<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 30, 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 November 29, 1999
-------------------- --------------------------------
$.01 Par Value 39,328,295 Shares
Class B Common Stock Outstanding at November 29, 1999
-------------------- --------------------------------
$.01 Par Value 209,799,538 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 30, 1999 and October 31, 1998 ..................... 3
Consolidated Balance Sheets
October 30, 1999, January 30, 1999 and October 31, 1998 ... 4
Consolidated Statements of Cash Flows
Thirty-nine Weeks Ended
October 30, 1999 and October 31, 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
</TABLE>
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 Thirty-nine Weeks Ended
----------------------------- ----------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 814,158 $ 708,985 $ 2,709,088 $ 2,354,561
Costs of goods sold and buying and
occupancy costs 491,125 434,042 1,652,683 1,471,602
----------- ----------- ----------- -----------
Gross income 323,033 274,943 1,056,405 882,959
General, administrative and store
operating expenses 251,875 204,325 750,215 616,006
----------- ----------- ----------- -----------
Operating income 71,158 70,618 306,190 266,953
Interest expense (7,915) (7,361) (24,673) (22,487)
Other income -- 2,870 2,035 12,650
----------- ----------- ----------- -----------
Income before income taxes 63,243 66,127 283,552 257,116
Provision for income taxes 25,300 26,400 113,400 102,800
----------- ----------- ----------- -----------
Net income $ 37,943 $ 39,727 $ 170,152 $ 154,316
=========== =========== =========== ===========
Net income per share:
Basic $ 0.15 $ 0.15 $ 0.68 $ 0.59
=========== =========== =========== ===========
Diluted $ 0.15 $ 0.15 $ 0.67 $ 0.58
=========== =========== =========== ===========
Dividends per share $ 0.14 $ 0.13 $ 0.41 $ 0.40
=========== =========== =========== ===========
</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 30, January 30, October 31,
1999 1999 1998
----------- ----------- -----------
(Unaudited) (Unaudited)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and equivalents $ 21,038 $ 387,774 $ 25,587
Accounts receivable 18,394 15,627 13,873
Inventories 795,744 479,896 625,804
Other 101,190 93,944 93,105
----------- ----------- -----------
Total current assets 936,366 977,241 758,369
Property and equipment, net 423,569 398,469 403,331
Other assets 78,916 72,367 73,214
----------- ----------- -----------
Total assets $ 1,438,851 $ 1,448,077 $ 1,234,914
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 125,838 $ 93,764 $ 119,462
Current portion of long-term debt -- 100,000 100,000
Accrued expenses 170,016 198,321 160,606
Intercompany payable 556,227 5,860 27,431
Income taxes 7,125 139,223 37,748
----------- ----------- -----------
Total current liabilities 859,206 537,168 445,247
Long-term debt 250,000 250,000 250,000
Deferred income taxes -- 2,251 10,165
Other long-term liabilities 16,643 14,015 13,581
Shareholders' equity:
Common stock 2,646 2,527 2,527
Paid-in capital 1,215,183 672,391 673,886
Retained earnings (deficit) (331,041) 145,396 (65,869)
----------- ----------- -----------
886,788 820,314 610,544
Less: treasury stock, at average cost (573,786) (175,671) (94,623)
----------- ----------- -----------
Total shareholders' equity 313,002 644,643 515,921
----------- ----------- -----------
Total liabilities and shareholders' equity $ 1,438,851 $ 1,448,077 $ 1,234,914
=========== =========== ===========
</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 30, October 31,
1999 1998
--------- ---------
<S> <C> <C>
Operating activities:
Net income $ 170,152 $ 154,316
Impact of other operating activities on cash flows:
Depreciation and amortization 77,385 74,475
Changes in assets and liabilities:
Accounts receivable (2,767) 20,766
Inventories (315,848) (208,101)
Accounts payable and accrued expenses 3,769 (38,810)
Income taxes (143,416) (59,213)
Other assets and liabilities 5,824 31,084
--------- ---------
Net cash used for operating activities (204,901) (25,483)
--------- ---------
Investing activities:
Capital expenditures (110,409) (87,308)
--------- ---------
Financing activities:
Repayment of long-term debt (100,000) --
Change in intercompany balance 550,367 39,888
Repurchase of common stock (404,410) (106,046)
Dividends paid (101,623) (105,557)
Stock options and other 4,240 1,373
--------- ---------
Net cash used for financing activities (51,426) (170,342)
--------- ---------
Net decrease in cash and equivalents (366,736) (283,133)
