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LTD > SEC Filings for LTD > Form 10-Q on 30-Nov-2012All Recent SEC Filings

Show all filings for LIMITED BRANDS INC

Form 10-Q for LIMITED BRANDS INC


30-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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 ("GAAP"). The following information should be read in conjunction with our financial statements and the related notes included in Item
1. Financial Statements. Executive Overview
We had strong performance in the third quarter of 2012. Our operating income increased $1 million to $187 million and our operating income rate improved to 9.1% from 8.6%. Our third quarter 2012 operating income included $10 million of expense associated with the store closure initiative at La Senza. Comparable store sales increased 5%, and net sales were $2.050 billion compared to $2.174 billion last year. Third quarter 2011 sales included $259 million attributable to the third-party apparel sourcing business which was sold in November 2011. At Victoria's Secret, sales increased 5% and operating income increased 5%. At Bath & Body Works, sales increased 7% and operating income increased 42%. For additional information related to our third quarter 2012 financial performance, see "Results of Operations."

The global retail sector and our business continue to face an uncertain environment and, as a result, we continue to take a conservative stance with respect to the financial management of our business. We will continue to manage our business carefully, and we will focus on the execution of the retail fundamentals.
At the same time, we are aggressively focusing on bringing compelling merchandise assortments and marketing, store and online experiences to our customers. We will look for, and capitalize on, those opportunities available to us in this uncertain environment. We believe that our brands, which lead their categories and offer high emotional content to customers at accessible prices, are well positioned.


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Store Data
The following table compares the third quarter of 2012 store data to the third
quarter of 2011 and the year-to-date 2012 store data to year-to-date 2011:
                                                     Third Quarter                         Year-to-date
                                             2012        2011       % Change      2012        2011       % Change
Sales per Average Selling Square Foot
Victoria's Secret Stores (a)               $   166     $   156         6  %     $   537     $   495          8 %
Bath & Body Works (a)                          133         124         7  %         408         380          7 %
La Senza (b)                                   101          90        12  %         300         277          8 %
Sales per Average Store (in thousands)
Victoria's Secret Stores (a)               $   992     $   925         7  %     $ 3,208     $ 2,926         10 %
Bath & Body Works (a)                          315         294         7  %         966         900          7 %
La Senza (b)                                   334         298        12  %         995         923          8 %
Average Store Size (selling square feet)
Victoria's Secret Stores (a)                 6,012       5,934         1  %
Bath & Body Works (a)                        2,363       2,372         -  %
La Senza                                     3,327       3,319         -  %
Total Selling Square Feet (in thousands)
Victoria's Secret Stores (a)                 6,132       6,035         2  %
Bath & Body Works (a)                        3,734       3,784        (1 )%
La Senza (c)                                   549         826       (34 )%

(a) Metric relates to company-owned stores in the U.S.

(b) Metric is presented in Canadian dollars to eliminate the impact of foreign currency fluctuations.

(c) During the fourth quarter of 2011, we initiated a restructuring program designed to resize a portion of La Senza's store fleet. Under this program, we closed 38 underperforming stores. Of these stores, 12 were closed as of January 28, 2012. The remainder were closed during the first quarter of 2012. During the second quarter of 2012, we initiated a second restructuring program to close an additional 41 underperforming stores. Of these stores, 34 were closed as of October 27, 2012 with the remainder expected to close by the end of the first quarter of 2013. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 1. Financial Statements.


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The following table compares third quarter of 2012 store data to the third quarter of 2011 and year-to-date 2012 store data to the year-to-date 2011:

