limited brands annual report 1997_full

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S I S M A N D E S I G N M E C H A N I C A L

J O B Limited AnnualS TO RY O F

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limitedTHREE LIMITED PARKWAY • PO BOX 16000 • COLUMBUS • OHIO 43216 • 614. 415 7000

annual

1997

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The complete Financial Summary, Management’s Discussion and Analysis, Financial Statements and Notes to the Financial Statements can be found in the accompanying piece entitled “financial info” inserted into the center of this two-part annual report.


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highlights

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KEY

Women’s Brands

Emerging Brands

Intimate Brands

Abercrombie & Fitch

SALES ($ in millions)

1997 1996 1995

Total: $9,189 Total: $8,645 Total: $7,881

SELLING SQUARE FEET (in thousands)

1997 1996 1995

Total: 28,400 Total: 28,405 Total: 27,403

NUMBER OF STORES

1997 1996 1995

Total: 5,640 Total: 5,633 Total: 5,298

Annual Growth

financial

FACT: The Limited, Inc.’s 28,400,000 square feet of selling space equals 652 acres, which is roughly the size of 493 football fields.

Operating Results

(Thousands except per share amounts)1997 1996 1995

Net Sales $9,188,804 $8,644,791 $7,881,437

Operating Income $480,099 $636,067 $613,349

Adjusted Operating Income (excluding special charges) $706,314 $648,067 $612,035

Net Income $217,390 $434,208 $961,511

Adjusted Net Income(excluding gain in connection with IPOs and special charges) $341,199 $321,830 $311,230

Net Income per Diluted Share $.79 $1.54 $2.68

Adjusted Net Income per Diluted Share (excluding gain in connection with IPOs and special charges) $1.24 $1.14 $.87

Dividends per Share $.48 $.40 $.40

Year-end Position

he Limited, Inc. is a $9.2 billion specialtyretailer which sells women’s, men’s andchildren’s apparel; lingerie; personal careproducts and sporting goods through its5,640 stores and two catalogues. The past few years have seen significant, positivechange in the business. This report seeks to outline and clarify that change.

●A Excludes the effect on net income of the gain in connection with initial public offerings of $8,606 in 1997, $118,178 in 1996, and $649,467 in 1995. Also excludes special charges of ($226,215) in 1997, ($12,000) in 1996 and $1,314 in 1995 (see Note 2 to the Consolidated Financial Statements).

(Thousands except financial ratios)1997 1996 1995

Total Assets $4,300,761 $4,120,002 $5,266,563

Working Capital $937,739 $638,204 $2,018,960

Current Ratio 1.9 1.7 3.5

Long-term Debt $650,000 $650,000 $650,000

Debt-to-equity Ratio 32% 34% 20%

Shareholders’ Equity $2,044,957 $1,922,582 $3,201,041

Return on Average Shareholders’ Equity 11% 17% 32%

Adjusted Return on Average Shareholders’ Equity ●A 17% ●A 16% ●A 10%

3,901

1,148

3,618

522

4,282

1,031

2,997

335

4,294

835

2,517

235

2,907

867

1,710

156

3,038

859

1,609

127

3,093

812

1,293

100

18,075

3,763

5,328

1,234

18,780

3,572

5,047

1,006

19,235

3,146

4,230792

t

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ing Crosby’s been on mymind lately. Can’t get hisvoice out of my head. Ijust keep hearing himsinging: “You’ve got toaccentuate the positive.Eliminate the negative.Latch on to the affirma-

tive. Don’t mess with Mr. In-between.”How true. How true. For me, and the

business, they’ve become words to live by.If I could take one major lesson from the

past year, and continue to emphasize andapply it as we go forward, it would be to un-derstand and appreciate the power of doing a few things and doing them very well.

What’s really working? What’s drivingperformance? What matters? What doesn’t?What do you do about it?

If you had asked me, even three or fouryears ago, I would have said that we werefocused. And I would have believed it.

In retrospect, we weren’t.In the past few years, our business has

gone through enormous streamlining, sig-nificant growth, and substantial changes inleadership. We’ve eliminated entire business-es, sold significant but distracting assets,and strengthened our core brands. Indeed,we’ve reviewed our entire portfolio, and theamount of energy that should be applied toeach piece of that portfolio. We are not per-sonally immune to the laws of supply anddemand. Our resources, while substantial,

had to be channeled into dis-ciplined growth strategies.Strategies that would yieldthe greatest return. Designed to unlock andcreate even greater value for shareholders.

Let me share just some of the initiativesundertaken in the past few years:1998•Announced intent to establish Abercrombie &

Fitch as a fully independent public companythrough an exchange offer

1997•Sale of Newport Office Building•Sale of The Tuttle Mall in Columbus•Sale of Brylane stock•Closure of 186 underperforming stores•Closure of Cacique•Closure of all but one Henri Bendel store1996•85 million share stock repurchase•Sale of Penhaligon’s• Initial public offering of Abercrombie & Fitch •Closure of 135 underperforming stores1995•Initial public offering of Intimate Brands•Securitization of $1.2 billion in credit card

receivables•Sale of 60% interest in Alliance Data Systems•Closure of 79 underperforming stores

Accentuate the positive. Eliminate thenegative.

Substantial change. Streamlined opera-tions. A multitude of distractions eliminated.Unlocking shareholder value.

In my view, it’s just the beginning. Because,what all these initiatives really do is allow usto put energy into the places where we getthe greatest payback. This is not about doingmore things. It’s about doing fewer things.Very well. Focusing on top stores, top busi-nesses, top people. Not the bottom. Recog-nizing, and focusing on, what we’re best at.And doing it.

We are not about averages. Or average per-formance. In fact, I hate it when a businessreports “average store performance.” It’s non-sense. That’s not what performance is about.

Performance is about consistently focus-ing on the top third, eliminating the bottomthird, and constantly raising the bar.

Let me give you an example. We spent asignificant amount of time in the past yearrepositioning Structure. We developed astrategy to yield substantially better resultsin pants, a critical category. And we tested it.

