Summary of LIMITED BRANDS INC

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

The following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The following information should be read in conjunction with our financial statements and the related notes included in Item 8. Financial Statements and Supplementary Data.

Our operating results are generally impacted by changes in the U.S. and Canadian economies and, therefore, we monitor the retail environment using, among other things, certain key industry performance indicators such as the University of Michigan Consumer Sentiment Index (which measures consumers' views on the future course of the U.S. economy), the National Retail Traffic Index (which measures traffic levels in malls nationwide) and National Retail Sales (which reflects sales volumes of 5,000 businesses as measured by the U.S. Census Bureau). These indices provide insight into consumer spending patterns and shopping behavior in the current retail environment and assist us in assessing our performance as well as the potential impact of industry trends on our future operating results. Additionally, we evaluate a number of key performance indicators including comparable store sales, gross profit, operating income and other performance metrics such as sales per average selling square foot and inventory per selling square foot in assessing our performance.

Executive Overview

Strategy

Our strategy supports and drives our mission to build a family of the world's best fashion retail brands whose well-told stories create loyal customers and deliver sustained growth for our stakeholders.

To execute our strategy, we are focused on these key strategic imperatives:

• Grow our core brands in current channels and geographies;

• Extend our core brands into larger footprints and new channels and geographies;

• Incubate and grow new brands in current channels;

• Build enabling infrastructure and capabilities;

• Become the top destination for talent; and

• Optimize our capital structure.

2008 Overview

We anticipated that the retail environment would be challenging in 2008. However, the holiday season was much more difficult than expected as a result of the global economic downturn and its impact on the U.S. and Canadian retail environment. Our financial performance in 2008 was significantly impacted by the downturn. Our net sales decreased 11% to $9.043 billion, driven by a comparable store sales decrease of 9%, and our operating income decreased $521 million to $589 million. The decline in our operating income included a $215 million impairment of goodwill and other intangible assets related to our La Senza business. For additional information related to our 2008 financial performance, see "Results of Operations-2008 Compared to 2007."

As a result of these challenges, we focused on the conservative management of retail fundamentals including:

• Inventory levels-we ended 2008 down 6% and 33% as compared to 2007 and 2006, respectively, and our inventory per selling square foot ended 2008 down 8% and 34% compared to 2007 and 2006, respectively;

• Operating expenses-we have taken actions to reduce our expense base including reducing our home office headcount by approximately 10% during the second quarter of 2007 and an additional 10% during the fourth quarter of 2008;

• Capital expenditures-we reduced our capital expenditures from $749 million in 2007 to $479 million in 2008. We are currently planning capital expenditures of approximately $200 million in 2009;

• Cash and liquidity-we generated cash flow from operations of $954 million in 2008 and ended 2008 with $1.2 billion in cash. Additionally, in February 2009, we renegotiated the covenants on our $750 million term loan and $1 billion revolving credit facility to provide us additional flexibility in this uncertain environment.

Despite the challenging environment during 2008, we accomplished the following in terms of the execution of our business strategy:

• The stabilization of operations in our new distribution center for Victoria's Secret Direct;

• The divestiture of a personal care joint venture in the first quarter of 2008 which generated pre-tax cash proceeds of $159 million and a pre-tax gain of $128 million;

• The successful introduction of Bath & Body Works stores into Canada; and

• The implementation of our new supply chain systems at Mast.

2009 Outlook

Economic Environment

The global retail sector and our business continue to face a very uncertain and difficult environment and, as a result, we have taken a defensive stance in terms of the financial management of our business. We will continue to manage our business conservatively and we will focus on the execution of the retail fundamentals noted above.

At the same time, we are aggressively focusing on bringing compelling merchandise assortments, marketing and store experiences to our customers. We will look for, and capitalize on, those opportunities available to us in this difficult environment. We believe that our brands, which lead their categories and offer high emotional content at accessible prices, are well positioned heading into 2009.

International Expansion

We anticipate opening approximately 20 new Bath & Body Works Canada stores in 2009. The six stores that we opened in 2008 have exceeded our performance expectations. Additionally, we will continue to explore other international opportunities in 2009.

Capital Expenditures

We plan to spend approximately $200 million in 2009 on capital expenditures with the majority relating to opening new stores and remodeling and improving existing stores. We expect to open approximately 50 new stores in the U.S. and Canada and to remodel approximately 40 stores during 2009.

