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Previous: SPROTT SECURITIES LTD, SC 13G, 2000-12-11 |
Next: INTIMATE BRANDS INC, 10-Q, EX-15, 2000-12-11 |
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 28, 2000 |
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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
Three Limited Parkway, P.O. Box 16000, Columbus, OH 43230
(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 24, 2000 | |
| $.01 Par Value | 79,016,999 Shares | |
| Class B Common Stock |
|
Outstanding at November 24, 2000 |
| $.01 Par Value | 411,635,902 Shares |
INTIMATE BRANDS, INC.
TABLE OF CONTENTS
| |
Page No. |
|||
|---|---|---|---|---|
| Part I. Financial Information | ||||
| Item 1. Financial Statements |
|
|
||
| Consolidated Statements of Income Thirteen and Thirty-nine Weeks Ended October 28, 2000 and October 30, 1999 |
3 | |||
| Consolidated Balance Sheets October 28, 2000, January 29, 2000 and October 30, 1999 |
|
4 |
||
| Consolidated Statements of Cash Flows Thirty-nine Weeks Ended October 28, 2000 and October 30, 1999 |
|
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 |
|
18 |
||
| Item 5. Other Information |
|
18 |
||
| Item 6. Exhibits and Reports on Form 8-K |
|
19 |
||
2
Item 1. FINANCIAL STATEMENTS
INTIMATE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share amounts)
(Unaudited)
| |
Thirteen Weeks Ended |
Thirty-nine Weeks Ended |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
October 28, 2000 |
October 30, 1999 |
October 28, 2000 |
October 30, 1999 |
|||||||||||
| Net sales | $ | 925,108 | $ | 814,158 | $ | 3,087,139 | $ | 2,709,088 | |||||||
| Costs of goods sold and buying and occupancy costs | (566,089 | ) | (498,480 | ) | (1,888,824 | ) | (1,672,953 | ) | |||||||
| Gross income | 359,019 | 315,678 | 1,198,315 | 1,036,135 | |||||||||||
| General, administrative and store operating expenses | (278,900 | ) | (243,620 | ) | (831,257 | ) | (713,445 | ) | |||||||
| Operating income | 80,119 | 72,058 | 367,058 | 322,690 | |||||||||||
| Interest expense | (8,023 | ) | (7,915 | ) | (18,723 | ) | (24,673 | ) | |||||||
| Other income | — | — | 3,131 | 2,035 | |||||||||||
| Income before income taxes | 72,096 | 64,143 | 351,466 | 300,052 | |||||||||||
| Provision for income taxes | 28,900 | 25,700 | 140,600 | 120,000 | |||||||||||
| Net income | $ | 43,196 | $ | 38,443 | $ | 210,866 | $ | 180,052 | |||||||
| Net income per share: | |||||||||||||||
| Basic | $ | 0.09 | $ | 0.08 | $ | 0.43 | $ | 0.36 | |||||||
| Diluted | $ | 0.09 | $ | 0.08 | $ | 0.42 | $ | 0.35 | |||||||
| Dividends per share | $ | 0.07 | $ | 0.07 | $ | 0.21 | $ | 0.21 | |||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
3
INTIMATE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands)
| |
October 28, 2000 |
January 29, 2000 |
October 30, 1999 |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(Unaudited) |
|
(Unaudited) |
|||||||||
| ASSETS | ||||||||||||
| Current assets: | ||||||||||||
| Cash and equivalents | $ | 24,252 | $ | 76,373 | $ | 21,038 | ||||||
| Accounts receivable | 19,775 | 18,135 | 18,394 | |||||||||
| Inventories | 869,415 | 583,469 | 795,744 | |||||||||
| Stores supplies | 45,715 | 42,103 | 38,536 | |||||||||
| Other | 86,017 | 51,832 | 47,295 | |||||||||
| Total current assets |
|
|
1,045,174 |
|
|
771,912 |
|
|
921,007 |
|
||
| Property and equipment, net | 517,285 | 449,043 | 423,569 | |||||||||
| Other assets | 122,305 | 124,036 | 112,275 | |||||||||
| Total assets |
|
$ |
1,684,764 |
|
$ |
1,344,991 |
|
$ |
1,456,851 |
|
||
| LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
||
| Current liabilities: | ||||||||||||
| Accounts payable | $ | 136,242 | $ | 102,446 | $ | 125,838 | ||||||
| Current portion of long-term debt | 150,000 | 150,000 | — | |||||||||
