Summary of LIMITED BRANDS INC

ITEM 7. 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") as codified in the Accounting Standards Codification ("ASC"). 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

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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 our mission to build a family of the world's best fashion retail brands offering captivating customer experiences that drive long-term loyalty.
To execute our strategy, we are focused on these key strategic imperatives:
• Grow and maximize profitability of our core brands in current channels and geographies;

• Extend our core brands into new channels and geographies;

• Build enabling infrastructure and capabilities;

• Become the top destination for talent; and

• Return value to our shareholders.

We have a multi-year goal to substantially increase operating margins for our brands through increased sales productivity, merchandise margin expansion and expense control. With regard to merchandise margin expansion, we actively manage our inventory to minimize the level of promotional activity and we will continue to work with our merchandise vendors on innovation, quality, speed and cost. Finally, we have and will continue to optimize our marketing expense by concentrating our expenditures on efficient and return-generating programs. In 2012, we made significant progress towards improving our operating income rate. The following is a discussion of certain of our key strategic imperatives:
Grow and maximize profitability of our core brands in current channels and geographies
Our overriding focus is on the substantial growth opportunity in North America. The core of Victoria's Secret is bras and panties. We see clear opportunities for substantial growth in these categories by focusing on product newness and innovation and expanding into under-penetrated market and price segments. In 2013, we plan to increase our square footage at Victoria's Secret by about 3.5% through expansions of existing stores and the opening of approximately 50 new stores. In our direct channel, we have the infrastructure in place to support growth well into the future. We believe our direct channel is an important form of brand advertising given the ubiquitous nature of the internet and our large customer file.
The core of Bath & Body Works is its home fragrance and personal care product lines including shower gels, lotions, soaps and sanitizers which together make up the majority of sales and profits for the business. Additionally, www.BathandBodyWorks.com continues to exhibit significant year-over-year growth. Extend our core brands into new channels and geographies We began our international expansion with the acquisition of La Senza at the beginning of 2007. Since 2008, we have opened 71 Bath & Body Works stores, 16 Victoria's Secret full assortment stores and 10 Victoria's Secret Pink stores in Canada. Based on the success we have experienced in Canada, we plan to open an additional 8 Bath & Body Works stores and 8 Victoria's Secret stores in Canada in 2013.
We continue to expand our presence outside of North America. In 2012, we accomplished the following:
• Victoria's Secret Beauty and Accessories Stores-Our partners opened 51 net Victoria's Secret Beauty and Accessories stores bringing the total to 108. These stores are principally located in airports and tourist destinations. These stores are focused on Victoria's Secret branded beauty and accessory products and are operated by partners under a franchise or wholesale model. Our partners plan to open an additional 70 to 100 Victoria's Secret Beauty and Accessories stores in 2013.

• Bath & Body Works Franchise Stores-Our partner opened 20 Bath & Body Works stores in the Middle East and Eastern Europe in 2012 bringing the total to
38. Our partner plans to open approximately 20 additional stores in 2013.

• Victoria's Secret Full Assortment Stores-We opened two company-owned Victoria's Secret full assortment stores in London in 2012 including our flagship store on New Bond Street as well as a mall-based store. We plan to open three

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additional Victoria's Secret full assortment stores in the U.K. in 2013. Additionally, a partner opened three Victoria's Secret full assortment stores in the Middle East and plans to open two to four more in 2013.
• La Senza Franchise Stores-We ended 2012 with over 330 La Senza franchise stores around the world and our partners plan to expand by an additional 10 to 20 stores in 2013.