Cash and equivalents, beginning of year 387,774 308,720
--------- ---------
Cash and equivalents, end of period $ 21,038 $ 25,587
========= =========
</TABLE>
In 1999, noncash financing activities included the addition of $0.1 million
common stock and $544.9 million paid-in capital that was transferred from
retained earnings as a result of the 5% stock dividend which resulted in the
issuance of 11.8 million additional 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 84.2% 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
thirty-nine week periods ended October 30, 1999 and October 31, 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
thirty-nine week periods ended October 30, 1999 and October 31, 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 Thirty-nine Weeks Ended
------------------------- -------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Common shares issued 265,838 265,335 265,801 265,335
Treasury shares (16,817) (3,787) (15,667) (1,551)
-------- -------- -------- --------
Basic shares 249,021 261,548 250,134 263,784
Dilutive effect of stock options and
restricted shares 3,792 1,125 4,154 1,792
-------- -------- -------- --------
Diluted shares 252,813 262,673 254,288 265,576
======== ======== ======== ========
</TABLE>
The computation of earnings per diluted share excludes options to
purchase .3 million shares and 3.6 million shares of common stock at
October 31, 1999 and October 31, 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>
October 30, January 30, October 31,
1999 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Property and equipment, at cost $ 890,123 $ 821,061 $ 811,567
Accumulated depreciation and amortization (466,554) (422,592) (408,236)
--------- --------- ---------
Property and equipment, net $ 423,569 $ 398,469 $ 403,331
========= ========= =========
</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 30, 1999 and October 31, 1998
approximated $250 million and $162 million. Deferred income tax assets
of $9 million were included in other assets at October 30, 1999.
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 30, January 30, October 31,
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
-------- -------- --------
250,000 350,000 350,000
Less: current portion of long-term debt -- 100,000 100,000
-------- -------- --------
$250,000 $250,000 $250,000
======== ======== ========
</TABLE>
Interest paid during the thirty-nine weeks ended October 30, 1999 and
October 31, 1998, including interest on the intercompany cash
management account (see Note 7), approximated $34 million and $30
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. Due to a
change in how the operations of Gryphon, Inc. are integrated into the
retail businesses, including changes in intercompany pricing, Gryphon
is now included in the retail segment. All prior periods have been
restated to reflect this change. The Catalogue segment consists of the
Victoria's Secret Catalogue operations. Sales outside the United States
were immaterial.
Segment information as of and for the thirteen and thirty-nine weeks
ended October 30, 1999 and October 31, 1998 follows (in thousands):
<TABLE>
<CAPTION>
1999 Retail Catalogue Corporate Total
------------------------ ----------- ----------- ----------- ---------
THIRTEEN WEEKS:
<S> <C> <C> <C> <C>
Net sales $ 690,337 $ 123,821 -- $ 814,158
Operating income (loss) 90,653 (594) ($ 18,901) 71,158
THIRTY-NINE WEEKS:
Net sales 2,166,534 542,554 -- 2,709,088
Operating income (loss) 330,609 40,063 (64,482) 306,190
Total assets 1,204,892 221,269 12,690 1,438,851
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
1999 Retail Catalogue Corporate Total
------------------------ ----------- ----------- ----------- ---------
THIRTEEN WEEKS:
<S> <C> <C> <C> <C>
Net sales $ 579,044 $ 129,941 -- $ 708,985
Operating income (loss) 80,491 5,786 ($ 15,659) 70,618
THIRTY-NINE WEEKS:
Net sales 1,823,632 530,929 -- 2,354,561
Operating income (loss) 280,641 46,990 (60,678) 266,953
Total assets 1,032,977 193,992 7,945 1,234,914
</TABLE>
In addition to its operating segments, management also focuses on
Victoria's Secret as a brand. Sales of the Victoria's Secret brand grew
20% for the thirteen weeks ended October 30, 1999 to $423 million and
18% for the thirty-nine weeks ended October 30, 1999 to $1.331 billion.
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 $5.0 million in 1999, leaving a $5.8 million
liability at October 30, 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 1999 or 1998.
10
<PAGE> 11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of
Intimate Brands, Inc.