                             Third Quarter       Year-to-Date
Number of Stores (a)        2012      2011      2012      2011
Victoria's Secret U.S.
Beginning of Period        1,015     1,018     1,017     1,028
Opened                         8         1        20         2
Closed                        (3 )      (2 )     (17 )     (13 )
End of Period              1,020     1,017     1,020     1,017
Bath & Body Works U.S.
Beginning of Period        1,581     1,596     1,587     1,606
Opened                         -         2         3         3
Closed                        (1 )      (3 )     (10 )     (14 )
End of Period              1,580     1,595     1,580     1,595
La Senza
Beginning of Period          197       249       230       252
Opened                         -         -         -         -
Closed (b)                   (32 )       -       (65 )      (3 )
End of Period                165       249       165       249
Bath & Body Works Canada
Beginning of Period           69        62        69        59
Opened                         1         3         2         6
Closed                         -         -        (1 )       -
End of Period                 70        65        70        65
Victoria's Secret Canada
Beginning of Period           20        14        19        12
Opened                         4         4         5         6
Closed                         -        (1 )       -        (1 )
End of Period                 24        17        24        17
Henri Bendel
Beginning of Period           23        12        19        11
Opened                         3         4         7         5
Closed                         -         -         -         -
End of Period                 26        16        26        16
Victoria's Secret UK
Beginning of Period            1         -         -         -
Opened                         1         -         2         -
Closed                         -         -         -         -
End of Period                  2         -         2         -
Total
Beginning of Period        2,906     2,951     2,941     2,968
Opened                        17        14        39        22
Closed                       (36 )      (6 )     (93 )     (31 )
End of Period              2,887     2,959     2,887     2,959

(a) Number of stores excludes independently owned La Senza, Bath & Body Works and Victoria's Secret stores operated by licensees and franchisees.

(b) During the fourth quarter of 2011, we initiated a restructuring program designed to resize a portion of La Senza's store fleet. Under this program, we closed 38 underperforming stores. Of these stores, 12 were closed as of January 28, 2012. The remainder were closed during the first quarter of 2012. During the second quarter of 2012, we initiated a second restructuring program to close an additional 41 underperforming stores. Of these stores, 34 were closed as of October 27, 2012 with the remainder expected to close by the end of the first quarter of 2013. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 1. Financial Statements.


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Segment Reporting Change
In the fourth quarter of 2011, we ceased aggregating La Senza with Victoria's Secret. While this reporting change did not impact our consolidated results, segment data for previous years has been recast to be consistent with the current year presentation throughout.

Results of Operations
Third Quarter of 2012 Compared to Third Quarter of 2011
Operating Income
The following table provides our segment operating income (loss) and operating
income rates (expressed as a percentage of net sales) for the third quarter of
2012 in comparison to the third quarter of 2011:

                                               Operating Income Rate
                         2012       2011         2012          2011
Third Quarter             (in millions)
Victoria's Secret      $   158     $ 150         12.3  %       12.3  %
Bath & Body Works           58        41         10.7  %        8.1  %
Other (a) (b)              (29 )      (5 )      (12.4 )%       (1.1 )%
Total Operating Income $   187     $ 186          9.1  %        8.6  %

(a) Includes Corporate, Mast Global, Henri Bendel and our international operations including La Senza. In the fourth quarter of 2011, we divested 51% of our third-party apparel sourcing business. As such, results of this business are included in the third quarter of 2011 but not the third quarter of 2012. For additional information, see Note 8 to the Consolidated Financial Statements included in Item 1. Financial Statements.

(b) 2012 includes $10 million of expense associated with the store closure initiative at La Senza. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 1. Financial Statements.

For the third quarter of 2012, operating income increased $1 million to $187 million and the operating income rate increased to 9.1% from 8.6%. The drivers of the operating income results are discussed in the following sections. Net Sales
The following table provides net sales for the third quarter of 2012 in comparison to the third quarter of 2011:

                           2012       2011      % Change
Third Quarter               (in millions)
Victoria's Secret Stores $ 1,009    $   941        7  %
Victoria's Secret Direct     271        277       (2 )%
Total Victoria's Secret    1,280      1,218        5  %
Bath & Body Works            538        504        7  %
Other (a)                    232        452      (49 )%
Total Net Sales          $ 2,050    $ 2,174       (6 )%

(a) Includes Corporate, Mast Global, Henri Bendel and our international operations including La Senza. In the fourth quarter of 2011, we divested 51% of our third-party apparel sourcing business. Third quarter 2011 sales included $259 million attributable to the third-party apparel sourcing business. For additional information, see Note 8 to the Consolidated Financial Statements included in Item 1. Financial Statements.


