
July 31, 1999, January 30, 1999 and
August 1, 1998........................... 4
Consolidated Statements of Cash Flows
Twenty-six Weeks Ended
July 31, 1999 and August 1, 1998........... 5
Notes to Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition ................................... 12
Part II. Other Information
Item 1. Legal Proceedings ............................. 20
Item 5. Other Information ............................. 21
Item 6. Exhibits and Reports on Form 8-K............... 21
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTIMATE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
------------------------------ ------------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 1,017,109 $ 874,708 $ 1,894,930 $ 1,645,576
Costs of goods sold and buying and occupancy costs
617,164 538,564 1,161,558 1,037,560
----------- ----------- ----------- -----------
Gross income 399,945 336,144 733,372 608,016
General, administrative and store operating
expenses 249,107 211,227 498,340 411,681
----------- ----------- ----------- -----------
Operating income 150,838 124,917 235,032 196,335
Interest expense (7,894) (7,563) (16,758) (15,126)
Other income 59 5,408 2,035 9,780
----------- ----------- ----------- -----------
Income before income taxes 143,003 122,762 220,309 190,989
Provision for income taxes 57,200 49,200 88,100 76,400
----------- ----------- ----------- -----------
Net income $ 85,803 $ 73,562 $ 132,209 $ 114,589
=========== =========== =========== ===========
Net income per share:
Basic $ 0.34 $ 0.28 $ 0.53 $ 0.44
=========== =========== =========== ===========
Diluted $ 0.34 $ 0.28 $ 0.52 $ 0.43
=========== =========== =========== ===========
Dividends per share $ 0.13 $ 0.13 $ 0.27 $ 0.27
=========== =========== =========== ===========
</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>
July 31, January 30, August 1,
1999 1999 1998
--------------- -------------- ---------------
(Unaudited) (Unaudited)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and equivalents $ 11,787 $ 387,774 $ 21,796
Accounts receivable 18,414 15,627 16,465
Inventories 561,206 479,896 432,228
Intercompany receivables -- -- 192,350
Other 90,180 93,944 84,195
----------- ----------- -----------
Total current assets 681,587 977,241 747,034
Property and equipment, net 413,819 398,469 396,168
Other assets 70,677 72,367 74,687
----------- ----------- -----------
Total assets $ 1,166,083 $ 1,448,077 $ 1,217,889
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 81,051 $ 93,764 $ 81,593
Current portion of long-term debt 100,000 100,000 --
Accrued expenses 189,580 198,321 176,666
Intercompany payable 176,366 5,860 --
Income taxes 43,437 139,223 20,067
----------- ----------- -----------
Total current liabilities 590,434 537,168 278,326
Long-term debt 250,000 250,000 350,000
Deferred income taxes 2,785 2,251 8,599
Other long-term liabilities 15,538 14,015 12,738
Shareholders' equity:
Common stock 2,646 2,527 2,527
Paid-in capital 1,214,958 672,391 673,854
Retained earnings (deficit) (334,085) 145,396 (70,589)
----------- ----------- -----------
883,519 820,314 605,792
Less: treasury stock, at average cost (576,193) (175,671) (37,566)
----------- ----------- -----------
Total shareholders' equity 307,326 644,643 568,226
----------- ----------- -----------
Total liabilities and shareholders' equity $ 1,166,083 $ 1,448,077 $ 1,217,889
=========== =========== ===========
</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>
Twenty-six Weeks Ended
------------------------------------
July 31, August 1,
1999 1998
------------ -----------
<S> <C> <C>
Operating activities:
Net income $ 132,209 $ 114,589
Impact of other operating activities on cash flows:
Depreciation and amortization 48,980 49,448
Changes in assets and liabilities:
Accounts receivable (2,787) 18,174
Inventories (81,310) (14,525)
Accounts payable and accrued expenses (21,454) (60,619)
Income taxes (95,252) (78,460)
Other assets and liabilities 9,010 37,569
------------ -----------
Net cash provided from (used for) operating activities (10,604) 66,176
------------ -----------
Investing activities:
Capital expenditures (66,363) (55,009)
------------ -----------
Financing activities:
Dividends paid (66,724) (70,713)
Decrease (increase) in intercompany receivable/payable 170,506 (179,893)
Repurchase of common stock (404,410) (48,659)
Stock options and other 1,608 1,174
------------ -----------
Net cash used for financing activities (299,020) (298,091)
------------ -----------
Net decrease in cash and equivalents (375,987) (286,924)
Cash and equivalents, beginning of year 387,774 308,720
------------ -----------
Cash and equivalents, end of period $ 11,787 $ 21,796
============ ===========
</TABLE>
In 1999, noncash financing activities include the addition of $0.1 million
common stock and $544.9 million paid-in capital as a result of the 5% stock
dividend which resulted in the issuance of 11.8 million shares of common stock
(see Note 2).