When the results of the test were analyzed,I was, frankly, disappointed. Sales gains, onaverage, were negligible. Then we probed alittle deeper. “How’d the top third of thestores perform?” The answer: “Up 65%.”Up 65%?! That’s not a win. It’s a gusher.“Why are we talking about averages? Get the best store managers together. Find outwhat they did. Share best practices. Now.”

Accentuate the positive.

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FACT: www.limited.com received 220,000+ visitors since its launch, 8/1/97, and 2,000+ copies of last year’s annual report have been downloaded.

letterbDear Partner

chairman’s

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rt Retail doesn’t wait. It moves. And so mustwe. And as we move, I am determined thatwe employ no tactics, none, zero, zilch, thaterode one scintilla of our brand equity. Thosedays are over. And they aren’t coming back.

Our focus on branding has forced us to re-align our entire organization. We are, remem-ber, a collection of specialty store brands,and, by definition as specialists, we must be best at, must dominate, single categoriesthat most reflect brand personalities.

o do that, you have to align, andeven distort, the organization to win. Again, that’s not aboutaverages. It’s about intention-ally focusing design, market-ing, display, finance, stores,CEO time, everything, to winthe category. You can’t just be

competitive. You have to be best at every-thing that makes the category important tothe customer. How many styles? Fits? Col-ors? Where’s the freshness?

Look at Limited Too, a business posi-tioned to young girls. There, new fashionsmust land every week. That’s what their

customers expect. It’s what they demand.Limited Too has to be organized to deliver,or they can’t win.

Getting ahead. Being first to market.Lapping competition. All are important.Victoria’s Secret was first to market with“Angels,” a collection of sheer bras and pan-ties. That proved to be an enormous advan-tage resulting in high sales and margins.Now, “English Lace” is ahead of the pack, andthe results, not coincidentally, are terrific.

Being first isn’t an accident. It’s deli-berate. And well planned. You get focused,and you make opportunities. You align theorganization around them. No sideshows.Relentlessly pursuing a few things. Doingthem very well.

I expect each part of the business to applythe same philosophy. Take the finance depart-ment: inventory is the life of the business,and finance must focus its efforts aroundthis critical piece of the whole.

I’m not really interested in what Financethinks of commercials, or display, or fashion.I want them to focus on their expertise, howthey contribute to the brand. By the way, for you financial types reading this letter, Iwill also note, no doubt to your great relief,that I also have little interest in what theadvertising staff has to say about finance. Or distribution. I want each person concen-trating on what he or she can do, creatively, to add value. Focus the resources. Relent-lessly. Even maniacally. Do the things youknow how to do. Do them well. And do themuntil they’re done.

Leaders must lead this process. And chal-lenge their organizations to change. Peo-ple, I’ve learned, do not, by nature, like todistort. They like balance. And they worryabout being “out of balance.” And, I be-lieve, they bring that to the office.

Baloney!Great businesses are all about distortion.

Jack Welch doesn’t talk about averages. Hetalks about excellence. Ray Kroc dominatedhamburgers. And announced every one hesold. You can’t win by pushing everythingat once. We’ll win at what we’re best at. If

someone beats us there, they’ve really donesomething.

I’m also taking my own medicine. In addi-tion to all of the initiatives outlined earlier,I’ve taken steps to free myself up for what I believe I’m best at: spotting market voids,and inventing and refining brands withlarge, mass consumer appeal and economicviability to fill them. Last summer, I namedKen Gilman Chief Administrative Officer, to complement his duties as Vice Chair-man and better describe his role. He took onthe added responsibilities of overseeing RealEstate, Legal, Distribution, and MIS func-tions, and is leading the important initia-tive to ensure our information technologysystems are ready for any Year 2000 issues.

In order for him to take on these addi-tional responsibilities, Ken essentially had to replace himself. He had to find a world-class CFO, one who understood large, mul-tidivisional businesses, and could step in

4

FACT: If each of the 426 million Victoria’s Secret Catalogues printed in 1997 were lined up end-to-end, they would circle the earth 2.7 times.

Women’s Brands

Intimate Brands

% OF TOTAL SALES (in millions)

1997 1996 1995

$3,618 $2,997 $2,517

39% 35% 32%

SALES PER AVERAGE SELLING SQUARE FOOT

1997 1996 1995

Victoria's Secret Stores $495 $458 $459

Bath & Body Works $676 $684 $710

Cacique $260 $240 $225

Total $532 $494 $482

% OF TOTAL OPERATING INCOME (in millions)

1997 1996 1995

●A $505 ●B $458 $386

105% 72% 63%

●A 1997 includes a $68 million charge related to the closingof the Cacique business effective January 31, 1998.

●B 1996 includes a $12 million special and nonrecurringcharge in connection with the sale of Penhaligon’s inearly 1997.

39%


1997 1996 1995

$3,901 $4,282 $4,294

42% 49% 54%


1997 1996 1995

Express $251 $298 $323

Lerner New York $162 $169 $155

Lane Bryant $235 $228 $231

The Limited $200 $209 $198

Henri Bendel $736 $904 $1,002

Total $212 $225 $223


1997 1996 1995

●A ($268) $64 ●B $54

(56%) 10% 9%

●A 1997 includes special and nonrecurring charges ofapproximately $187 million relating to the closure offive out of six Henri Bendel stores and chargesassociated with asset valuation impairment and theclosure and downsizing of certain stores, plus $13million in inventory liquidation charges associatedwith the Henri Bendel closings.

●B 1995 includes a special and nonrecurring charge of $48million, primarily for store closings and downsizings.

42%

1997

1997

tUnderstand and appreciate the po

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rtquickly. In Ann Hailey, I believe he, and the business, made a perfect choice. She’s a world-class executive with important ex-perience in large, multidivisional, brandedcompanies. Experience that is essential toour growth strategy.