We have reviewed the condensed consolidated balance sheets of Intimate Brands,
Inc. and Subsidiaries (the "Company") at October 30, 1999 and October 31, 1998,
and the related condensed consolidated statements of income for the thirteen and
thirty-nine week periods ended October 30, 1999 and October 31, 1998 and the
condensed consolidated statements of cash flows for the thirty-nine week periods
ended October 30, 1999 and October 31, 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
November 10, 1999
<PAGE> 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net sales for the third quarter of 1999 were $814.2 million, an increase of 15%,
from $709.0 million for the third quarter of 1998. This increase was driven by a
13% increase in comparable store sales and a 10% increase in selling square
feet. Operating income was $71.2 million in 1999 compared to $70.6 million in
1998 and net income was $37.9 million in 1999 versus $39.7 million in 1998.
Earnings per diluted share were $0.15 in both 1999 and 1998 (adjusted for a 5%
stock dividend declared June 22, 1999).
Third quarter highlights included the following:
- - Victoria's Secret Stores third quarter performance was driven by the
relaunch of Body by Victoria and the introduction of Stretch Cotton.
Victoria's Secret Stores recorded comparable stores sales of 16% for the
quarter. Victoria's Secret Catalogue sales decreased 5% as strong lingerie
sales were more than offset by weaker demand in the clothing category.
- - Bath & Body Works delivered a sales increase of 19% and third quarter
comparable store sales of 10%. The brand realized strong performances in
product relaunches such as aromatherapy, anti-bacterial and home fragrance.
Net sales for the thirty-nine weeks ended October 30, 1999 were $2.709 billion,
an increase of 15%, from $2.355 billion in 1998, driven by a comparable store
sales increase of 13%. Operating income increased 15% to $306.2 million from
$267.0 million in 1998 and net income increased 10% to $170.2 million from
$154.3 million in 1998. Earnings per diluted share grew 16% to $0.67 per share,
compared to $0.58 per share in 1998.
12
<PAGE> 13
Financial Summary
- -----------------
The following summarized financial and statistical data compares the thirteen
week and thirty-nine week periods ended October 30, 1999 to the comparable 1998
periods:
<TABLE>
<CAPTION>
Third Quarter Year - to - Date
------------------------------ -----------------------------
1999 1998 Change 1999 1998 Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
NET SALES (MILLIONS):
Victoria's Secret Stores $ 423 $ 352 20% $1,331 $1,127 18%
Bath & Body Works 260 218 19% 820 677 21%
Other (principally Gryphon) 7 9 (22%) 15 20 (25%)
------ ------ ------ ------ ------ ------
Total retail sales 690 579 19% 2,166 1,824 19%
Victoria's Secret Catalogue 124 130 (5%) 543 531 2%
------ ------ ------ ------ ------ ------
Total net sales $ 814 $ 709 15% $2,709 $2,355 15%
====== ====== ====== ====== ====== ======
COMPARABLE STORE SALES:
Victoria's Secret Stores 16% 4% 14% 4%
Bath & Body Works 10% 6% 11% 3%
------ ------ ------ ------
Total comparable store sales increase 13% 4% 13% 3%
====== ====== ====== ======
STORE DATA:
Retail sales increase
attributable to net new and
remodeled stores:
Victoria's Secret Stores 6% 3% 6% 4%
Bath & Body Works 9% 14% 11% 16%
Retail sales per average selling square foot:
Victoria's Secret Stores $ 109 $ 97 12% $ 349 $ 312 12%
Bath & Body Works $ 114 $ 109 5% $ 370 $ 354 5%
Retail sales per average store (thousands):
Victoria's Secret Stores $ 485 $ 437 11% $1,551 $1,407 10%
Bath & Body Works $ 227 $ 213 7% $ 737 $ 689 7%
Average store size at end of
quarter (selling square feet):
Victoria's Secret Stores 4,425 4,510 (2%)
Bath & Body Works 2,007 1,967 2%
Retail selling square feet at end of
quarter (thousands):
Victoria's Secret Stores 3,924 3,662 7%
Bath & Body Works 2,340 2,054 14%
</TABLE>
13
<PAGE> 14
Third Quarter Year - to - Date
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
NUMBER OF STORES:
Beginning of period 1,985 1,799 1,890 1,710
Opened 70 59 174 161
Closed (2) (2) (11) (15)
------ ------ ------ ------
End of period 2,053 1,856 2,053 1,856
====== ====== ====== ======
<TABLE>
<CAPTION>
Number of Stores Selling Sq. Ft. (thousands)
--------------------------------------- --------------------------------------
Change Change
October 30, October 31, From Prior October 30, October 31, From Prior
1999 1998 Year 1999 1998 Year
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Victoria's Secret Stores 887 812 75 3,924 3,662 262
Bath & Body Works 1,166 1,044 122 2,340 2,054 286
----- ----- ----- ----- ----- -----
Total stores and selling
square feet 2,053 1,856 197 6,264 5,716 548
===== ===== ===== ===== ===== =====
</TABLE>
Net Sales
- ---------
Net sales for the third quarter of 1999 increased 15% to $814.2 million from
$709.0 million in 1998. The net sales increase was primarily due to a 13%
increase in comparable store sales. The balance of the increase was due to the
net addition of 197 new stores. These increases were partially offset by a 5%
decrease in catalogue sales.