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. The Company consists of Victoria's Secret Stores,
Victoria's Secret Catalogue, Bath & Body Works, and Gryphon Development.
The Limited, Inc. owns 84.3% 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 and for the thirteen and
twenty-six week periods ended July 31, 1999 and August 1, 1998 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 1998
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 except as discussed in Note 9) 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 and for the thirteen and
twenty-six week periods ended July 31, 1999 and August 1, 1998 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.
6
<PAGE> 7
2. Shareholders' Equity and Earnings per Share
On June 22, 1999, the Company declared a five percent stock dividend to
both The Limited and public shareholders of record as of July 2, 1999 which
resulted in the issuance of 11.8 million shares of common stock.
Accordingly, common stock, additional paid-in capital and retained earnings
have been adjusted based on the fair market value of the additional shares
issued.
Weighted average shares outstanding, earnings per share and dividends per
share for all periods presented have been restated to reflect the five
percent stock dividend.
Weighted average common shares outstanding (thousands):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------------- --------------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Common shares issued 265,828 265,335 265,783 265,335
Treasury shares (17,050) (672) (15,092) (434)
-------- -------- -------- --------
Basic shares 248,778 264,663 250,691 264,901
Dilutive effect of stock options and
restricted shares 4,518 2,088 4,334 2,127
-------- -------- -------- --------
Diluted shares 253,296 266,751 255,025 267,028
======== ======== ======== ========
</TABLE>
The computation of earnings per diluted share excludes options to purchase
0.6 million shares of common stock at quarter-end for 1998, 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>
July 31, January 30, 1999 August 1,
1999 1998
----------------- ----------------- -------------
<S> <C> <C> <C>
Property and equipment, at cost $ 869,086 $ 821,061 $ 782,677
Accumulated depreciation and amortization (455,267) (422,592) (386,509)
--------- --------- ---------
Property and equipment, net $ 413,819 $ 398,469 $ 396,168
========= ========= =========
</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 twenty-six
weeks ended July 31, 1999 and August 1, 1998 approximated $183 million and
$155 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>
July 31, January 30, August 1,
1999 1999 1998
-------- ---------- ---------
<S> <C> <C> <C>
7 1/2% Debentures due March 2023 $100,000 $100,000 $100,000
9 1/8% notes due February 2001 150,000 150,000 150,000
8 7/8% notes due August 1999 100,000 100,000 100,000
-------- -------- --------
350,000 350,000 350,000
Less: current portion of long-term debt 100,000 100,000 --
-------- -------- --------
$250,000 $250,000 $350,000
======== ======== ========
</TABLE>
Interest paid during the twenty-six weeks ended July 31, 1999 and August 1,
1998, including interest on the intercompany cash management account (see
Note 7), approximated $16.8 million and $15.2 million.
7. Intercompany Relationship with the 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 services-related costs not specifically attributable to
an operating business have been allocated to the Company based upon various
allocation methods. The Company and The Limited have entered into
intercompany agreements which establish the provision of services in
accordance with the terms described above.