| Accrued expenses | 192,596 | 248,729 | 186,098 | |||||||||
| Payable to The Limited, Inc. | 580,279 | 23,741 | 556,227 | |||||||||
| Income taxes | — | 128,845 | 7,125 | |||||||||
| Total current liabilities | 1,059,117 | 653,761 | 875,288 | |||||||||
| Long-term debt | 100,000 | 100,000 | 250,000 | |||||||||
| Deferred income taxes | 12,168 | 816 | — | |||||||||
| Other long-term liabilities | 49,902 | 45,683 | 44,561 | |||||||||
| Shareholders' equity: | ||||||||||||
| Common stock | 5,305 | 2,646 | 2,646 | |||||||||
| Paid-in capital | 1,215,143 | 1,217,806 | 1,215,183 | |||||||||
| Retained earnings (deficit) | (6,151 | ) | (113,067 | ) | (357,041 | ) | ||||||
| 1,214,297 | 1,107,385 | 860,788 | ||||||||||
| Less: treasury stock, at average cost | (750,720 | ) | (562,654 | ) | (573,786 | ) | ||||||
| Total shareholders' equity | 463,577 | 544,731 | 287,002 | |||||||||
| Total liabilities and shareholders' equity | $ | 1,684,764 | $ | 1,344,991 | $ | 1,456,851 | ||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
4
INTIMATE BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
| |
Thirty-nine Weeks Ended |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
October 28, 2000 |
October 30, 1999 |
||||||||
| Operating activities: | ||||||||||
| Net income | $ | 210,866 | $ | 180,052 | ||||||
| Adjustments to reconcile net income to net cash provided by (used for) operating activities: | ||||||||||
| Depreciation and amortization | 82,281 | 77,385 | ||||||||
| Changes in assets and liabilities: | ||||||||||
| Accounts receivable | (1,640 | ) | (2,767 | ) | ||||||
| Inventories | (285,946 | ) | (315,848 | ) | ||||||
| Accounts payable and accrued expenses | (22,337 | ) | (14,420 | ) | ||||||
| Income taxes | (149,878 | ) | (136,816 | ) | ||||||
| Other assets and liabilities | 9,387 | 7,513 | ||||||||
| Net cash used for operating activities | (157,267 | ) | (204,901 | ) | ||||||
| Investing activities: | ||||||||||
| Capital expenditures | (155,827 | ) | (110,409 | ) | ||||||
| Financing activities: | ||||||||||
| Repayment of long-term debt | — | (100,000 | ) | |||||||
| Change in payable to The Limited, Inc. | 556,538 | 550,367 | ||||||||
| Repurchase of common stock | (197,878 | ) | (404,410 | ) | ||||||
| Dividends paid | (103,950 | ) | (101,623 | ) | ||||||
| Stock options and other | 6,263 | 4,240 | ||||||||
| Net cash provided by (used for) financing activities | 260,973 | (51,426 | ) | |||||||
| Net decrease in cash and equivalents | (52,121 | ) | (366,736 | ) | ||||||
| Cash and equivalents, beginning of year | 76,373 | 387,774 | ||||||||
| Cash and equivalents, end of period | $ | 24,252 | $ | 21,038 | ||||||
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 23.6 million additional shares of common stock.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
5
INTIMATE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Intimate Brands, Inc. (the Company) includes specialty retail and direct response (catalogue and e-commerce) 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 Direct, and Bath & Body Works. The Limited, Inc. owns 84% of the outstanding common stock of the Company.
The consolidated financial statements include the accounts of the Company and all significant subsidiaries which are more than 50 percent owned and controlled. All significant intercompany balances and transactions have been eliminated in consolidation.
In September 2000, the Company formed a joint venture with Shiseido Co., Ltd. to develop, market and sell new lines of prestige beauty products. Because the Company has the ability to significantly influence the joint venture's operations and financial policies, the Company's investment in the joint venture is accounted for on the equity method.