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The following table provides a reconciliation of net sales for the third quarter of 2012 to the third quarter of 2011:

                                   Victoria's         Bath &
                                     Secret         Body Works          Other           Total
Third Quarter                                             (in millions)
2011 Net Sales                   $      1,218     $         504     $       452     $     2,174
Comparable Store Sales                     52                23              (2 )            73
Sales Associated with New,
Closed, and Non-comparable
Remodeled Stores, Net                      16                 5              24              45
Foreign Currency Translation                -                 -               2               2
Direct Channels                            (6 )               6               -               -
Mast Global and Other                       -                 -              15              15
Divestiture of Third-party
Apparel Sourcing Business                   -                 -            (259 )          (259 )
2012 Net Sales                   $      1,280     $         538     $       232     $     2,050

The following table compares the third quarter of 2012 comparable store sales to the third quarter of 2011:

Third Quarter                    2012    2011
Victoria's Secret Stores          6 %     13 %
Bath & Body Works                 5 %      9 %
Total Comparable Store Sales (a)  5 %      9 %

(a) Includes La Senza, Bath & Body Works Canada, Victoria's Secret Canada and Henri Bendel.

For the third quarter of 2012, our net sales decreased $124 million to $2.050 billion and comparable store sales increased 5%. Third quarter 2011 sales included $259 million attributable to the third-party apparel sourcing business which was sold in November 2011. The change in our net sales was driven by the following:

Victoria's Secret

For the third quarter of 2012, net sales increased $62 million to $1.280 billion and comparable store sales increased 6%. The increase in net sales was primarily driven by the following:
At Victoria's Secret Stores, net sales increased across most categories including Pink and swimwear, driven by a compelling merchandise assortment that incorporated newness, innovation and fashion as well as in-store execution.

At Victoria's Secret Direct, net sales decreased 2% related to a decrease in apparel partially offset by increases in Pink, core lingerie and sleepwear.

The increase in comparable store sales was primarily driven by higher average dollar sales and an increase in total transactions at Victoria's Secret Stores. Bath & Body Works
For the third quarter of 2012, net sales increased $34 million to $538 million and comparable store sales increased 5%. From a merchandise category perspective, net sales were driven by growth in the Signature Collection, home fragrance and antibacterial categories which all incorporated newness and innovation. The increase in comparable store sales was driven primarily by an increase in average dollar sales.
Other
For the third quarter of 2012, net sales decreased $220 million to $232 million primarily related to the divestiture of the third-party sourcing business in the fourth quarter of 2011 and a decrease in sales at La Senza due to store closures. This decrease was partially offset by growth in Victoria's Secret and Bath & Body Works sales in Canada, Victoria's Secret sales in the UK and Henri Bendel sales.


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Gross Profit
For the third quarter of 2012, our gross profit increased $40 million to $825 million and our gross profit rate (expressed as a percentage of net sales) increased to 40.2% from 36.1%, primarily driven by the following:
Victoria's Secret

For the third quarter of 2012, the gross profit increase was primarily driven by the following:
At Victoria's Secret Stores, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses due to an increase in occupancy expense driven by higher net sales and store related activity.

At Victoria's Secret Direct, gross profit decreased primarily due to lower merchandise margin dollars as a result of the decrease in net sales and higher buying and occupancy expenses driven by higher website expenses.

The gross profit rate increase was driven by an increase in the merchandise margin rate due to decreased promotional activities and favorable input costs at Pink.