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
8
<PAGE> 9
cash management account is calculated based on the Federal Reserve AA
Composite 30-day rate.
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. Segment Information
The Company identifies operating segments based on a business's operating
characteristics and whether management reports directly to the Chairman.
Reportable segments were determined based on the similar economic
characteristics of the retail businesses and the similar methods used to
distribute products and combine the store-based operations of Victoria's
Secret Stores and Bath & Body Works. The Catalogue segment consists of the
Victoria's Secret Catalogue operations. Sales outside the United States
were immaterial.
Segment information for the thirteen weeks ended July 31, 1999 and August
1, 1998 follows (in thousands):
<TABLE>
<CAPTION>
Reconciling
1999 Retail Catalogue Other (a) Items Total
- -------------------------- ------------- ------------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 787,731 $ 224,726 $ 4,652 -- $1,017,109
Intersegment sales -- -- 95,943 ($ 95,943) (b) --
Operating income (loss) 141,978 24,256 (15,396) -- 150,838
Total assets 869,894 187,615 108,574 -- 1,166,083
</TABLE>
<TABLE>
<CAPTION>
Reconciling
1998 Retail Catalogue Other (a) Items Total
- -------------------------- ------------- ------------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 666,834 $201,975 $5,899 -- $874,708
Intersegment sales -- -- 74,745 ($ 74,745) (b) --
Operating income (loss) 123,073 22,260 (20,416) -- 124,917
Total assets 747,004 178,221 292,664 -- 1,217,889
</TABLE>
(a) Included in the "Other" category are Gryphon and Corporate, neither of
which are significant operating segments. The Company maintained an
intercompany payable of $176,366 as of July 31, 1999 (see Note 7). Total
assets included an intercompany receivable of $192,350 as of August 1,
1998.
(b) Represents intersegment sales elimination.
9
<PAGE> 10
Segment information for the twenty-six weeks ended July 31, 1999 and August
1, 1998 follows (in thousands):
<TABLE>
<CAPTION>
Reconciling
1999 Retail Catalogue Other (a) Items Total
- -------------------------- ------------- ------------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $1,468,602 $418,733 $7,595 -- $1,894,930
Intersegment sales -- -- 173,517 ($173,517) (b) --
Operating income (loss) 228,169 40,657 (33,794) -- 235,032
</TABLE>
<TABLE>
<CAPTION>
Reconciling
1998 Retail Catalogue Other (a) Items Total
- -------------------------- ------------- ------------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $1,233,722 $400,988 $ 10,866 -- $1,645,576
Intersegment sales -- -- 137,952 ($137,952) (b) --
Operating income (loss) 191,654 41,204 (36,523) -- 196,335
</TABLE>
(a)-(b) See description under table on previous page.
In addition to its operating segments, management also focuses on
Victoria's Secret as a brand. Sales of the Victoria's Secret brand
grew 15% for the thirteen weeks ended July 31, 1999 to $709.7 million
in 1999 and 13% for the twenty-six weeks ended July 31, 1999 to $1.327
billion in 1999.
9. Special and Nonrecurring Charge
In the fourth quarter of 1997, the Company recognized a $67.6 million
charge in conjunction with closing Cacique, a 118-store lingerie
business. Outlays for the cash component of the charge amounted to
$26.8 million in 1998 and $3.2 million in 1999, leaving a $7.6 million
liability at July 31, 1999. The liability relates principally to
future payments for settlement of store obligations, currently
scheduled through 2004. In determining the provision for lease
obligations, the Company considered the estimated amount necessary for
either buying out the lease or continuing rent payments through lease
expiration.
No accruals related to these charges were reversed or recorded in
operating income during the first half of 1999 or fiscal year 1998.
10
<PAGE> 11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Audit Committee of
The Board of Directors of
Intimate Brands, Inc.