Build enabling infrastructure and capabilities Over the past five years, we have opened a new Direct to Consumer distribution center, launched new merchandise planning systems, new supply chain management systems, new financial and other support systems and a new point-of-sale system in our stores. We are using these capabilities to be able to productively and quickly react to current market conditions, improve inventory accuracy, turnover and in-stock levels and deliver more targeted assortments at the store level. In 2013, we plan to continue to roll out new point-of-sale systems to our stores, continue to build new cross-channel functionality at Victoria's Secret and invest in international support systems. Return value to our shareholders
We believe in returning value to our shareholders through a combination of dividends and share repurchase programs. During 2012, we paid $1.449 billion in regular and special dividends and repurchased $625 million of our common stock. We use cash flow generated from operating activities, as well as cash flow generated from financing activities, to fund our dividends and share repurchase programs.
2012 Overview
We utilize the retail calendar for reporting. As such, the results for fiscal years 2012, 2011 and 2010 represent the 53-week period ended February 2, 2013 and the 52-week periods ended January 28, 2012 and January 29, 2011, respectively. The 2012 fourth quarter consists of a fourteen week period versus a thirteen week period in 2011. The extra week accounted for approximately $125 million, or 3%, in incremental sales in the fourth quarter.
Our net sales increased $95 million to $10.459 billion driven by a comparable store sales increase of 6%, partially offset by the impact of the divestiture of the third-party apparel sourcing business in the fourth quarter of 2011. Our operating income increased $335 million to $1.573 billion and our operating income rate improved significantly from 11.9% to 15.0%. Our operating income for 2012 and 2011 included $134 million and $308 million, respectively, of special items. For additional information on the special items, see the "Adjusted Financial Information" table below. Excluding these special items, our adjusted operating income increased $161 million to $1.707 billion and our adjusted operating income rate increased to 16.3% from 14.9% in 2012. Our adjusted operating income increase was primarily driven by the strength of our assortments and store selling efforts, coupled with continued disciplined inventory and expense management.
For additional information related to our 2012 financial performance, see "Results of Operations - 2012 Compared to 2011." During 2012, we focused on the execution of retail fundamentals and initiatives to enable future growth including:
• Inventory levels- We continue to grow inventories slower than sales year over year while maintaining our high in-stock position. Compared to 2011, our inventory per selling square foot ended 2012 up 4% while our 2012 comparable store sales increased 6%.

• Capital expenditures-Our capital expenditures of $588 million included $425 million for opening new stores and remodeling and improving existing stores. Remaining capital expenditures were primarily related to spending on technology and infrastructure to support growth.

• Cash and liquidity-We generated cash flow from operations of $1.351 billion in 2012 and ended the year with $773 million in cash.

We also accomplished the following in terms of the execution of our business strategy in 2012:
• Significantly improved adjusted operating income and adjusted operating income rate driven primarily by the increase in net sales and related expense leverage;

• Increased sales by 7% and operating income by 10% at Victoria's Secret;

• Increased sales by 9% and operating income by 18% at Bath & Body Works;

• Returned approximately $2.1 billion to our shareholders through share repurchases, special dividends and our ongoing regular dividends. In February 2013, our Board of Directors approved an increase in our 2013 common stock dividend from $1.00 to $1.20 per share;

• Opened two company-owned Victoria's Secret stores in the United Kingdom;

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• Continued expansion of company-owned Bath & Body Works and Victoria's Secret stores in Canada;

• Expansion of Bath & Body Works and Victoria's Secret stores in the Middle East and Eastern Europe with franchise partners;

• Continued expansion of Victoria's Secret Beauty and Accessories stores with partners throughout the world; and

• Continued repositioning of the La Senza brand. During the fourth quarter of 2011, we initiated a restructuring program designed to resize a portion of La Senza's store fleet and relocate its home office from Montreal, Canada to Columbus, Ohio. In the second quarter of 2012, we initiated a second restructuring program designed to further resize the La Senza store fleet. We recognized a pre-tax charge consisting of contract termination costs, severance and other costs of $14 million in 2012.

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Adjusted Financial Information
In addition to our results provided in accordance with GAAP above and throughout this Form 10-K, we have provided non-GAAP measurements which present operating income, net income and earnings per share in 2012, 2011 and 2010 on an adjusted basis which removes certain special items. We believe that these special items are not indicative of our ongoing operations due to their size and nature. We use adjusted financial information as key performance measures of results of operations for the purpose of evaluating performance internally. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Instead, we believe that the presentation of adjusted financial information provides additional information to investors to facilitate the comparison of past and present operations. Further, our definition of adjusted financial information may differ from similarly titled measures used by other companies. The table below reconciles the GAAP financial measures to the non-GAAP financial measures. For additional information regarding the special items, see the footnotes to the table in Item 6. Selected Financial Data.