Bath & Body Works

For the third quarter of 2012, the gross profit increase was driven by higher merchandise margin dollars related to the increase in net sales. The increase in merchandise margin dollars was partially offset by an increase in buying and occupancy expenses driven by higher occupancy costs related to the increase in net sales and store related activity. The gross profit rate increase was driven primarily by a decrease in the buying and occupancy expense rate due to leverage associated with higher sales and an increase in the merchandise margin rate due to less promotional activities.
Other

For the third quarter of 2012, the gross profit decrease was primarily driven by the divestiture of the third-party apparel sourcing business, lower merchandise margin dollars related to net sales decreases at La Senza and $10 million in store closure restructuring charges related to our La Senza business. The decrease was partially offset by higher merchandise margin dollars related to net sales increases in our Canadian Victoria's Secret and Bath & Body Works stores and Victoria's Secret UK stores. The gross profit rate increased significantly primarily driven by the divestiture of the third-party apparel sourcing business in the fourth quarter of 2011 which removed lower margin sales.

General, Administrative and Store Operating Expenses

For the third quarter of 2012, our general, administrative and store operating expenses increased $39 million to $638 million primarily driven by:
An increase in store selling expenses related to higher sales and other investments to improve the customer experience, including investments in training and technology; and

An increase in expenses resulting from increased international expansion.

The general, administrative and store operating expense rate increased to 31.1% from 27.6% primarily due to the factors mentioned above and the divestiture of the third-party apparel sourcing business in the fourth quarter of 2011.


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Other Income and Expense
Interest Expense
The following table provides the average daily borrowings and average borrowing
rates for the third quarter of 2012 and 2011:
Third Quarter                             2012        2011
Average daily borrowings (in millions)  $ 4,520     $ 3,520
Average borrowing rate (in percentages)    6.83 %      7.18 %

For the third quarter of 2012, our interest expense increased $13 million to $77 million primarily driven by an increase in average borrowings related to the February 2012 $1 billion note issuance partially offset by a decrease in the average borrowing rate.
Other Income
For the third quarter of 2012, our other income increased $18 million to $18 million primarily driven by the $13 million gain related to $13 million in cash distributions from certain of our investments in Easton in the third quarter of 2012 and equity method income from our investment in the third-party apparel sourcing business.

Provision for Income Taxes

For the third quarter of 2012, our effective tax rate was 42.4% as compared to 22.6% in the third quarter of 2011. The 2012 rate was higher than our combined estimated federal and state rate of 39.0% primarily due to losses related to certain foreign subsidiaries. The 2011 rate was lower than our combined estimated federal and state rate primarily due to income tax benefits associated with the resolution of certain tax matters.

Results of Operations
Year-to-Date 2012 Compared to Year-to-Date 2011
Operating Income
The following table provides our segment operating income (loss) and operating
income rates (expressed as a percentage of net sales) for year-to-date 2012 in
comparison to year-to-date 2011:

                                               Operating Income Rate
                         2012       2011        2012           2011
Year-to-Date              (in millions)
Victoria's Secret      $   692     $ 634        16.0  %        15.7  %
Bath & Body Works          206       165        12.5  %        10.7  %
Other (a) (b) (c)         (113 )    (202 )     (18.0 )%       (15.9 )%
Total Operating Income $   785     $ 597        11.9  %         8.7  %

(a) Includes Corporate, Mast Global, Henri Bendel and our international operations including La Senza. In the fourth quarter of 2011, we divested 51% of our third-party apparel sourcing business. As such, results of this business are included in 2011 but not 2012. For additional information, see Note 8 to the Consolidated Financial Statements included in Item 1. Financial Statements.

(b) 2011 includes $163 million of expense associated with the charitable contribution of all of our remaining shares of Express to The Limited Brands Foundation. For additional information, see Note 8 to the Consolidated Financial Statements included in Item 1. Financial Statements.

(c) 2012 includes $14 million of expense associated with the store closure initiative at La Senza. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 1. Financial Statements.

For year-to-date 2012, operating income increased $188 million to $785 million and the operating income rate increased to 11.9% from 8.7%. The drivers of the operating income results are discussed in the following sections.