We have reviewed the condensed consolidated balance sheets of Intimate Brands,
Inc. and Subsidiaries (the "Company") at July 31, 1999 and August 1, 1998, and
the related condensed consolidated statements of income for each of the thirteen
and twenty-six week periods ended July 31, 1999 and August 1, 1998 and the
condensed consolidated statements of cash flows for the twenty-six week periods
ended July 31, 1999 and August 1, 1998. 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 30, 1999, 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
17, 1999, 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 30, 1999, 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
August 11, 1999
11
<PAGE> 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net sales for the second quarter of 1999 were $1.017 billion, an increase of
16%, from $874.7 million for the second quarter of 1998. This increase was
driven by a 12% increase in comparable store sales and a 9% increase in selling
square feet. Gross income increased 19% to $399.9 million from $336.1 million in
1998 and operating income increased 21% to $150.8 million from $124.9 million in
1998. Net income was $85.8 million, an increase of 17%, from $73.5 million in
1998. Earnings per diluted share grew 21% to $0.34 per share, compared to $0.28
per share in 1998 (adjusted for a 5% stock dividend declared June 22, 1999).
Second quarter highlights included the following:
- - Victoria's Secret's second quarter performance was driven by a successful
June semi-annual sale, the `never-out-of-stock' on basics inventory program
and three new product launches backed by national television advertising.
Victoria's Secret Stores recorded comparable stores sales of 13% for the
quarter and Victoria's Secret Catalogue sales grew 11%.
- - Bath & Body Works delivered a sales increase of 19% and second quarter
comparable store sales of 9%. The brand realized consistent performance in
all product categories with new introductions in fragrance, body care
products, `Art Stuff' and home fragrance.
- - On June 22, 1999, the Company declared a five percent stock dividend to
shareholders of record on July 2, 1999. The stock dividend resulted in the
issuance of 11.8 million additional shares. All share and per share
information throughout this report have been retroactively adjusted to
reflect this dividend.
Net sales for the twenty-six weeks ended July 31, 1999 were $1.895 billion, an
increase of 15%, from $1.646 billion in 1998, driven by comparable store sales
of 12%. Gross income increased 21% to $733.4 million from $608.0 million in 1998
and operating income increased 20% to $235.0 million from $196.3 million in
1998. Earnings per diluted share grew 21% to $0.52 per share, compared to $0.43
per share in 1998.
12
<PAGE> 13
Financial Summary
- -----------------
The following summarized financial and statistical data compares the thirteen
week and twenty-six week periods ended July 31, 1999 to the comparable 1998
periods:
<TABLE>
<CAPTION>
Second Quarter Year - to - Date
------------------------------------ ------------------------------------
1999 1998 Change 1999 1998 Change
--------- ------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET SALES (MILLIONS):
Victoria's Secret Stores $ 485 $ 413 18% $ 908 $ 775 17%
Bath & Body Works 303 254 19% 561 459 22%
------ ------ ------- ------ ------ -------
Total retail sales 788 667 18% 1,469 1,234 19%
Victoria's Secret Catalogue 225 202 11% 419 401 4%
Other 4 6 N/M 7 11 N/M
------ ------ ------- ------ ------ -------
Total net sales $1,017 $ 875 16% $1,895 $1,646 15%
====== ====== ======= ====== ====== =======
COMPARABLE STORE SALES:
Victoria's Secret Stores 13% 2% 13% 4%
Bath & Body Works 9% 3% 11% 1%
------- ------- ------ ------
Total comparable store sales increase 12% 2% 12% 3%
======= ======= ====== ======
STORE DATA:
Retail sales increase
attributable to net new and
remodeled stores 7% 9% 8% 9%
Retail sales per average
selling square foot $ 131 $ 121 8% $ 248 $ 227 9%
Retail sales per average
store (thousands) $ 401 $ 375 7% $ 759 $ 703 8%
Average store size at end of
quarter (selling square feet) 3,047 3,084 (1%)
Retail selling square feet at end of
quarter (thousands) 6,048 5,549 9%
</TABLE>
N/M Not meaningful
13
<PAGE> 14
<TABLE>