In the third quarter of 1999, retail sales increased 19% to $690.3 million from
$579.0 million in 1998. Bath & Body Works' sales increase of 19% was evenly
attributable to both a 10% increase in comparable store sales and the net
addition of 122 new stores. Victoria's Secret Stores' sales increased 20% to
$423.4 million. The sales increase was primarily due to a 16% increase in
comparable store sales, with the remaining increase coming from the net addition
of 75 new stores.
Victoria's Secret Catalogue net sales for the third quarter of 1999 decreased 5%
to $123.8 million from $129.9 million a year ago. This sales decrease was due to
weaker demand in the clothing category and lower than expected response rates on
sales books.
Year-to-date net sales increased 15% to $2.709 billion from $2.355 billion in
1998. The net sales increase was primarily due to a 13% increase in comparable
store sales. The balance of the increase was due to the net addition of 197 new
stores and a 2% increase in catalogue sales.
Gross Income
- ------------
The third quarter of 1999 gross income rate, expressed as a percentage of sales,
increased to 39.7% from 38.8% for the same period in 1998. The rate increase was
primarily due to an increase in the merchandise margin rate, particularly at
Victoria's Secret Stores. The remaining increase was driven by buying and
occupancy expense leverage resulting from a 16% comparable store sales increase
at Victoria's Secret Stores.
The 1999 year-to-date gross income rate increased to 39.0% from 37.5% in 1998.
The rate increase was primarily due to an increase in the merchandise margin
rate, both at Victoria's
14
<PAGE> 15
Secret Stores and Bath & Body Works. The remaining increase was driven by buying
and occupancy expense leverage resulting from a 14% comparable store sales
increase at Victoria's Secret Stores.
General, Administrative and Store Operating Expenses
- ----------------------------------------------------
The general, administrative and store operating expense rate, expressed as a
percentage of net sales, increased to 30.9% in the third quarter of 1999 from
28.8% for the same period in 1998. The rate increase was primarily due to an
increase in national advertising investment for the Victoria's Secret brand. The
remaining increase was due to increased investments in training and
merchandising payroll at Bath & Body Works, as well as a shift in the mix of net
sales to Bath & Body Works, which represented 30% of total Company net sales in
1999 versus 29% in 1998. Bath & Body Works has historically recorded higher
general, administrative and store operating expense rates due to significantly
smaller stores.
The year-to-date, general, administrative and store operating expense rate
increased to 27.7% from 26.2% in 1998. In addition to the reasons discussed
above, the rate increase was driven by investment in infrastructure and by
relocation costs and higher operating costs associated with moving the
Victoria's Secret's Beauty business to New York City.
Operating Income
- ----------------
The third quarter operating income rate, expressed as a percentage of net sales,
was 8.7% in 1999 compared to 10.0% in 1998. The increase in the gross income
rate of 0.9% was more than offset by the increase in the general, administrative
and store operating expense rate of 2.1%.
The year-to-date operating income rate, expressed as a percentage of net sales,
was 11.3% in 1999 and 1998. The increase in the gross income rate of 1.5% was
offset by an equal increase in the general, administrative and store operating
expense rate .
Interest Expense and Other Income
- ---------------------------------
Interest expense increased $0.5 million and $2.2 million in the third quarter
and year-to-date periods in 1999 from the comparable periods in 1998. The
interest expense is primarily for the Company's $250 million long-term debt and
the intercompany payable. 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 and debt repayment.
Other income decreased $2.9 million and $10.6 million in the third 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 and debt repayment.
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 $5.0 million
in 1999, leaving a $5.8 million liability at October 30, 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 1999 or 1998.