I’ve always believed my strength is creat-ing strong brands. And now, I’ve set up the infrastructure to support that strength.Years ago, understanding that store designwas one of the longest lead-time brandissues, and one the businesses had to livewith for years, I created a separate internaldivision, run by Charlie Hinson, to controlstore design and construction. Charlie andhis group have done spectacular work, theenvy of the industry, and he did afford me great leverage in this important area ofbrand positioning. But in retrospect, wedidn’t go far enough. “Brand” encompassesmore than store design. It’s also fashiondesign. And it’s marketing.

That’s why we recently created two newbusinesses, and named two new presidentsto work with me on these additional criticalcomponents. We spent years recruiting MarieHolman-Rao because we believed she was

the best leader for retail/brand design inAmerica, with a proven track record, an ex-cellent eye, and a great sense of what sells.This year, she became President of LimitedDesign Services, and, all I can say is, I wishwe could have been more persuasive earlier.Marie’s impact, steady hand and maturityare a great addition to our team, and she’s a great partner to me.

Now we have someone I can rely on toorganize visual presentation and fashion di-rection. Someone I am in sync with, andpresidents can respond to. Marie is com-pletely in tune with the direction of thebusinesses, and her instincts are uncanny. We can talk in shorthand, and I already feel as if we’ve worked together for years.

Speaking of working with someone foryears, that is certainly the case with EdRazek, the new President of Limited Brandand Creative Services. Ed has been my busi-ness partner for years, and has been involved

in a number of the businesses’ greatest suc-cesses. I have, frankly, skewed his time overthe past three years toward Victoria’s Secret,and the results, I think, have been obvious.From the Fashion Show, to the “Angels”launch, to the “Million Dollar Miracle Bra,”Ed knows how to create “on-brand” market-ing that gets noticed and creates sales. I’vecharged Ed with building his organization so that same creativity can be applied acrossthe brands.

With these additions, I now have trusted,highly capable creative executives workingwith me on the most critical pieces of thebrand process: store design, fashion andmarketing. It’s leveraging my time, and, Ibelieve, creating value for the business.

Clearly, there is much to do. The women’sbusinesses need improvement, and we willfocus significant energies there. MichaelWeiss has made quick and substantial pro-gress at Express, and I’m optimistic theywill recapture all of their lost momentum.The Limited is in the midst of a major repositioning, with substantial work in frontof them. Still the stores look the best theyhave in years. If you haven’t been to one

lately, I’d strongly encourage you to do so.The IBI brands, Victoria’s Secret and

Bath & Body Works, continue to performvery well, and we will remain focused ontheir success. For our other businesses tosucceed at the expense of these great brandswould not be a victory for anyone.

I’ve tried to give you a sense, in these fewpages, of how committed I am, and the bus-iness is, to identifying the few things thatcreate real value, and how we plan to con-centrate our efforts around them. These arenot things we’re talking about. This is whatwe’re doing in every area of the businesses.Unproductive stores are being closed. Brandswith big potential are being supported. Inevery way possible. It’s what we’ve done. It’swhat we’ll continue to do.

Accentuate the positive. Eliminate thenegative. Don’t mess with Mr. In-between.

Emerging Brands


1997 1996 1995

$1,148 $1,031 $835

13% 12% 11%


1997 1996 1995

Structure $310 $321 $308

Limited Too $331 $277 $273

Galyan’s Trading Co.(since 7/2/95) $283 $293 $184

Total $311 $306 $288


1997 1996 1995

●A $159 $68 ●B $149

33% 11% 24%

●A 1997 includes $42 million of special andnonrecurring income relating to the gain from thesale of approximately one-half of the Company’sinterest in Brylane, offset by a valuation adjustmenton an investment where the carrying value ispermanently impaired.

●B 1995 includes 100% of WFNNB’s operating incomebefore interest expense and the gain from the sale of a 60% interest in WFNNB, partially offset byspecial and nonrecurring charges.

LESLIE H. WEXNER, CHAIRMAN

13%

Abercrombie & Fitch


1997 1996 1995

$522 $335 $235

6% 4% 3%


1997 1996 1995

Abercrombie & Fitch $462 $373 $354


1997 1996 1995

$84 $46 $24

18% 7% 4%

6%

1997

1997

wer of doing a few things very well.o

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ast year, we kept talking aboutbuilding brand leadership and,frankly, I was never comfortablewith it. It sounded like academi-cians spouting theory and devel-oping process.

That’s not what we’re in busi-ness for.

We’re in business to create cus-tomer demand. Nothing happens until thecustomer says “I’ll take it,” and the custo-

mer could care less about theory or process.The customer responds to leadership

brands. The best in the market. Disney.Coke. Victoria’s Secret. Leadership brands.Big brands. Top of mind awareness.

Our goal is clear: we want to have fewerbrands, but better brands. Lifestyle-focusedbrands that can be category leaders.

And brands that do major volume. I’vesaid it before: We’re only interested in brandswith the potential to do $1 billion or more

annually. By that criterion, our brands mustbe first, or, at the very worst, a damn fast sec-ond, in their category, or they shouldn’t exist.

Fewer brands. Better brands.Why did we close Cacique? Because it was

a bad idea? No. It wasn’t a bad idea. In fact,it was a good idea. But Victoria’s Secret is abetter one. Already positioned as the cate-gory leader. With infinitely greater opportun-ities. We elected to concentrate our resources,our energies, on the brand that has the great-est potential for return and brand exten-sions. That’s good for the brand, good for thebusiness, and good for our shareholders.

Limited Too has quickly emerged as theleader in its category. They are incredibly

close to their customer, well defined, andclearly differentiated. It is our intention thateach of our brands be as well defined, anddifferentiated, to their customer. Our newlyformed Design, and Brand and Creative Ser-vices businesses were created to help clarifyand differentiate market positions, by brand,and keep them fresh.

We intend to support great brands in every way possible. I’ve never believed, not for a minute, that you can make a bad brand

good through advertising. All you really do is kill it. But a great brand, like Victoria’sSecret, should be, and is, supported withpowerful, brand-right advertising. Victoria’sSecret, alone, will spend over $50 million onadvertising this year. It wouldn’t surpriseme if that figure reached $100 million in thevery near future.