Store Data

The following table compares 2008 store data to the comparable periods for 2007
and 2006:



                                                                              % Change
                                              2008      2007      2006     2008      2007
  Sales Per Average Selling Square Foot
  Victoria's Secret Stores                   $   620   $   694   $   731    (11 %)     (5 %)
  La Senza (a) (b) (c)                           524       529        NM     (1 %)     NM
  Bath & Body Works                              594       655       697     (9 %)     (6 %)

  Sales per Average Store (in thousands)
  Victoria's Secret Stores                   $ 3,480   $ 3,678   $ 3,698     (5 %)     (1 %)
  La Senza (a) (b) (c)                         1,551     1,619        NM     (4 %)     NM
  Bath & Body Works                            1,410     1,540     1,613     (8 %)     (5 %)

  Average Store Size (selling square feet)
  Victoria's Secret Stores                     5,727     5,489     5,111      4 %       7 %
  La Senza (a) (c)                             3,026     2,888        NM      5 %      NM
  Bath & Body Works                            2,378     2,370     2,331      - %       2 %

  Total Selling Square Feet (in thousands)
  Victoria's Secret Stores                     5,973     5,599     5,126      7 %       9 %
  La Senza (a) (c)                               974       901       944      8 %      (5 %)
  Bath & Body Works                            3,895     3,773     3,604      3 %       5 %

(a) La Senza was acquired on January 12, 2007.

(b) Excluding the impact of currency fluctuations, sales per average selling square foot were flat for 2008 and sales per average store decreased 3% for 2008.

NM Not meaningful

The following table compares 2008 store data to the comparable periods for 2007 and 2006:

                   Number of Stores (a)   2008      2007      2006
                   Victoria's Secret
                   Beginning of Period    1,020     1,003       998
                   Opened                    41        35        24
                   Closed                   (18 )     (18 )     (19 )

                   End of Period          1,043     1,020     1,003

                   La Senza (b)
                   Beginning of Period      312       291         -
                   Opened                    15        27         -
                   Closed                    (5 )      (6 )      (2 )
                   Acquired                   -         -       293

                   End of Period            322       312       291

                   Bath & Body Works
                   Beginning of Period    1,592     1,546     1,555
                   Opened                    80        67        20
                   Closed                   (34 )     (21 )     (29 )

                   End of Period          1,638     1,592     1,546

                   Apparel
                   Beginning of Period        -       918     1,035
                   Opened                     -         -         2
                   Closed                     -       (49 )    (119 )
                   Divested (c)               -      (869 )       -

                   End of Period              -         -       918

(a) Excludes Henri Bendel store locations (5 in 2008 and 2 in 2007 and 2006), Bath & Body Works Canada store locations (6 in 2008 and 0 in 2007 and 2006) and Diva London store locations (0 in 2008 and 2007 and 6 in 2006).

(b) Number of stores excludes independently owned La Senza stores operated by licensees.

(c) Represents stores related to the 75% divestitures of our ownership interests in Express and Limited Stores in July 2007 and August 2007, respectively.

Results of Operations-2008 Compared to 2007

Operating Income

The following table provides our segment operating income (loss) and operating
income rates (expressed as a percentage of net sales) for 2008 in comparison to
2007:



                                                            Operating Income Rate
                                   2008      2007(a)        2008             2007
                                     (in millions)
       Victoria's Secret (b) (c)   $ 405     $    718           7.2 %           12.8 %
       Bath & Body Works             215          302           9.1 %           12.1 %
       Apparel (d)                     -          250            NA             28.7 %
       Other (e) (f) (g) (h)         (31 )       (160 )        (2.9 %)         (13.7 %)

       Total                       $ 589     $  1,110           6.5 %           11.0 %

(a) Amounts presented are restated to conform with the corporate cost allocation methodology adopted at the beginning of 2008. For additional information, see Note 21 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

(b) 2008 includes a $215 million impairment charge related to goodwill and other intangible assets for the La Senza business. For additional information, see Critical Accounting Policies and Estimates and Note 10 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

(d) 2007 includes a $230 million net gain related to the divestiture of Express and Limited Stores. For additional information, see Note 6 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

(e) Includes Corporate, Mast, Henri Bendel and Bath & Body Works Canada.

(f) 2008 includes a $109 million net gain on joint ventures. For additional information, see Note 6 and Note 11 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

(g) 2008 includes $23 million of expense related to restructuring activities. For additional information, see Note 7 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

(h) 2007 includes restructuring and impairment charges totaling $53 million, which excludes both the $6 million of minority interest income associated with the charges and $25 million in gains related to the sale of corporate aircraft. For additional information, see Note 7 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

NA Not applicable

For 2008, operating income decreased $521 million to $589 million and the operating income rate decreased to 6.5% from 11.0%. The drivers of the operating income results are discussed in the following sections.

Net Sales

The following table provides net sales for 2008 in comparison to 2007:



                                           2008       2007     % Change
                                            (in millions)
               Victoria's Secret Stores   $ 3,590   $  3,720         (3 %)
               La Senza (a)                   491        488          1 %
               Victoria's Secret Direct     1,523      1,399          9 %

               Total Victoria's Secret      5,604      5,607          - %
               Bath & Body Works            2,374      2,494         (5 %)
               Express (b)                     NA        659         NM
               Limited Stores (b)              NA        211         NM

               Total Apparel (b)               NA        870         NM
               Other (c)                    1,065      1,163         (8 %)

               Total Net Sales            $ 9,043   $ 10,134        (11 %)

(a) La Senza includes a $19 million decrease in net sales from 2007 to 2008 related to currency fluctuations.