The consolidated financial statements as of and for the thirteen and thirty-nine week periods ended October 28, 2000 and October 30, 1999 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 1999 Annual Report on Form 10-K. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations for a full fiscal year.
The consolidated financial statements as of and for the thirteen and thirty-nine week periods ended October 28, 2000 and October 30, 1999 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. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for its report on the consolidated financial statements because that report is not a "report" within the meaning of Sections 7 and 11 of that Act.
On May 2, 2000, the Company declared a two-for-one stock split ("stock split") in the form of a stock dividend distributed on May 30, 2000 to shareholders of record on May 12, 2000. Shareholders' equity reflects the reclassification of an amount equal to the par value of the increase in issued common shares ($2.7 million) from paid-in capital to common stock. All share and per share data throughout this report has been restated to reflect the stock split.
6
Weighted average common shares outstanding (thousands):
| |
|
Thirteen Weeks Ended |
Thirty-nine Weeks Ended |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
|
October 28, 2000 |
October 30, 1999 |
October 28, 2000 |
October 30, 1999 |
|||||
| Common shares issued | 532,069 | 531,676 | 531,982 | 531,602 | ||||||
| Treasury shares | (41,783 | ) | (33,634 | ) | (37,884 | ) | (31,334 | ) | ||
| Basic shares | 490,286 | 498,042 | 494,098 | 500,268 | ||||||
| Dilutive effect of stock options and restricted shares | 6,154 | 7,584 | 6,603 | 8,307 | ||||||
| Diluted shares | 496,440 | 505,626 | 500,701 | 508,575 | ||||||
The computation of earnings per diluted share excludes options to purchase 1.1 million and 0.5 million shares of common stock at quarter-end 2000 and 1999, because the options' exercise price was greater than the average market price of the common shares during the period.
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.
Property and equipment, net, consisted of (thousands):
| |
|
October 28, 2000 |
January 29, 2000 |
October 30, 1999 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Property and equipment, at cost | $ | 1,061,588 | $ | 936,612 | $ | 890,123 | |||||
| Accumulated depreciation and amortization | (544,303 | ) | (487,569 | ) | (466,554 | ) | |||||
| Property and equipment, net | $ | 517,285 | $ | 449,043 | $ | 423,569 | |||||
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 28, 2000 and October 30, 1999 approximated $283 million and $250 million. Income tax assets of $32.4 million were included in other current assets at October 28, 2000. Income tax assets of $27 million were included in other assets at October 30, 1999.
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 71/2% debentures are subject to early redemption beginning in 2003 concurrent with any prepayment of the corresponding debt by The Limited.
7
Unsecured long-term debt consisted of (thousands):
| |
|
October 28, 2000 |
January 29, 2000 |
October 30, 1999 |
||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 71/2% Debentures due March 2023 | $ | 100,000 | $ | 100,000 | $ | 100,000 | ||||
| 91/8% Notes due February 2001 | 150,000 | 150,000 | 150,000 | |||||||
| 250,000 | 250,000 | 250,000 | ||||||||
| Less: current portion of long-term debt | 150,000 | 150,000 | — | |||||||
| $ | 100,000 | $ | 100,000 | $ | 250,000 | |||||
Interest paid during the thirty-nine weeks ended October 28, 2000 and October 30, 1999, including interest on the intercompany cash management account (see Note 7), approximated $24.1 million and $34.1 million.
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 service-related costs not specifically attributable to an operating business have been allocated to the Company based upon various allocation methods, which the Company believes are reasonable. 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 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.
The Company identifies operating segments based on a business's operating characteristics. Reportable segments were determined based on similar economic characteristics, the nature of products and services, and the method of distribution. The retail segment includes the store-based operations of Victoria's Secret Stores and Bath & Body Works. The VS Direct segment consists of the Victoria's Secret Direct catalogue and e-commerce operations. Sales outside the United States were not significant.