To be frank, four years ago Victoria’s Secretwould not have been deserving of any mediasupport. They were really just another pro-motionally priced retailer. Not anymore. Infour years, they’ve undergone a remarkabletransformation. Today, they are recognizedworldwide.

As a great brand.

l

8

brandsWe are not building brand leadership.

We are building leadership brands.

FACT: A recent “Most Recognized Brands” survey showed that Victoria’s Secret had moved from 26th to 9th in just two years.

Our focus on branding has forced us to realign

our entire organization.

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rtVictoria’sSecretStoresNYSE: IBIThe world’s mostsuccessful brand ofelegant intimateapparel, foundationsand related productsfor women.

Lerner New YorkLerner New York brings its customersgreat style and value with the NewYork & Companysportswear brand.

Galyan’sTradingCompanyThe coolest interactiveretail destination forsports enthusiasts andwannabes of all ages.

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rt Structure Geared to urban,active, creative young men in their mid-20s, Structureoffers authentic,American-influencedclassic sportswearwith an edge.

Victoria’sSecretCatalogueNYSE: IBIThe world’s mostfamous catalogue isalso an industry leader in profitability.

Christmasdreams & fantasies

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Limited TooLimited Too, the onlyspecialty storespecifically developedfor fashion-aware girls, sells apparel andlifestyle and personalcare products.

The LimitedModern American sportswear for women.

ExpressA lifestyle brandoffering hot newinternational fashion to youngwomen.

HERITAGE PL

BACKGROUN

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Lane BryantThe key fashiondestination for the large-size customer (size14–28); offering the best in jeans, sweaters,sportswear, suitseparates and dresses as well as intimateapparel, hosiery andaccessories.

HenriBendelCatering to today’shigher-income, modern,thirty-somethingwoman, Bendel’s offersfashion apparel,cosmetics, accessoriesand gifts.

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rtBath &Body WorksNYSE: IBIHealthy, natural, good-for-you personal care products andgifts from America’sheartland, presentedin a service-orientedcountry environment.

Abercrombie & FitchNYSE: ANFQuality, casual, classicAmerican sportswear brand, targeted to theyoung, hip customer.

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’ll let you in on a littlesecret—in any mall, thecool kids always work inthe hot stores.

The same is true inretail businesses. Want toknow where the formerPresident of J. Crew Group,the President of BananaRepublic, the President ofJ. Crew catalogue, thechildren’s GMM at Sears,the GMM of Talbot’s,

and the Vice President of Stores at PotteryBarn work now?

The Limited, Inc.They all joined the business in the past

year. As did the head designer at EddieBauer, a lead designer at Anne Klein, thehead menswear designer at Calvin Klein,and many, many others.

We’re talking about savvy, street smart,seasoned professionals. People who could geta job anywhere. People whose former com-panies would have been very happy if they’djust stayed put.

So, why here? Why now?Because they see the future. This business,one of the great retail success stories of thetwentieth century, is positioned even betterfor the twenty-first.

A big acknowledgment for this enormousinflux of new talent goes to Arnie Kanarickand his team in Human Resources, who setout to erase some enormous misconceptionsabout our business, and did just that. Whenthe real picture emerged, when seasonedprofessionals saw the opportunity, they came.

In droves.

FACT: The Limited, Inc. is the 18th largest employer in the U.S. (excluding the government and nonprofits) and the 7th largest retail employer.

italent

ROB BERNARDPresident, The LimitedRob’s career encompassesmore than 20 years inAmerican retailing, includingsenior executive positions at Liz Claiborne and Macy’s.Prior to joining The Limited,Inc. he was President and Chief Operating Officerat the J. Crew Group. Rob’s depth and breadth of experience will beessential as we continue to reestablish The Limited as a dominant brand.

KEN GILMANVice Chairman and ChiefAdministrative OfficerIn addition to his duties asVice Chairman, Ken assumedall responsibility for RealEstate, MIS, Legal,Distribution, and InformationTechnology in the past year. He leads the effort inhow to maximize theprofitability of our Real Estateassets, and is charged with the critical IT Year 2000transformation. Ken played a senior role in all of therecent IPOs, real estate sell-offs, and store and businessclosings. His expertise isrespected in both the retailand financial communities.

ANN HAILEYChief Financial OfficerWith stints at Pepsi,Nabisco, and Pillsbury, Annbrings important skills to our executive mix: first-hand,

big-time, heavyweightexperience at multidivisionalinternational businesses that, more important, thinkof themselves as brands. Ann is an insightful, well-rounded business executivewho is able to bring her vastexperience and objectiveapproach to the disciplines ofretailing. She’s a majorpartner in helping to build ourbusinesses into brands whileunlocking shareholder value.

MARIE HOLMAN-RAOPresident, Limited DesignServicesThe former President of Banana Republic, Mariereports directly to Les, and has responsibility not only for the overall designposition of each business,but also for the quality of each individual business’sdesign organization. Marie isinitially spending the bulk of her time working with RobBernard and The Limited,clarifying their merchandisemix and customer profile.

NICK LAHOWCHICPresident, Limited DistributionServicesNick joined us this year from Becton Dickinson where he was President ofSupply Chain Services. Before that, he led logisticmanagement at Colgate-Palmolive and Nabisco Brands.Nick is a proven leader, whounderstands supply chain

management. Integrating our supply chain processesfrom factories to stores is critical to our success.

ED RAZEKPresident, Limited Brand andCreative ServicesEd has worked, in one way or another, with thebusinesses for over twentyyears. In partnership withLes, he developed bothForenza and Outback Red forThe Limited, worked on theinitial positioning of Express,and has, for the past threeyears, been involved in every aspect of the Victoria’sSecret brand. He willcontinue to extend thatbrand while spendingsubstantially more time withthe women’s businesses inthe coming year.