(b) Express and Limited Stores were divested in July 2007 and August 2007, respectively.

NA Not applicable

NM Not meaningful

The following tables provide a reconciliation of net sales for 2007 to 2008:

                                       Victoria's        Bath & Body
                                         Secret             Works           Apparel        Other        Total
                                                                    (in millions)
2007 Net Sales                        $      5,607      $       2,494      $     870      $ 1,163      $ 10,134
Comparable Store Sales                        (289 )             (212 )            -            -          (501 )
Sales Associated with New, Closed,
Divested and Non-comparable
Remodeled Stores, Net (a)                      162                 73           (870 )         14          (621 )
Direct Channels                                124                 19              -            -           143
Mast Third-party Sales and Other                 -                  -              -         (112 )        (112 )

2008 Net Sales                        $      5,604      $       2,374      $       -      $ 1,065      $  9,043

(a) Victoria's Secret includes a $19 million decrease in net sales at La Senza related to currency fluctuations.

The following table compares 2008 comparable store sales to 2007:

                                                  2008      2007
                   Victoria's Secret Stores         (9 %)     (2 %)
                   La Senza                         (3 %)      6 %

                   Total Victoria's Secret          (8 %)     (2 %)
                   Bath & Body Works                (9 %)     (4 %)
                   Express (a)                      NA         6 %
                   Limited Stores (a)               NA         4 %

                   Total Apparel (a)                NA         5 %
                   Henri Bendel                      1 %       2 %

                   Total Comparable Store Sales     (9 %)     (2 %)

(a) Reflects comparable store sales prior to the divestitures of Express and Limited Stores in July 2007 and August 2007, respectively.

NA Not applicable

For 2008, our net sales decreased 11% to $9.043 billion and comparable store sales decreased 9%. The decrease in our net sales was primarily driven by the following:

Victoria's Secret

For 2008, net sales remained relatively flat at $5.604 billion and comparable store sales decreased 8%. The net sales result was primarily driven by:

• At Victoria's Secret Direct, net sales increased 9% driven by strong performance in certain categories including swimwear and dresses and the impact of the 2007 operational issues at the new distribution center;

• At La Senza, net sales increased slightly due to increased net sales to international licensees and new store growth mostly offset by unfavorable currency fluctuations;

Partially offset by:

• At Victoria's Secret Stores, net sales decreased across many categories primarily driven by a merchandise assortment that did not overcome the challenging economic environment and initial recognition of gift card breakage of $48 million in 2007. The declines were partially offset by growth related to new and expanded stores and an increase in Pink.

The decrease in comparable store sales was primarily driven by declines in store traffic and transactions in addition to decreased units per sales transaction.

Bath & Body Works

For 2008, net sales decreased 5% to $2.374 billion and comparable store sales decreased 9%. Net sales decreased driven by weak store traffic and the challenging economic environment. From a category perspective, declines in Signature Collection were offset partially by increases in the Aromatherapy, True Blue Spa and home fragrance categories. The decrease in comparable store sales was primarily driven by declines in store traffic and lower average unit retail prices offset partially by an increase in merchandise units per transaction.

Apparel and Other

For 2008, Apparel net sales decreased $870 million as a result of the 2007 divestitures of 75% of our equity interests in Express and Limited Stores. In addition, Other net sales decreased $98 million to $1.065 billion primarily driven by a decrease in Mast sales as well as the personal care joint venture that was sold in the first quarter of 2008.

Gross Profit

For 2008, our gross profit decreased 14% to $3.006 billion and our gross profit rate (expressed as a percentage of net sales) decreased to 33.2% from 34.6% primarily driven by the following:

Victoria's Secret

For 2008, gross profit decreased primarily driven by the decrease at Victoria's Secret Stores in net sales and the related decrease in merchandise margin dollars combined with increased buying and occupancy expenses related to our new and remodeled stores.

Victoria's Secret Direct's gross profit remained relatively flat as the impact of the 9% increase in net sales was offset by the impact of increased promotional activity to clear inventory and an increase in catalogue circulation.

The gross profit rate decreased driven primarily by an increase in the buying and occupancy expense rate as cited above.

Bath & Body Works

For 2008, gross profit decreased primarily driven by lower net sales and a related decrease in merchandise margin dollars combined with an increase in buying and occupancy expenses associated with store real estate activity.

The gross profit rate decreased driven primarily by an increase in the buying and occupancy expense rate due to the factors cited above.