8
Segment information as of and for the thirteen and thirty-nine weeks ended October 28, 2000 and October 30, 1999 follows (in thousands):
| |
2000 |
Retail |
VS Direct |
Corporate |
Total |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Thirteen Weeks: | |||||||||||||
| |
Net sales |
|
$ |
792,465 |
|
$ |
132,643 |
|
|
— |
|
$ |
925,108 |
| |
Operating income (loss) |
|
|
104,271 |
|
|
2,689 |
|
($ |
26,841 |
) |
|
80,119 |
| |
Thirty-nine Weeks: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net sales |
|
|
2,517,737 |
|
|
569,402 |
|
|
— |
|
|
3,087,139 |
| |
Operating income (loss) |
|
|
400,582 |
|
|
47,942 |
|
|
(81,466 |
) |
|
367,058 |
| |
Total assets |
|
|
1,375,730 |
|
|
210,527 |
|
|
98,507 |
|
|
1,684,764 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
1999 |
Retail |
VS Direct |
Corporate |
Total |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Thirteen Weeks: | |||||||||||||
| |
Net sales |
|
$ |
690,337 |
|
$ |
123,821 |
|
|
— |
|
$ |
814,158 |
| |
Operating income (loss) |
|
|
90,653 |
|
|
306 |
|
($ |
18,901 |
) |
|
72,058 |
| |
Thirty-nine Weeks: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net sales |
|
|
2,166,534 |
|
|
542,554 |
|
|
— |
|
|
2,709,088 |
| |
Operating income (loss) |
|
|
342,509 |
|
|
44,663 |
|
|
(64,482 |
) |
|
322,690 |
| |
Total assets |
|
|
1,137,601 |
|
|
221,269 |
|
|
97,981 |
|
|
1,456,851 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to its operating segments, management also focuses on Victoria's Secret as a brand. Sales of the Victoria's Secret brand grew 9% to $597.9 million for the thirteen weeks ended October 28, 2000, and 12% to $2.089 billion for the thirty-nine weeks ended October 28, 2000.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was subsequently amended and clarified by SFAS No. 138. SFAS No. 133, as amended, is effective for the Company's 2001 fiscal year. It requires that derivative instruments be recorded at fair value and that changes in their fair value be recognized in current earnings unless specific hedging criteria are met. With respect to SFAS No. 133, the Company has been educating Company personnel, identifying and documenting the Company's use of derivative instruments, including embedded derivatives, and addressing other related issues. Due to the Company's limited use of derivatives, management does not believe that the adoption of SFAS No. 133 will have a significant effect on the Company's results of operations or its financial position.
Emerging Issues Task Force ("EITF") Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs," will be effective in the fourth quarter of 2000 and addresses the classification of shipping and handling fees and costs.
EITF Issue No. 00-14, "Accounting for Certain Sales Incentives," will be effective in the second quarter of 2001 and addresses the accounting for, and classification of, various sales incentives.
The Securities and Exchange Commission ("SEC") has issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which will be effective in the fourth
9
quarter of 2000. SAB No. 101 provides the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues.
The Company has determined that adopting the provisions of the above EITF Issues and SAB No. 101 will not have a material impact on its consolidated financial statements.
10
Report of Independent Accountants
To
the Board of Directors and
Shareholders of
Intimate Brands, Inc.
We have reviewed the accompanying condensed consolidated balance sheets of Intimate Brands, Inc. and its subsidiaries (the "Company") as of October 28, 2000 and October 30, 1999, and the related condensed consolidated statements of income for each of the thirteen and thirty-nine week periods ended October 28, 2000 and October 30, 1999 and the condensed consolidated statements of cash flows for the thirty-nine week periods ended October 28, 2000 and October 30, 1999. 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 condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of January 29, 2000, and the related consolidated statements of income and shareholders' equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 16, 2000 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of January 29, 2000, 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 14, 2000
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net sales for the third quarter of 2000 were $925.1 million, an increase of 14% from $814.2 million for the third quarter of 1999. Gross income increased 14% to $359.0 million from $315.7 million in 1999, and operating income increased 11% to $80.1 million from $72.1 million in 1999. Net income was $43.2 million, an increase of 12% from $38.4 million in 1999. Earnings per share grew 13% to $0.09 per share from $0.08 per share in 1999 (adjusted to reflect the two-for-one stock split declared on May 2, 2000).