<CAPTION>
Second Quarter Year - to - Date
------------------- ----------------------------
1999 1998 1999 1998
-------- -------- ------------- -----------
<S> <C> <C> <C> <C>
NUMBER OF STORES:
Beginning of period 1,950 1,757 1,890 1,710
Opened 43 51 104 102
Closed (8) (9) (9) (13)
------- ------ ------ ------
End of period 1,985 1,799 1,985 1,799
======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Number of Stores Selling Sq. Ft. (thousands)
----------------------------------------- --------------------------------------------
Change Change
July 31, August 1, From Prior July 31, August 1, From Prior
1999 1998 Year 1999 1998 Year
---------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Victoria's Secret Stores 859 799 60 3,810 3,595 215
Bath & Body Works 1,126 1,000 126 2,238 1,954 284
---------- --------- ---------- ------------ --------- ----------
Total stores and selling
square feet 1,985 1,799 186 6,048 5,549 499
============ ============ ============ ============ ============ ============
</TABLE>
Net Sales
- ---------
Net sales for the second quarter of 1999 increased 16% to $1.017 billion from
$874.7 million in 1998. The net sales increase was primarily due to a 12%
increase in comparable store sales. The balance of the increase was due to the
net addition of 186 new stores and an increase in catalogue sales.
In the second quarter of 1999, retail sales increased 18% to $787.7 million from
$666.8 million in 1998. Bath & Body Works' sales increase was primarily
attributable to the net addition of 126 new stores. Victoria's Secret Stores'
sales increased 18% to $485.0 million. The sales increase was primarily due to a
13% increase in comparable store sales, with the remaining increase coming from
the addition of 60 new stores.
Victoria's Secret Catalogue net sales for the second quarter of 1999 increased
11% to $224.7 million from $202.0 million a year ago. This sales increase was
due to an increase in catalogue circulation and an improved response rate.
Year-to-date net sales increased 15% to $1.895 billion from $1.646 billion in
1998. The net sales increase was primarily due to a 12% increase in comparable
store sales. The balance of the increase was due to the net addition of 186 new
stores and a 4% increase in catalogue sales.
Gross Income
- ------------
The second quarter of 1999 gross income rate, expressed as a percentage of
sales, increased to 39.3% from 38.4% for the same period in 1998. The rate
increase was primarily due to a decrease in the buying and occupancy rate, with
positive leverage resulting from a 13% comparable store sales increase at
Victoria's Secret Stores. The remaining increase was driven by an increase in
the merchandise margin rate, which resulted from higher retail markups and lower
markdowns, particularly at Victoria's Secret Stores.
The 1999 year-to-date gross income rate increased to 38.7% from 36.9% in 1998.
The rate increase was primarily due to a decrease in the buying and occupancy
rate. The remaining
14
<PAGE> 15
increase was driven by an increase in the merchandise margin rate. The increase
in the merchandise margin rate was primarily attributable to higher retail
markups and reduced markdowns, particularly at Victoria's Secret Stores. Both
the buying and occupancy rate and the merchandise margin rate were favorably
impacted by Bath & Body Works, which increased to 30% of total Company net sales
in 1999 from 28% in 1998. Bath & Body Works has historically recorded higher
merchandise margins due to higher retail markups and lower buying and occupancy
costs due to smaller store sizes and higher sales productivity.
General, Administrative and Store Operating Expenses
- ----------------------------------------------------
The general, administrative and store operating expense rate, expressed as a
percentage of net sales, increased to 24.5% in the second quarter of 1999 from
24.1% for the same period in 1998. The rate increase was primarily due to
relocation costs and higher operating expenses associated with moving Victoria's
Secret's beauty business to New York City, as well as an increase in base
infrastructure costs for the beauty business. These factors were partially
offset by improved leverage from a 13% comparable store sales increase at
Victoria's Secret Stores.