Apparel and Other

For 2008, gross profit decreased $250 million as a result of the divestitures of 75% equity interest in Express and Limited Stores in 2007.

General, Administrative and Store Operating Expenses

For 2008, our general, administrative and store operating expenses decreased 12% to $2.311 billion primarily driven by:

• the Apparel divestitures in the second quarter of 2007;

• the elimination of costs related to the technology joint venture that was closed in December 2007;

• the elimination of costs related to the personal care joint venture that was sold in the first quarter of 2008; and

• expense reductions across all segments, primarily in home office costs.

Partially offset by:

• gains of $25 million related to the sale of corporate aircraft in 2007.

The general, administrative and store operating expense rate decreased to 25.6% from 25.8% primarily driven by the factors cited above.

Impairment of Goodwill and Other Intangible Assets

In the fourth quarter of 2008, we recognized charges totaling $215 million related to the impairment of goodwill and trade name assets associated with our La Senza business. The impairment charges were based on our evaluation of the estimated fair value of the La Senza business and trade name assets as compared to their respective carrying values. Our evaluation concluded that as a result of the global economic downturn and the related negative impact on La Senza's operating performance, the fair value of the La Senza business and trade name assets were below their carrying values as of the fourth quarter of 2008. For additional information, see Critical Accounting Policies and Estimates and Note 10 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

Net Gain on Joint Ventures

In April 2008, we and our investment partner completed the divestiture of a personal care joint venture to a third party. We recognized a pre-tax gain of $128 million on the divestiture. The pre-tax gain is included in Net Gain on Joint Ventures on the 2008 Consolidated Statement of Income. In addition, we recorded a $19 million impairment charge related to another joint venture. The charge consisted of writing down the investment balance, reserving certain accounts and notes receivable and accruing a contractual liability. The impairment of $19 million is also included in Net Gain on Joint Ventures on the 2008 Consolidated Statement of Income.

Apparel Divestitures

On July 6, 2007, we finalized the divestiture of a 75% ownership interest in our Express brand to affiliates of Golden Gate Capital for pre-tax net cash proceeds of $547 million. The transaction resulted in a pre-tax gain on divestiture of $302 million.

On August 3, 2007, we divested a 75% ownership interest of our Limited Stores business to affiliates of Sun Capital Partners. As part of the transaction, Sun Capital contributed $50 million of equity capital into the business and arranged for a $75 million credit facility. We received no cash proceeds from the transaction and recorded a pre-tax loss of $72 million on the transaction.

Other Income and Expenses

Interest Expense

The following table provides the average daily borrowings and average borrowing
rates for 2008 and 2007:



                                                       2008        2007
            Average daily borrowings (in millions)    $ 2,909     $ 2,408
            Average borrowing rate (in percentages)       5.9 %       6.2 %

For 2008, interest expense increased $32 million to $181 million. The increase was primarily driven by an increase in average borrowings and an increase in fees related to our credit facilities partially offset by a decrease in the average borrowing rate.

Interest Income

For 2008, our interest income remained flat at $18 million as the impact of higher average invested cash balances was offset by a decrease in average effective interest rates.

Other Income (Loss)

For 2008, other income (loss) decreased $105 million to $23 million due to a 2007 gain of $100 million related to a distribution from Easton Town Center, LLC and net gains of $17 million from the settlement of interest rate lock agreements in 2007. The other income decrease was partially offset by a $71 million cash distribution from Express which resulted in a pre-tax gain of $13 million in 2008.

Minority Interest

For 2008, minority interest decreased $18 million to $4 million. Minority interest represents the proportional share of net income or losses of consolidated, less than wholly owned subsidiaries attributable to the minority interest investor. The decrease is a result of the divestiture of a personal care joint venture in first quarter of 2008 and the closure of a technology joint venture in December 2007.

Provision for Income Taxes

For 2008, our effective tax rate increased to 51.5% from 36.4%. The increase in the rate resulted primarily from the 2008 impairment of goodwill and other intangible assets at La Senza, which is not deductible for income tax purposes.

Results of Operations-Fourth Quarter of 2008 Compared to Fourth Quarter of 2007

Operating Income

The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for the fourth quarter of 2008 in comparison to the fourth quarter of 2007:

                                    Fourth Quarter            Operating Income Rate
                                  2008         2007(a)         2008             2007
                                     (in millions)
    Victoria's Secret (b) (c)   $     (2 )    $     358           (0.1 %)         18.9 %
    Bath & Body Works                209            296           21.0 %          27.3 %
    Other (d) (e)                    (54 )          (33 )        (24.2 %)        (10.5 %)

    Total                       $    153      $     621            5.1 %          19.0 %

(d) Includes Corporate, Mast, Henri Bendel and Bath & Body Works Canada.

(e) 2008 includes $23 million in restructuring charges. For additional . . .