Third quarter business highlights included the following:
Net sales for the thirty-nine weeks ended October 28, 2000 were $3.087 billion, an increase of 14% from $2.709 billion in 1999. The increase was driven by a 9% comparable store sales increase and a 9% increase in selling square feet. Gross income increased 16% to $1.198 billion from $1.036 billion in 1999, and operating income increased 14% to $367.1 million from $322.7 million in 1999. Net income was $210.9 million, an increase of 17% from $180.1 million in 1999. Earnings per share increased 20% to $0.42 per share from $0.35 per share in 1999.
12
Financial Summary
The following summarized financial and statistical data compares the thirteen week and thirty-nine week periods ended October 28, 2000 to the comparable 1999 periods:
| |
Third Quarter |
Year-To-Date |
|||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
Change |
2000 |
1999 |
Change |
|||||||||||||
| Net Sales (millions): | |||||||||||||||||||
| Victoria's Secret Stores | $ | 465 | $ | 423 | 10 | % | $ | 1,520 | $ | 1,331 | 14 | % | |||||||
| Bath & Body Works | 317 | 260 | 22 | % | 976 | 820 | 19 | % | |||||||||||
| Other (principally Gryphon) | 10 | 7 | N/M | 22 | 15 | N/M | |||||||||||||
| Total retail sales | 792 | 690 | 15 | % | 2,518 | 2,166 | 16 | % | |||||||||||
| Victoria's Secret Direct |
|
|
133 |
|
|
124 |
|
7 |
% |
|
569 |
|
|
543 |
|
5 |
% |
||
| Total net sales | $ | 925 | $ | 814 | 14 | % | $ | 3,087 | $ | 2,709 | 14 | % | |||||||
| Comparable Store Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
| Victoria's Secret Stores |
|
|
8 |
% |
|
16 |
% |
|
|
|
11 |
% |
|
14 |
% |
|
|
||
| Bath & Body Works | 5 | % | 10 | % | 5 | % | 11 | % | |||||||||||
| Total comparable store sales increase | 6 | % | 13 | % | 9 | % | 13 | % | |||||||||||
N/M Not meaningful
13
| |
Third Quarter |
Year-To-Date |
||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
Change |
2000 |
1999 |
Change |
||||||||||||
| Store Data: | ||||||||||||||||||
| Retail sales increase attributable to net new and remodeled stores: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
| Victoria's Secret Stores | 2 | % | 6 | % | 3 | % | 6 | % | ||||||||||
| Bath & Body Works | 17 | % | 9 | % | 14 | % | 11 | % | ||||||||||
| Retail sales per average selling square foot: |
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| Victoria's Secret Stores | $ | 115 | $ | 109 | 6 | % | $ | 377 | $ | 349 | 8 | % | ||||||
| Bath & Body Works | $ | 111 | $ | 114 | (3 | %) | $ | 357 | $ | 370 | (4 | %) | ||||||
| Retail sales per average store (thousands): |
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| Victoria's Secret Stores | $ | 508 | $ | 485 | 5 | % | $ | 1,668 | $ | 1,551 | 8 | % | ||||||
| Bath & Body Works | $ | 234 | $ | 227 | 3 | % | $ | 744 | $ | 737 | 1 | % | ||||||
| Average store size at end of quarter (selling square feet): |
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| Victoria's Secret Stores | 4,416 | 4,425 | 0 | % | ||||||||||||||
| Bath & Body Works | 2,112 | 2,007 | 5 | % | ||||||||||||||
| Retail selling square feet at end of quarter (thousands): |
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| Victoria's Secret Stores | 4,094 | 3,924 | 4 | % | ||||||||||||||
| Bath & Body Works | 2,978 | 2,340 | 27 | % | ||||||||||||||
| Number of Stores: |
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| Beginning of period |
|
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2,205 |
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1,985 |
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2,110 |
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1,890 |
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| Opened | 136 | 70 | 238 | 174 | ||||||||||||||
| Closed | (4 | ) | (2 | ) | (11 | ) | (11 | ) | ||||||||||
| End of period |
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2,337 |
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2,053 |
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2,337 |
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2,053 |
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| |
Number of Stores |
Selling Sq. Ft. (thousands) |
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|---|---|---|---|---|---|---|---|---|---|
| |
October 28, 2000 |
October 30, 1999 |
October 28, 2000 |
October 30, 1999 |
|||||
| Victoria's Secret Stores | 927 | 887 | 4,094 | 3,924 | |||||
| Bath & Body Works | 1,410 | 1,166 | 2,978 | 2,340 | |||||
| Total stores and selling square feet | 2,337 | 2,053 | 7,072 | 6,264 | |||||
14
Net Sales
Net sales for the third quarter of 2000 increased 14% to $925.1 million from $814.2 million in 1999. The net sales increase was primarily due to the net addition of 284 new stores and a 6% increase in comparable store sales.