The year-to-date, general, administrative and store operating expense rate
increased to 26.3% from 25.0% in 1998. In addition to the reasons discussed
above, the rate increase was driven by an increase in national advertising
investment for the Victoria's Secret brand, and a shift in the mix of net sales
to Bath & Body Works, which has higher general, administrative and store
operating expense rates due to significantly smaller stores.
Operating Income
- ----------------
Second quarter and year-to-date operating income, expressed as a percentage of
net sales, was 14.8% and 12.4% in 1999 compared to 14.3% and 11.9% in 1998,
respectively. The increase in gross income rate more than offset the increase in
the general, administrative and store operating expense rate for both the second
quarter and year-to-date.
Interest Expense and Other Income
- ---------------------------------
Second quarter and year-to-date interest expense was $7.9 million and $16.8
million in 1999 compared to $7.6 million and $15.1 million in 1998,
respectively. The interest expense is primarily for the Company's $350 million
long-term debt. The year-to-date increase in interest expense was primarily due
to an increase in the Company's intercompany payable as a result of the share
repurchase.
Other income decreased $5.3 million and $7.7 million in the second quarter and
year-to-date periods in 1999 from the comparable periods in 1998. The decrease
was primarily due to lower average invested cash balances as a result of the
share repurchase.
Special and Nonrecurring Charge
- -------------------------------
In the fourth quarter of 1997, the Company recognized a $67.6 million charge in
conjunction with closing Cacique, a 118-store lingerie business. Outlays for the
cash component of the charge amounted to $26.8 million in 1998 and $3.2 million
in 1999, leaving a $7.6 million liability at July 31, 1999. The liability
relates principally to future payments for settlement of store obligations,
currently scheduled through 2004. In determining the provision for lease
obligations, the Company considered the estimated amount necessary for either
buying out the lease or continuing rent payments through lease expiration.
No accruals related to these charges were reversed or recorded in operating
income during the first half of 1999 or fiscal year 1998.
15
<PAGE> 16
FINANCIAL CONDITION
The Company's consolidated balance sheet as of July 31, 1999 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>
July 31, January 30, August 1,
1999 1999 1998
-------- ----------- ---------
<S> <C> <C> <C>
Working capital $ 91,153 $440,073 $468,708
======== ======== ========
Capitalization:
Long-term debt $250,000 $250,000 $350,000
Shareholders' equity 307,326 644,643 568,226
-------- ----------- ---------
Total capitalization $557,326 $894,643 $918,226
======== ======== ========
</TABLE>
Net cash used for operating activities totaled $10.6 million for the twenty-six
weeks ended July 31, 1999 versus net cash provided from operating activities of
$66.2 million for the same period in 1998. The change in net cash provided from
operating activities was primarily driven by an increase in inventories,
especially at Victoria's Secret Stores with the `never out of stock' on basics
inventory program.
Investing activities were for capital expenditures, which were primarily for new
and remodeled stores.
Financing activities included two quarterly cash dividend payments of $0.13 per
share. In addition, financing activities included the repurchase of
approximately 9.7 million shares of the Company's common stock, of which 8.2
million shares were repurchased from The Limited, for $404.4 million. The stock
repurchase program was completed in May 1999. The cash dividend payment and
stock repurchase were partially offset by a $170.5 million net increase in The
Limited's intercompany cash management account payable (see Note 7 to the
Consolidated Financial Statements).
16
<PAGE> 17
Capital Expenditures
- --------------------
Capital expenditures, primarily for new and remodeled stores, totaled $66.3
million for the twenty six weeks ended July 31, 1999, compared to $55.0 million
for the comparable period of 1998. The Company anticipates spending $150-$170
million in 1999 for capital expenditures, of which $110-$120 million will be for
new stores, the relocation and expansion of existing stores and related
improvements for the retail business.