                                                                2012        2011        2010
Detail of Special Items included in Operating Income - Income
(Expense)
La Senza Goodwill and Intangible Asset Impairment Charges     $   (93 )   $  (232 )   $     -
Henri Bendel Long-lived Store Asset Impairment Charges            (27 )         -           -
La Senza Restructuring Charges                                    (14 )       (24 )         -
Expense related to Contribution of Express Common Stock to
The Limited Brands Foundation                                       -        (163 )         -
Gain on Divestiture of Third-party Apparel Sourcing Business        -         111           -
Total Special Items included in Operating Income              $  (134 )   $  (308 )   $     -

Detail of Special Items included in Other Income - Income
(Expense)
Gain on Distributions from Easton Investments                 $    13     $     -     $     -
Gain on Sale of Express Common Stock                                -          86          45
Gain on Contribution of Express Common Stock to The Limited
Brands Foundation                                                   -         147           -
Gain on Express Initial Public Offering                             -           -          52
Gain on Distributions from Express                                  -           -          49
Gain on Sale of Limited Stores Ownership Interest                   -           -          20
Loss on Extinguishment of Debt                                      -           -         (25 )
Gain on Express Dividend                                            -           -           7
Total Special Items included in Other Income                  $    13     $   233     $   148

Detail of Special Items included in Provision for Income
Taxes - Benefit (Provision)
Tax effect of Special Items included in Operating Income      $    12     $    83     $     -
Tax effect of Special Items included in Other Income               (5 )       (31 )       (27 )
Tax benefit related to favorable resolution of certain
discrete income tax matters                                         -          56           -
Total Special Items included in Provision for Income Taxes    $     7     $   108     $   (27 )

Reconciliation of Reported Operating Income to Adjusted
Operating Income
Reported Operating Income                                     $ 1,573     $ 1,238     $ 1,284
Special Items included in Operating Income                        134         308           -
Adjusted Operating Income                                     $ 1,707     $ 1,546     $ 1,284

Reconciliation of Reported Net Income to Adjusted Net Income
Reported Net Income                                           $   753     $   850     $   805
Special Items included in Net Income                              114         (33 )      (121 )
Adjusted Net Income                                           $   867     $   817     $   684

Reconciliation of Reported Earnings Per Share to Adjusted
Earnings Per Share
Reported Earnings Per Share                                   $  2.54     $  2.70     $  2.42
Special Items included in Earnings Per Share                     0.38       (0.10 )     (0.36 )
Adjusted Earnings Per Share                                   $  2.92     $  2.60     $  2.06

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2013 Outlook
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 heading into 2013.
Company-Owned Store Data
The following table compares 2012 company-owned store data to the comparable periods for 2011 and 2010:

                                                                             % Change
                                           2012       2011       2010      2012     2011
Sales per Average Selling Square Foot
Victoria's Secret Stores (a)             $   817    $   754    $   663      8 %     14 %
Bath & Body Works (a)                        718        658        620      9 %      6 %
La Senza (b)                                 438        409        397      7 %      3  %
Sales per Average Store (in thousands)
Victoria's Secret Stores (a)             $ 4,892    $ 4,463    $ 3,886     10 %     15 %
Bath & Body Works (a)                      1,701      1,561      1,468      9 %      6 %
La Senza (b)                               1,435      1,362      1,333      5 %      2  %
Average Store Size (selling square feet)
Victoria's Secret Stores (a)               6,038      5,941      5,892      2 %      1 %
Bath & Body Works (a)                      2,365      2,374      2,369      -  %     -  %
La Senza                                   3,219      3,312      3,343     (3 )%    (1 )%
Total Selling Square Feet (in thousands)
Victoria's Secret Stores (a)               6,153      6,042      6,057      2  %     -  %
Bath & Body Works (a)                      3,716      3,768      3,805     (1 )%    (1 )%
La Senza (c)                                 509        762        843    (33 )%   (10 )%


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

(b) Metric relates to company-owned stores in Canada. 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, 40 were closed as of February 2, 2013. The remaining store closed in February 2013. For additional information, see Note 5 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

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The following table compares 2012 company-owned store data to the comparable periods for 2011 and 2010:

Number of Stores (a)        2012      2011      2010
Victoria's Secret U.S.
Beginning of Period        1,017     1,028     1,040
Opened                        22         8         6
Closed                       (20 )     (19 )     (18 )
End of Period              1,019     1,017     1,028
Bath & Body Works U.S.
Beginning of Period        1,587     1,606     1,627
Opened                         4         6         2
Closed                       (20 )     (25 )     (23 )
End of Period              1,571     1,587     1,606
La Senza
Beginning of Period          230       252       258
Opened                         -         -         -
Closed (b)                   (72 )     (22 )      (6 )
End of Period                158       230       252
Bath & Body Works Canada
Beginning of Period           69        59        31
Opened                         3        10        28
Closed                        (1 )       -         -
End of Period                 71        69        59
Victoria's Secret Canada
Beginning of Period           19        12         4
Opened                         7         8         8
Closed                         -        (1 )       -
End of Period                 26        19        12
Henri Bendel
Beginning of Period           19        11        11
Opened                        10         8         -
Closed                         -         -         -
End of Period                 29        19        11
Victoria's Secret U.K.
Beginning of Period            -         -         -
Opened                         2         -         -
Closed                         -         -         -
End of Period                  2         -         -
Total
Beginning of Period        2,941     2,968     2,971
Opened                        48        40        44
Closed                      (113 )     (67 )     (47 )
End of Period              2,876     2,941     2,968


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(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

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Results of Operations-2012 Compared to 2011

Operating Income
The following table provides our segment operating income (loss) and operating
income rates (expressed as a percentage of net sales) for 2012 in comparison to
2011:

                                                        Operating Income Rate
                                2012        2011         2012           2011
                                  (in millions)
Victoria's Secret             $ 1,188     $ 1,081        18.1 %         17.7 %
Bath & Body Works                 604         513        20.8 %         19.2 %
Other (a) (b) (c) (d) (e) (f)    (219 )      (356 )     (22.3 )%       (22.7 )%
Total                         $ 1,573     $ 1,238        15.0 %         11.9 %


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(a) Includes our international operations, Mast Global, Henri Bendel and Corporate. In the fourth quarter of 2011, we divested 51% of our third-party apparel sourcing business. As such, results of this business are only included through the first three quarters of 2011. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

(b) 2012 and 2011 include $93 million and $232 million, respectively, impairments of goodwill, trade name and other intangible assets at La Senza. For additional information, see Note 8 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

(c) 2012 includes a $27 million impairment of long-lived store assets at Henri Bendel. For additional information, see Note 7 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

(d) 2012 and 2011 include $14 million and $24 million, respectively, of expense associated with restructuring activities at La Senza. For additional information, see Note 5 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

(e) 2011 includes $163 million of expense associated with the charitable contribution of shares of Express, Inc. to The Limited Brands Foundation. For additional information, see Note 9 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

(f) 2011 includes an $111 million gain associated with the divestiture of the third-party apparel sourcing business. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

For 2012, operating income increased $335 million to $1.573 billion and the operating income rate increased to 15.0% from 11.9%. Our 2012 and 2011 operating income includes the impact of $134 million and $308 million, respectively, in special items. For additional information, see "Adjusted Financial Information". Excluding these special items, our adjusted operating income increased $161 million to $1.707 billion and the operating income rate increased to 16.3% from 14.9%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for 2012 in comparison to 2011:

                          2012 (b)      2011       % Change
                             (in millions)
Victoria's Secret Stores $   4,981    $  4,564        9 %
Victoria's Secret Direct     1,593       1,557        2 %
Total Victoria's Secret      6,574       6,121        7 %
Bath & Body Works Stores     2,686       2,491        8 %
Bath & Body Works Direct       216         183       18 %
Total Bath & Body Works      2,902       2,674        9 %
Other (a)                      983       1,569      (37 %)
Total Net Sales          $  10,459    $ 10,364        1 %


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the first three quarters of 2011. 2011 sales included $702 million attributable to the third-party apparel sourcing business. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
(b) We utilize the retail calendar for reporting. As such, the results for fiscal year 2012 represent the 53-week period ended February 2, 2013 and the results for 2011 represent the 52-week period ended January 28, 2012. The extra week accounted for approximately $125 million in incremental net sales in 2012.

The following table provide a reconciliation of net sales for 2011 to 2012:

                                       Victoria's         Bath &
                                         Secret         Body Works        Other          Total
                                                             (in millions)
2011 Net Sales                       $      6,121     $      2,674     $    1,569     $   10,364
Comparable Store Sales                        288              162             (7 )          443
. . .