15
<PAGE> 16
FINANCIAL CONDITION
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):
October 30, January 30, October 31,
1999 1999 1998
-------- -------- --------
Working capital $ 77,160 $440,073 $313,122
======== ======== ========
Capitalization:
Long-term debt $250,000 $250,000 $250,000
Shareholders' equity 313,002 644,643 515,921
-------- -------- --------
Total capitalization $563,002 $894,643 $765,921
======== ======== ========
Net cash used for operating activities totaled $204.9 million for the
thirty-nine weeks ended October 30, 1999 versus $25.5 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, and an
increase in income tax payments.
Investing activities were for capital expenditures, which were primarily for new
and remodeled stores.
Financing activities included the first and second quarter cash dividend
payments of $0.13 per share and the third quarter cash dividend payment of $0.14
per share. Financing activities also 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. In addition, financing activities included
the repayment of $100 million of long-term debt that was due in August 1999. The
cash dividend payments, stock repurchase and debt repayment were partially
offset by a $550.4 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 $110.4
million for the thirty-nine weeks ended October 30, 1999, compared to $87.3
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 700,000 selling square feet in 1999,
which will represent a 12% increase over year-end 1998. This increase will
result from the addition of approximately 230 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 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 these
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
identified key vendors, suppliers and service providers, and sent Year
2000 surveys to 170 of these vendors to determine their Year 2000 status.
A total of 160 vendors responded and indicated that they will be Year 2000
compliant. 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. Each of the Company's businesses has
considered the results of the vendor surveys and on-site visits during the
development of its contingency plan.
- 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 Company and its individual operating businesses have substantially
completed the development of contingency plans that identify actions to be taken
if any critical systems or services are interrupted. The Company's businesses
have considered various contingency plans, such as alternative sourcing and
accelerated delivery of merchandise from foreign suppliers, and operational
alternatives, including manual processes. In addition, the Company plans to have
key managerial, operational and technical support personnel available to
identify and remedy any disruption that may occur during the transition to the
new millennium.
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
18
<PAGE> 19
control. Accordingly, the Company can give no assurances that the failure of
technology infrastructure of the United States (or other systems, such as
utilities, of general importance), foreign nations or 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.
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. On September 14, 1999,
the United States Court of Appeals for the Sixth Circuit affirmed the
order of dismissal. ATMI's petition for rehearing and suggestion for
rehearing en banc were denied on November 2, 1999.
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. On September 29, 1999, the United States
District Court for the Central District of California, Western
Division, transferred the case to the United States District Court for
the District of Hawaii. The Limited, along with certain other
defendants, has filed a petition for a writ of mandamus in the Ninth
Circuit Court of Appeals seeking an order holding that the transfer of
the case to the United States District Court for the District of Hawaii
was in error and ordering that the case be transferred to the United
States District Court on Saipan. The motion to dismiss the complaint
for failure to state a claim upon which relief can be granted remains
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 (called a "demurrer")
seeking dismissal of this complaint was filed. On September 3, 1999,
portions of the demurrer were overruled and the plaintiffs were given
leave to amend other portions of the complaint. A First Amended
Complaint was filed on September 23, 1999, and a second demurrer was
filed on October 6, 1999. On November 22, 1999, the demurrer to the
First Amended Complaint was overruled.
20
<PAGE> 21
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 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. 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 10, 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 November 10, 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 thirty-nine week
periods ended October 30, 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
December 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 October 30, 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> AUG-01-1999
<PERIOD-END> OCT-30-1999
<CASH> 21,038
<SECURITIES> 0
<RECEIVABLES> 18,394
<ALLOWANCES> 0
<INVENTORY> 795,744
<CURRENT-ASSETS> 936,366
<PP&E> 890,123
<DEPRECIATION> 466,554
<TOTAL-ASSETS> 1,438,851
<CURRENT-LIABILITIES> 859,206
<BONDS> 0
0
0
<COMMON> 2,646
<OTHER-SE> 310,356
<TOTAL-LIABILITY-AND-EQUITY> 1,438,851
<SALES> 814,158
<TOTAL-REVENUES> 814,158
<CGS> 491,125
<TOTAL-COSTS> 491,125
<OTHER-EXPENSES> 251,875
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,915
<INCOME-PRETAX> 63,243
<INCOME-TAX> 25,300
<INCOME-CONTINUING> 37,943
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,943
<EPS-BASIC> $0.15
<EPS-DILUTED> $0.15
</TABLE>