PETER WHITFORDPresident, StructurePeter assumed the role ofPresident after serving asStructure’s GeneralMerchandise Manager. Priorto joining, Peter wasPresident of the retailer,“Country Road Australia.”He’s a good leader whounderstands brands. He hasalready begun to integratehis design and merchandisingfunctions into the brand-building process, whileradically transforming thebusiness’s pants category to become immediately more competitive.

Recent Changes & Additions

Leaders must challenge their organizations to change.

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15

There isn’t a brand in the portfolio that can’t be as powerfulas Victoria’sSecret. That’s the goal.

I believe in brands—they are the strategic platform for

building shareholder value.

Our brands can’tbe successful unless

all functionalareas are aligned behind

Les’ vision.That’s my focus.

Ed RazekPresident, Limited Brand and Creative Services

Ann HaileyChief Financial Officer

Rob BernardPresident, The Limited

Ken GilmanVice Chairman and Chief Administrative Officer

Don’t talk about averages. Focus onthe top third.Les WexnerChairman

Marie Holman-RaoPresident, Limited Design Services

I left a good job for a great

one. Reinventing, refocusing The

Limited is the best opportunity

in retail. We’re putting together a

team that will do just that.

My goal is to set up design environments where creativity can flourish—incubators

for brand innovation! Out of this comes an

enormous opportunity for excitement, newness and fashion direction.

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16

hroughout the business, ourprocesses have been reexaminedand refined. It is all part of an ongoing effort to boost ourwomen’s businesses while con-tinuing to grow our emergingconcepts, and strengthen ourworld-class brands. Here are afew examples:

Limited Too/Gryphon and the development of “Girl Care”It started as a simple test of nail polish inJune ’96 that was an immediate success, sell-ing 30,000 bottles per week.

Since then, Limited Too, Gryphon, andMast Industries have developed 65 “GirlCare” products with over 325 SKUs. And our customers love them. Particularly theglitter toiletries, cosmetics and accessories.

Young girls, as it turns out, want it all.Limited Too has invented fabulous new

products, all of whichare scented, like “Spar-kle Splash” (glitterbody splash), “GlimmerDust” (glitter powder),“Shimmerin’” (glitter

body lotion) and “Hi-Lite” (glitter hairmascara). Yes, you read that right.

The “Girl Care” product line now repre-sents significant sales and profits and, importantly, it drives traffic. The addition of these products has enhanced LimitedToo’s position as a destination store for girlsages 7–14, a place where they can go to have fun.

Lerner New York & “MPR”MPR. Merchandise Process Redesign. Itmeans the complete rethinking and rework-ing of a business’s merchandising process

from initial concept to quality control, rightthrough to delivery. It means changing frommerchant generalists to a team of special-ists: designers, sourcing and manufacturingpeople, planning and allocation specialists,and merchants, all experts on the brand’scustomer.

The Lerner New York team, led byRichard Crystal, President; Jackie Corso,Executive Vice President of Merchandis-ing; and Charlotte Neuville, Vice Presidentof Design, used theMPR process to develop100 percent of LernerNew York’s Spring ’98merchandise.

The result? The bestmade, best coordinated,best designed springpresentation in the history of the business,selling at ticket prices, and achieving broadcustomer acceptance for the New York &Company brand.

Express, Sweaters and MPRExpress’s sweater team is the first Expressteam to be up and running with MPR. Andit’s working. The rest of Express should beon-line with it by Fall ’98.

Today, sweater designers are working withmerchants. Discussing trends. And how theytranslate to the brand. Discussing voids.And how they are going to be filled. In turn,both teams are working with production

people to get brand-rightfashion made to high-qual-ity standards, and deliv-ered on time.

These specialists knowhow to do their jobs.And they’re doing themwell. Express is quickly

making up lost ground. And the sweaterinventory just looks better and better.

Structure becomes the “pants authority”You’ve got to be best at something. And foryoung men, if you’re not a pants authority,you’re nowhere.

Structure, whileworking on theirbrand positioning,changed their entirephilosophy on pantsin the past year. From the fit, to the styles, tothe washes, to the pricing—everything wasreviewed and revised to be brand consistent.

The result? Pant transactions are up,across all categories.

Stores have been deluged with productknowledge and given targets to hit. Troopshave been rallied. Our VP of Stores evenchanged his name from Pat to “Pant.” Well,not permanently.

Victoria’s Secret “Angels” launch“Sheer” was big news in fashion. Victoria’sSecret translated that news into one ofthe biggest lingerie successes ever.

“Angels,” a collection of sheer bras andpanties, was developed, and subsequentlylaunched, as the first major coordinatedmarketing effort between Stores and Cata-logue. Five of the world’s most beautifulsupermodels were cast, afamous director hired, wingswere made, sets designed,and Tom Jones was addedfor humor.

The national advertisingcampaign was picked up asnews, by the media, and seenby over 150 million people worldwide.

The rest is lingerie, and retailing, history.

processtBeing first isn’t accidental; it’s deliberate and well planned.

FACT: Founded in 1963, The Limited, Inc. was “born” the same year as Jim Carrey, Johnny Depp, Whitney Houston, Meg Ryan and Wesley Snipes.

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Express, Sweaters and MPR

Limited Too/Gryphonand the developmentof “Girl Care”

“Girl Care” drivestraffic, makingLimited Too a truedestination for girls

Trends musttranslate to the brand

Fit is an important part of getting the customer to say “I’ll take it!”

Design fills the void

FILL TOP LEFT PIC TO BLEED

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MPR, teamwork,and a commitmentto quality

Reviewing themerchandise plan

Is it “on-brand?”

Jeans, a must-wincategory, being fitted

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Structure becomes the “pants authority”

Every detail wasconsidered ,everything revised

Victoria’s Secret “Angels” launch

Inspirationcomes frommany places

Over 150 millionpeople worldwidesaw this launch

Being a pantsauthority is keywhen meeting theneeds of urban,active young men.