The Company intends to add approximately 766,000 selling square feet in 1999,
which will represent a 13% increase over year-end 1998. It is anticipated the
increase will result from the addition of approximately 240 net new stores and
the expansion of approximately 50 stores. The Company expects that capital
expenditures will be funded principally by net cash provided by operating
activities.
INFORMATION SYSTEMS AND "YEAR 2000" COMPLIANCE
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.
Readiness
- ---------
In order to address the Year 2000 issue, the Company is participating with its
parent, The Limited, which 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:
- awareness, which includes identifying risks and conducting an
education program regarding Year 2000 issues
- assessment, which primarily includes establishing project resources,
developing a Year 2000 renovation strategy, completing a company-wide
inventory of information technology and determining the necessary
training and testing facility requirements
- renovation/development, which includes the analysis of existing
information systems, the design of remediation activities and the
coding of necessary remedies
- validation, which primarily includes system testing
- implementation, which includes the placement of renovated systems "in
production" and training end users
There are four areas of focus:
- RENOVATION OF LEGACY SYSTEMS. The Company's operating businesses have
completed all five stages of Year 2000 implementation for renovation
of legacy systems.
17
<PAGE> 18
- INSTALLATION OF NEW SOFTWARE PACKAGES to replace selected legacy
systems at one of the Company's four operating businesses. Replacement
of significant legacy systems with new software packages is complete.
- ASSESSMENT OF YEAR 2000 READINESS AT KEY VENDORS AND SUPPLIERS. A vast
network of vendors, suppliers and service providers located both
within and outside the United States provide the Company with
merchandise for resale, supplies for operational purposes and
services. The Company has identified key vendors, suppliers and
service providers, and The Limited is making efforts to determine
their Year 2000 status. As a result, The Limited obtained completed
Year 2000 surveys from approximately 160 of our third-party vendors to
determine an estimated compliance date. Of the 160 third-party vendors
surveyed, approximately 90 have indicated that they are Year 2000
compliant. The majority of the remaining vendors have indicated they
will be compliant prior to year-end. Based upon the results of the
surveys, the Company selected 15 vendors for on-site visits to further
assess the vendors' progress and estimated compliance dates. The
Limited will continue to monitor the status of the vendors' estimated
compliance dates in order to identify potential delays.
- EVALUATING FACILITIES AND DISTRIBUTION EQUIPMENT WITH EMBEDDED
COMPUTER TECHNOLOGY. The Company uses various facilities and
distribution equipment with embedded computer technology, such as
conveyors, elevators, and security systems, fire protection systems
and energy management systems. All our remediation efforts are
complete.
Cost to Address the Year 2000 Issue
- -----------------------------------
Total expenditures related to remediation, testing, conversion, replacement and
upgrading system applications were $18 million. These expenditures were
completed in 1998. In addition, significant internal payroll costs (not
separately identified) were incurred relating to the Company's Year 2000
initiatives. During the period from Fall 1997 through Fall 1999, the Company has
allocated approximately 16% of its information technology budget toward Year
2000 remediation efforts.
Any additional expenditures related to the Company's Year 2000 efforts are not
expected to be material.
Reasonably Likely Worst Case Scenario and Contingency Plans
- -----------------------------------------------------------
The Company believes that the reasonably likely worst case scenario would
involve short-term disruption of systems affecting its supply and distribution
channels. The Limited is in the process of developing contingency plans, such as
alternative sourcing and accelerated delivery of merchandise from foreign
suppliers, and identifying the necessary actions that it would need to take if
critical systems or service providers were not Year 2000 compliant. The Limited
expects to finalize these contingency plans in the second half of 1999.
At the present time, the Company and The Limited are not aware of any Year 2000
issues that are expected to affect materially its products, services,
competitive position or financial performance. Additionally, the Company has not
postponed any significant information technology projects due to the Year 2000
project. Thus, the Company does not believe that the delay of any projects has
had a material impact on its financial condition and results of operations.
However, despite The Limited'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 technology infrastructure of the
United States, foreign nations or other companies on which the Company's
18
<PAGE> 19
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.