In the third quarter of 2000, retail sales increased 15% to $792.5 million from $690.3 million in 1999. Bath & Body Works' sales increase was primarily attributable to the net addition of 244 new stores and a 5% increase in comparable store sales. Victoria's Secret Stores' sales increase of 10% was primarily due to an 8% increase in comparable store sales, with the remaining increase resulting from the net addition of 40 stores.
Victoria's Secret Direct net sales for the third quarter of 2000 increased 7% to $132.6 million from $123.8 million a year ago. This sales increase was due to favorable results on shared bra styles with Victoria's Secret Stores and strong clothing results.
Year-to-date net sales in 2000 increased 14% to $3.087 billion from $2.709 billion in 1999. The net sales increase was due to a 9% increase in comparable store sales and the net addition of 284 new stores.
Gross Income
The third quarter of 2000 gross income rate, expressed as a percentage of sales, of 38.8% was flat to last year. The positive buying and occupancy expense leverage, driven by an 8% increase in comparable stores sales at Victoria's Secret Stores and leverage of catalogue expenses at Victoria's Secret Direct, was offset by a decline in the merchandise margin rate, primarily due to promotional offers at Victoria's Secret Stores and Victoria's Secret Direct.
The 2000 year-to-date gross income rate increased to 38.8% from 38.2% in 1999. The rate improvement was primarily due to positive buying and occupancy expense leverage, offset by a slight decline in the merchandise margin rate. These rate changes were primarily due to the factors discussed above.
General, Administrative and Store Operating Expenses
The general, administrative and store operating expense rate, expressed as a percentage of sales, increased to 30.1% in the third quarter of 2000 from 29.9% for the same period in 1999. The rate increase was primarily driven by increased investments in product development and store selling at Bath & Body Works and Victoria's Secret Stores, partially offset by slightly lower marketing expenses at Victoria's Secret Stores.
The 2000 year-to-date general, administrative and store operating expense rate increased to 26.9% from 26.3% in 1999, primarily due to increased investments in product development and store selling at Bath & Body Works.
Operating Income
The third quarter operating income rate, expressed as a percentage of sales, was 8.7% compared to 8.9% in 1999. The rate decrease was primarily due to the increase in the general, administrative and store operating expense rate.
The 2000 year-to-date operating income rate of 11.9% was flat to last year, as the improved gross income rate was offset by an increase in the general, administrative and store operating expense rate.
15
Interest Expense and Other Income
Third quarter and year-to-date interest expense was $8.0 million and $18.7 million in 2000 compared to $7.9 million and $24.7 million in 1999, respectively. The interest expense is primarily for the Company's long-term debt. The year-to-date decrease is due to the repayment of $100 million in term debt in August 1999.
The Company did not earn other income in the third quarter of 2000 or 1999. The Company earned $3.1 million and $2.0 million of other income in the year-to-date periods in 2000 and 1999. This other income was primarily interest income earned from excess net cash from operations managed through The Limited's centralized cash management system (see Note 7 to the Consolidated Financial Statements).
FINANCIAL CONDITION
A detailed discussion of the Company's 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 28, 2000 |
January 29, 2000 |
October 30, 1999 |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Working capital (deficit) | $ | (13,943 | ) | $ | 118,151 | $ | 45,719 | ||||
| Capitalization: | |||||||||||
| Long-term debt | $ | 100,000 | $ | 100,000 | $ | 250,000 | |||||
| Shareholders' equity | 463,577 | 544,731 | 287,002 | ||||||||
| Total capitalization | $ | 563,577 | $ | 644,731 | $ | 537,002 | |||||
Net cash used for operating activities totaled $157.3 million for the thirty-nine weeks ended October 28, 2000 versus net cash used for operating activities of $204.9 million for the same period in 1999. The change in net cash used for operating activities was primarily driven by increased net income and less inventory growth compared to 1999.