Great product + coordinated effort +supermodels,wings and Tom Jones= powerful newproduct launch

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DirectorsLESLIE H. WEXNERChairman ●C

KENNETH B. GILMANVice Chairman and Chief Administrative Officer

MARTIN TRUSTPresident: Mast Industries, Inc.Andover, Massachusetts

EUGENE M. FREEDMANSenior Advisor to and Director of Monitor Company, Inc. ●DCambridge, Massachusetts

E. GORDON GEEPresident: Brown University ●AProvidence, Rhode Island

DAVID T. KOLLATChairman: 22, Inc.Westerville, Ohio

CLAUDINE B. MALONEFinancial & Management Consulting, Inc. ●B ●D

McLean, Virginia

LEONARD A. SCHLESINGERGeorge F. Baker Jr. Professor of Business AdministrationHarvard Business SchoolCambridge, Massachusetts

DONALD B. SHACKELFORDChairman of the Board: State Savings Bank ●A ●B ●D

Columbus, Ohio

ALLAN R. TESSLERChairman and Chief Executive Officer:International Financial Group, Inc. ●B ●C ●D

New York, New York

ABIGAIL S. WEXNERAttorney at Law ●DColumbus, Ohio

BELLA WEXNERDirector Emeritus

RAYMOND ZIMMERMANRetired Chairman of the Board: Service Merchandise Co., Inc. ●B ●D

Brentwood, Tennessee

Company OfficersExecutive CommitteeLESLIE H. WEXNERChairman

KENNETH B. GILMANVice Chairman and Chief Administrative Officer

V. ANN HAILEYExecutive Vice President and Chief Financial Officer

ARNOLD F. KANARICKExecutive Vice President and Chief HumanResources Officer

DANIEL P. FINKELMANVice President, Planning

BRUCE A. SOLLVice President and Counsel

Functional LeadersWADE BUFFVice President, Internal Audit

SAMUEL P. FRIEDVice President, General Counsel and Secretary

PETER Z. HORVATHVice President, Chief Financial Officer,Merchandising Apparel

JACK LISTANOWSKYVice President and Chief Sourcing and Production Officer

TIM LYONSVice President, Taxes

JON J. RICKERVice President and Chief Information Officer

Other OfficersR. RICHARD AMARIVice President, Group Chief Information Officer

FRANK BALLVice President, Staffing

PAUL E. DAWSONVice President, Information Services

AL DIETZELVice President, Public Affairs

PATRICK HECTORNEVice President, Treasurer

THOMAS J. KATZENMEYERVice President, Investor Relations

THOMAS B. MCFADDENVice President, Group Chief Information Officer

JOHN S. MITCHELLVice President, Taxes

ROBERT A. MYERSVice President, Organization and Leadership Development

JEANNINE A. RALSTONVice President, Store Systems

PHILIP S. RENAUD, IIVice President, Insurance

ROBERT W. SEYBOLDVice President, Group Chief Information Officer

RITA TREVINO-FLYNNVice President, Communications

COLLEEN A. WOODBURNVice President, Compensation and Benefits

Business LeadersEXPRESSMichael A. Weiss, President

LERNER NEW YORKRichard P. Crystal, President

LANE BRYANTJill Dean, President

THE LIMITEDRobert E. Bernard, President

HENRI BENDELTedford G. Marlow, President

STRUCTUREPeter D. Whitford, President

LIMITED TOOMichael W. Rayden, President

GALYAN’S TRADING COMPANYJoel L. Silverman, Chief Operating Officer

VICTORIA’S SECRET STORESGrace A. Nichols, President

VICTORIA’S SECRET CATALOGUECynthia D. Fields, President

BATH & BODY WORKSBeth M. Pritchard, President

GRYPHON Robert J. Ruttenberg, President

ABERCROMBIE & FITCH CO.Michael S. Jeffries, President

MAST INDUSTRIESMartin Trust, President

LIMITED BRAND AND CREATIVE SERVICESEdward G. Razek, President

LIMITED DESIGN SERVICESMarie Holman-Rao, President

LIMITED DISTRIBUTION SERVICESNicholas LaHowchic, President

LIMITED REAL ESTATEGeorge R. Sappenfield, President

LIMITED STORE PLANNINGCharles W. Hinson, President

Company InformationHEADQUARTERSThe Limited, Inc.Three Limited Parkway, Columbus, Ohio 43230614. 415 7000www.limited.com

ANNUAL MEETINGThe Annual Meeting of Shareholders is scheduled for:9:00 A.M., Monday, May 18, 1998Three Limited Parkway, Columbus, Ohio 43230

STOCK EXCHANGE LISTINGSNew York Stock Exchange (Trading Symbol “LTD”)London Stock ExchangeCommonly listed in newspapers as “Limitd”

INDEPENDENT PUBLIC ACCOUNTANTSCoopers & Lybrand L.L.P., Columbus, Ohio

OVERSEAS OFFICESBudapest, Hong Kong, Jakarta, London, Milan, Paris,Porto, Seoul, Shanghai, Taipei, Tokyo

10-K REPORT AND INFORMATION REQUESTSA copy of form 10-K is available without chargethrough the website, www.limited.com, or upon written request to Thomas J. Katzenmeyer,Vice President, Investor Relations, at theheadquarters listed above. For information pleasecall 614. 415 6400.

STOCK TRANSFER AGENT, REGISTER, ANDDIVIDEND AGENTFirst Chicago Trust Company of New YorkPO Box 2500, Jersey City, New Jersey 07303-2500800. 317 4445

THE LIMITED, INC.Founded 1963As of January 31, 1998, number of associates: 131,000Approximate shareholder base: 241,000© 1997 The Limited, Inc.

limited inc information

●A Member of Compensation Committee ●B Member of Audit Committee ●C Member of Nominating Committee ●D Member of Finance Committee

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incinfo

limitedTHREE LIMITED PARKWAY • PO BOX 16000 • COLUMBUS • OHIO 43216 • 614. 415 7000

financial

1997

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The Chairman’s Letter, and a description of the brands, our talent and processes can be found in the accompanying piece of this year’s two-part annual report.