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 Form 10-Q or made by management of the Company involve risks and
uncertainties and are subject to change based on various important factors, many
of which may be beyond the Company's control. Accordingly, the Company's future
performance and financial results may differ materially from those expressed or
implied in any such forward-looking statements. Among other things, certain of
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 1999
and beyond to differ materially from those expressed or implied in any
forward-looking statements included in this Form 10-Q 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.
19
<PAGE> 20
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 that 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. The amended complaint alleged that the defendants
violated the federal False Claims Act by submitting false country of
origin declarations 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 appealed to the United States Court of Appeals for the
Sixth Circuit (the "Sixth Circuit"). On August 12, 1999, the Sixth
Circuit heard arguments from both sides, and the matter remains
pending.
On January 13, 1999, two complaints were filed against the Company's
parent, The Limited, and one of its subsidiaries, as well as other
defendants, including many national retailers. Both complaints relate
to labor practices allegedly employed on the island of Saipan,
Commonwealth of the Northern Mariana Islands, by apparel manufacturers
unrelated to The Limited (some of which have sold goods to The
Limited) and seek injunctions, unspecified monetary damages, and other
relief. One complaint, on behalf of a class of unnamed garment
workers, filed in the United States District Court for the Central
District of California, Western Division, alleges violations of
federal statutes, the United States Constitution, and international
law. On March 29, 1999, a motion was filed to transfer this action to
the United States District Court located on Saipan, and on April 12,
1999, a motion to dismiss the complaint for failure to state a claim
upon which relief can be granted was filed. Both motions remain
pending. The second complaint, filed by a national labor union and
other organizations in the Superior Court of the State of California,
San Francisco County, alleges unfair business practices under
California law. On March 29, 1999, a motion seeking dismissal of this
complaint was filed. That motion also remains pending.
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.
20
<PAGE> 21
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 may 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.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
15. Letter re: Unaudited Interim Financial Information to Securities
and Exchange Commission re: Incorporation of Report of
Independent Accountants.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
i. On July 28, 1999 the Company filed a report on Form 8-K which
contained a press release dated July 28, 1999.
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: September 13, 1999
- --------------------------
* Mr. Mallott is the principal financial officer and has been duly authorized to
sign on behalf of the Registrant.
22
<PAGE> 1
Exhibit 15
Securities and Exchange Commission
450 5th Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Commissioners:
We are aware that our report dated August 11, 1999 on our review of the interim
consolidated financial information of Intimate Brands, Inc. and Subsidiaries
(the "Company") as of and for the thirteen and twenty-six week periods ended
July 31, 1999 and included in this Form 10-Q is incorporated by reference in the
Company's registration statements on Form S-3, Registration No. 333-78485, 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.
Very truly yours,
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Columbus, Ohio
September 9, 1999
<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 July 31, 1999 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-29-2000
<PERIOD-START> MAY-02-1999
<PERIOD-END> JUL-31-1999
<CASH> 11,787
<SECURITIES> 0
<RECEIVABLES> 18,414
<ALLOWANCES> 0
<INVENTORY> 561,206
<CURRENT-ASSETS> 681,587
<PP&E> 869,086
<DEPRECIATION> 455,267
<TOTAL-ASSETS> 1,166,083
<CURRENT-LIABILITIES> 590,434
<BONDS> 0
0
0
<COMMON> 2,646
<OTHER-SE> 304,680
<TOTAL-LIABILITY-AND-EQUITY> 1,166,083
<SALES> 1,017,109
<TOTAL-REVENUES> 1,017,109
<CGS> 617,164
<TOTAL-COSTS> 617,164
<OTHER-EXPENSES> 249,107
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,894
<INCOME-PRETAX> 143,003
<INCOME-TAX> 57,200
<INCOME-CONTINUING> 85,803
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,803
<EPS-BASIC> $0.34
<EPS-DILUTED> $0.34
</TABLE>