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Net Sales
The following table provides net sales for year-to-date 2012 in comparison to
year-to-date 2011:
                           2012       2011      % Change
Year-to-Date                (in millions)
Victoria's Secret Stores $ 3,267    $ 2,992        9  %
Victoria's Secret Direct   1,060      1,039        2  %
Total Victoria's Secret    4,327      4,031        7  %
Bath & Body Works          1,652      1,547        7  %
Other (a)                    624      1,271      (51 )%
Total Net Sales          $ 6,603    $ 6,849       (4 )%

(a) Includes Corporate, Mast Global, Henri Bendel and our international operations including La Senza. In the fourth quarter of 2011, we divested 51% of our third-party apparel sourcing business. Year-to-date 2011 sales included $689 million attributable to the third-party apparel sourcing business. For additional information, see Note 8 to the Consolidated Financial Statements included in Item 1. Financial Statements.

The following table provides a reconciliation of net sales for year-to-date 2012 to year-to-date 2011:

                                   Victoria's         Bath &
                                     Secret         Body Works         Other           Total
Year-to-Date                                              (in millions)
2011 Net Sales                   $      4,031     $      1,547     $     1,271     $     6,849
Comparable Store Sales                    238               84              (9 )           313
Sales Associated with New,
Closed, and Non-comparable
Remodeled Stores, Net                      37                4              39              80
Foreign Currency Translation                -                -              (8 )            (8 )
Direct Channels                            21               17               -              38
Mast Global and Other                       -                -              20              20
Divestiture of Third-party
Apparel Sourcing Business                   -                -            (689 )          (689 )
2012 Net Sales                   $      4,327     $      1,652     $       624     $     6,603

The following table compares year-to-date 2012 comparable store sales to year-to-date 2011:

Year-to-Date                     2012    2011
Victoria's Secret Stores          9 %     15 %
Bath & Body Works                 6 %      8 %
Total Comparable Store Sales (a)  7 %     11 %

(a) Includes La Senza, Bath & Body Works Canada, Victoria's Secret Canada and Henri Bendel.

For year-to-date 2012, our net sales decreased $246 million to $6.603 billion and comparable store sales increased 7%. Year-to-date 2011 sales included $689 million attributable to the third-party apparel sourcing business which was sold in November 2011. The change in our net sales was driven by the following:

Victoria's Secret

For year-to-date 2012, net sales increased $296 million to $4.327 billion and comparable store sales increased 9%. The increase in net sales was primarily driven by the following:
At Victoria's Secret Stores, net sales increased across most categories including Pink, core lingerie, swimwear and beauty, driven by a compelling merchandise assortment that incorporated newness, innovation and fashion as well as in-store execution.

At Victoria's Secret Direct, net sales increased 2% related to increases in Pink, core lingerie, swimwear, sleepwear and beauty partially offset by a decrease in apparel.


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The increase in comparable store sales was primarily driven by an increase in total transactions and higher average dollar sales at Victoria's Secret Stores. Bath & Body Works
For year-to-date 2012, net sales increased $105 million to $1.652 billion and comparable store sales increased 6%. From a merchandise category perspective, net sales were driven by growth in the Signature Collection, home fragrance and antibacterial categories which all incorporated newness and innovation. The increase in comparable store sales was driven by higher average dollar sales. Other
For year-to-date 2012, net sales decreased $647 million to $624 million primarily related to the divestiture of the third-party sourcing business in the fourth quarter of 2011 and a decrease in sales at La Senza due to store closures. This decrease was partially offset by growth in Victoria's Secret and Bath & Body Works sales in Canada, Victoria's Secret sales in the UK, and Henri Bendel sales.
Gross Profit
For year-to-date 2012, our gross profit increased $139 million to $2.669 billion and our gross profit rate (expressed as a percentage of net sales) increased to 40.4% from 36.9%, primarily driven by the following:
Victoria's Secret

For year-to-date 2012, the gross profit increase was primarily driven by the following:
At Victoria's Secret Stores, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses due to an increase in occupancy expense driven by higher net sales and store related activity.

At Victoria's Secret Direct, gross profit decreased primarily due to higher buying and occupancy expenses driven by higher website expenses partially offset by higher merchandise margin dollars as a result of the increase in net sales.

The gross profit rate was roughly flat driven by a decrease in the merchandise margin rate due to increased promotional activity partially offset by a decrease in the buying and occupancy expense rate due to leverage associated with higher . . .

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