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scontentsFinancial Summary

Management’s Discussion and Analysis

Consolidated Statements of Income

Consolidated Statements of Shareholders’ Equity

Consolidated Balance Sheets

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Market Price and Dividend Information

Report of Independent Accountants

3

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19

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s The Limited, Inc.’s

balance sheet provides

continuing evidence

of financial strength and

flexibility. The

Company’s long-term

debt-to-equity ratio

declined to 32% at the end

of 1997 and working

capital increased 47%.

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(Thousands except per share amounts, ratios and store and associate data)

1997 1996 ●A ●B ●E 1995 1994 ●A 1993 1992 ●B 1991 ●B 1990 ●A ●E 1989 ●B 1988 1987

SUMMARY OF OPERATIONS

Net Sales $9,188,804 $8,644,791 $7,881,437 $7,320,792 $7,245,088 $6,944,296 $6,149,218 $5,253,509 $4,647,916 $4,070,777 $3,527,941

Gross Income $2,817,977 $2,496,579 $2,087,532 $2,114,363 $1,958,835 $1,990,740 $1,793,543 $1,630,439 $1,446,635 $1,214,703 $992,775

Operating Income $480,099 $636,067 $613,349 $798,989 $701,556 $788,698 $712,700 $697,537 $625,254 $467,418 $408,872

Operating Income as a Percentage of Sales 5.2% 7.4% 7.8% 10.9% 9.7% 11.4% 11.6% 13.3% 13.5% 11.5% 11.6%

Adjusted Operating Income ●C $706,314 ●C $648,067 ●C $612,035 798,989 ●C $698,939 $788,698 $712,700 $697,537 $625,254 $467,418 $408,872

Adjusted Operating Income as a Percentage of Sales ●C 7.7% ●C 7.5% ●C 7.8% 10.9% ●C 9.6% 11.4% 11.6% 13.3% 13.5% 11.5% 11.6%

Net Income $217,390 $434,208 $961,511 $448,343 $390,999 $455,497 $403,302 $398,438 $346,926 $245,136 $235,188

Net Income as aPercentage of Sales 2.4% 5.0% 12.2% 6.1% 5.4% 6.6% 6.6% 7.6% 7.5% 6.0% 6.7%

Adjusted Net Income ●D $341,199 ●D $321,830 ●D $311,230 $448,343 ●D $389,382 ●D $446,380 $403,302 $398,438 $346,926 $245,136 $235,188

Adjusted Net Income as a Percentage of Sales ●D 3.7% ●D 3.7% ●D 4.0% 6.1% ●D 5.4% ●D 6.4% 6.6% 7.6% 7.5% 6.0% 6.7%

PER SHARE RESULTS

Net Income Per Basic Share $0.80 $1.55 $2.69 $1.25 $1.09 $1.26 $1.12 $1.11 $0.97 $0.68 $0.63

Net Income Per Diluted Share $0.79 $1.54 $2.68 $1.25 $1.08 $1.25 $1.11 $1.10 $0.96 $0.68 $0.62

Adjusted Net IncomePer Diluted Share ●D $1.24 ●D $1.14 ●D $0.87 $1.25 ●D $1.08 ●D $1.23 $1.11 $1.10 $0.96 $0.68 $0.62

Dividends $0.48 $0.40 $0.40 $0.36 $0.36 $0.28 $0.28 $0.24 $0.16 $0.12 $0.12

Book Value $7.50 $7.09 $9.01 $7.72 $6.82 $6.25 $5.19 $4.33 $3.45 $2.64 $2.04

Weighted Average DilutedShares Outstanding 274,483 282,053 358,371 358,601 363,234 363,738 363,594 362,044 361,288 360,186 376,626

OTHER FINANCIAL INFORMATION

Total Assets $4,300,761 $4,120,002 $5,266,563 $4,570,077 $4,135,105 $3,846,450 $3,418,856 $2,871,878 $2,418,486 $2,145,506 $1,929,477

Return on Average Assets 5% 9% 20% 10% 10% 13% 13% 15% 15% 12% 13%

Adjusted Return on Average Assets ●D 8% ●D 7% ●D 6% 10% ●D 10% ●D 12% 13% 15% 15% 12% 13%

Working Capital $937,739 $638,204 $2,018,960 $1,750,111 $1,513,181 $1,063,352 $1,084,205 $884,004 $685,524 $567,639 $629,783

Current Ratio 1.9 1.7 3.5 3.2 3.1 2.5 3.1 2.8 2.4 2.2 2.9

Capital Expenditures $404,602 $409,260 $374,374 $319,676 $295,804 $429,545 $523,082 $428,844 $318,427 $288,972 $283,590

Long-Term Debt $650,000 $650,000 $650,000 $650,000 $650,000 $541,639 $713,758 $540,446 $445,674 $517,952 $681,000

Debt-to-Equity Ratio 32% 34% 20% 24% 27% 24% 38% 35% 36% 55% 93%

Shareholders’ Equity $2,044,957 $1,922,582 $3,201,041 $2,760,956 $2,441,293 $2,267,617 $1,876,792 $1,560,052 $1,240,454 $946,207 $729,171

Return on Average Shareholders’ Equity 11% 17% 32% 17% 17% 22% 23% 28% 32% 29% 31%

Adjusted Return on Average Shareholders’ Equity ●D 17% ●D 16% ●D 10% 17% ●D 17% ●D 22% 23% 28% 32% 29% 31%

Comparable Store SalesIncrease (Decrease) 0% 3% (2%) (3%) (1%) 2% 3% 3% 9% 8% 3%

STORES AND ASSOCIATES AT END OF YEAR

Total Number of Stores Open 5,640 5,633 5,298 4,867 4,623 4,425 4,194 3,760 3,344 3,497 3,115

Selling Square Feet 28,400,000 28,405,000 27,403,000 25,627,000 24,426,000 22,863,000 20,355,000 17,008,000 14,374,000 14,296,000 12,795,000

Number of Associates 131,000 123,100 106,900 105,600 97,500 100,700 83,800 72,500 63,000 56,700 50,200

●A Includes the results of companies disposed of up to the disposition date. Effective April 30, 1989, the Company sold its Lerner Woman Division, effective August 31, 1993, the Company sold 60% of its interest in Brylane, Inc. and effective January 31, 1996 the Company sold 60% of its interest in World Financial Network National Bank.