Investing activities were for capital expenditures, which were primarily for new and remodeled stores.
Financing activities in 2000 included three quarterly cash dividend payments of $0.07 per share. In addition, financing activities included the repurchase of 1.4 million shares of the Company's common stock from its public shareholders for $31.4 million. Additionally, the Company repurchased 7.4 million shares from The Limited for $166.5 million. The repurchases were proportionate and did not change The Limited's 84% ownership interest in the Company. The cash dividend payment and stock repurchase were offset by a $556.5 million net increase in The Limited's intercompany cash management account payable (see Note 7 to the Consolidated Financial Statements).
In 1999, financing activities included the repayment of $100 million of long-term debt and three quarterly cash dividend payments. In addition, financing activities included a proportionate repurchase of approximately 20.4 million shares of the Company's common stock for $404.4 million, of which 17.2 million shares were repurchased from The Limited, for $341.8 million. The above cash outflows were offset by a $550.4 million net increase in The Limited, Inc. intercompany cash management account payable.
16
Capital Expenditures
Capital expenditures, primarily for new and remodeled stores, totaled $155.8 million for the thirty-nine weeks ended October 28, 2000, compared to $110.4 million for the comparable period of 1999. The Company anticipates spending $225 to $250 million in 2000 for capital expenditures, of which $200 to $225 million will be for new stores and for remodeling of and improvements to existing stores.
The Company intends to add approximately 760,000 selling square feet in 2000, which will represent a 12% increase over year-end 1999. It is anticipated the increase will result from the addition of approximately 275 net new stores and the expansion of approximately 40 stores. The Company expects that capital expenditures will be funded principally by net cash provided by operating activities.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was subsequently amended and clarified by SFAS No. 138. SFAS No. 133, as amended, is effective for the Company's 2001 fiscal year. It requires that derivative instruments be recorded at fair value and that changes in their fair value be recognized in current earnings unless specific hedging criteria are met. With respect to SFAS No. 133, the Company has been educating Company personnel, identifying and documenting the Company's use of derivative instruments, including embedded derivatives, and addressing other related issues. Due to the Company's limited use of derivatives, management does not believe that the adoption of SFAS No. 133 will have a significant effect on the Company's results of operations or its financial position.
Emerging Issues Task Force ("EITF") Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs," will be effective in the fourth quarter of 2000 and addresses the classification of shipping and handling fees and costs.
EITF Issue No. 00-14, "Accounting for Certain Sales Incentives," will be effective in the second quarter of 2001 and addresses the accounting for, and classification of, various sales incentives.
The Securities and Exchange Commission ("SEC") has issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which will be effective in the fourth quarter of 2000. SAB No. 101 provides the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues.
The Company has determined that adopting the provisions of the above EITF Issues and SAB No. 101 will not have a material impact on its consolidated financial statements.
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. 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 2000 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.
17
Item 1. LEGAL PROCEEDINGS
The Company is a defendant in a variety of lawsuits arising in the ordinary course of business.
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 April 12, 1999, a motion to dismiss that complaint for failure to state a claim upon which relief can be granted was filed, and it remains pending. 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. On June 23, 2000, the United States District Court for the District of Hawaii transferred the case to the United States District Court for the District of the Northern Mariana Islands, and on July 7, 2000, denied plaintiffs' motion for reconsideration of the transfer order. Plaintiffs have filed a Petition for a Writ of Mandamus challenging the transfer order and Motion for Emergency Stay in the U.S. 9th Circuit Court of Appeals. The Motion for Emergency Stay was granted on November 3, 2000. The Petition for a Writ of Mandamus remains pending. A first amended complaint was filed on April 28, 2000, which adds additional defendants but does not otherwise substantively alter the claims alleged or relief sought. The second complaint, filed by a national labor union and other organizations in the Superior Court of the State of California, San Francisco County, and which alleges unfair business practices under California law, 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.
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.
18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
19
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) |
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| |
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By: |
/s/ V. ANN HAILEY V. Ann Hailey, Executive Vice President and Chief Financial Officer of The Limited, Inc.* |
Date: December 8, 2000
20
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