●B Includes the results of Abercrombie & Fitch subsequent to the February 1, 1988 acquisition date, Penhaligon’s subsequent to the July 2, 1990 acquisition date, Gryphon subsequentto June 1, 1991 when the Company acquired a controlling interest and Galyan’s subsequent to the July 2, 1995 acquisition date.

●C Excludes the effect on operating income of special and nonrecurring items of ($213,215) in 1997, ($12,000) in 1996, $1,314 in 1995 (see Note 2 to the Consolidated FinancialStatements) and $2,617 in 1993. Additionally, inventory liquidation charges of ($13,000) related to Henri Bendel store closings are excluded from 1997.

●D In addition to excluding special charges listed in (c) above, excludes the effect on net income of the gain resulting from the initial public offerings of $8,606 for Brylane, Inc. in1997, $118,178 for a 15.8% interest in Abercrombie & Fitch in 1996, $649,467 for a 16.9% interest in Intimate Brands, Inc. in 1995 (see Note 1 to the Consolidated FinancialStatements) and $9,117 for United Retail Group in 1992.

●E Fifty-three-week fiscal year.

Financial Summary

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Management’s Discussion and AnalysisResults of OperationsNet sales for the fourth quarter of 1997 grew 10% to $3.268 billionfrom $2.966 billion for the same period a year ago. Net income was$85.3 million versus $213.4 million in the fourth quarter of 1996,and earnings per diluted share were $.31 versus $.78 in the fourthquarter of 1996. Excluding special and nonrecurring items andinventory liquidation charges associated with the closing of fiveHenri Bendel stores, net income was $252.5 million versus $220.2million in the fourth quarter of 1996, and earnings per diluted sharewere $.91 versus $.81 in the fourth quarter of 1996.

As a result of an ongoing review of the Company’s retail busi-nesses and investments as well as implementation of initiativesintended to promote and strengthen the Company’s various retailbrands (including closing businesses, identification and disposal of non-core assets and identification of store locations not consis-tent with a particular brand) during the fourth quarter of 1997, theCompany recognized total charges of $289 million (approximately$30 million after-tax cash impact) or $.60 per diluted share, con-sisting of $276 million in special and nonrecurring charges and a $13 million cost of sales charge for inventory liquidation at Henri Bendel. These charges included:• A $68 million charge for closing the 118 store Cacique lingeriebusiness effective January 31, 1998. The amount includes $38 mil-lion in cash charges relating to cancellation of merchandise onorder and other exit costs such as severance, service contract ter-mination fees and lease termination costs;• $95 million in charges related to Henri Bendel, which include an$82 million special and nonrecurring charge related to streamliningHenri Bendel from six stores to a one-store operation by Septem-ber 1, 1998. The amount includes $56 million in cash charges thatare recorded in other current liabilities. In addition, the Companyincurred a $13 million cost of sales charge for inventory liquidation.The charge to cost of sales is in accordance with Emerging IssuesTask Force (“EITF”) Issue No. 96-9, “Classification of InventoryMarkdowns and Other Costs Associated with a Restructuring”;• $86 million of impaired asset charges related principally to thewomen’s apparel businesses, in accordance with Statement of Fi-nancial Accounting Standards (“SFAS”) No. 121, “Accounting forthe Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” This charge has no cash impact but is an SFASNo. 121 required accounting adjustment to measure the fair valueof store assets, and will provide a noncash benefit in future periodsfrom reduced depreciation and amortization;• A $28 million provision for closing or downsizing approximately80 oversized stores, primarily in the Limited, Lane Bryant, LernerNew York and Express women’s businesses, and a $12 million write-down to net realizable value of a real estate investment previouslyacquired in connection with closing and downsizing certain stores.

Net sales for the fiscal year ended January 31, 1998, increased 6%to $9.189 billion from sales of $8.645 billion for the same periodended February 1, 1997. Net income was $217.4 million, or $.79 per diluted share, compared to $434.2 million, or $1.54 per dilutedshare last year.

Excluding the impact of special and nonrecurring items, gains in connection with initial public offerings (“IPO”), and the Henri Ben-del inventory liquidation charges, the Company would have earned$1.24 per diluted share compared to last year’s $1.14. These exclud-ed items consisted of: 1) $213.2 million related to the previouslydescribed fourth quarter charges that was net of a third quarter netgain of $62.8 million related principally to the sale of approximatelyone-half of the Company’s investment in Brylane, Inc. (“Brylane”),a 26% owned (post- IPO) catalogue retailer; 2) in 1997, a pretax gainof $8.6 million in connection with the IPO of Brylane; 3) $12 mil-lion of special and nonrecurring charges in 1996 related to the April1997 sale of Penhaligon’s; and 4) in 1996, a gain of $118.2 millionresulting from the Abercrombie & Fitch (“A&F”) IPO.

Business highlights for 1997 include the following:• Intimate Brands, Inc. (“IBI”), led by strong performances atBath & Body Works and Victoria’s Secret Stores, recorded earningsper diluted share of $1.14, compared to $1.02 in 1996, includingspecial and nonrecurring charges of $.16 in 1997 and $.03 in 1996.• A&F delivered 1997 earnings per diluted share of $.94, a 74% increase over 1996 as comparable store sales increased 21% on topof 13% for 1996.• However, much of the gains from IBI and A&F were offset by adecline in operating income for each of the women’s businesses,which finished the year with a pretax operating loss aggregating $268 million, including special and nonrecurring charges of $187million and the $13 million inventory liquidation charge related tothe closing of five Henri Bendel stores.• Limited Too led the emerging businesses with a significant improve-ment in operating income and 20% comparable store sales gains.• During the year, the Company also completed the sales of itsinterests in the Newport Office Tower in Jersey City, New Jersey,and The Mall at Tuttle Crossing in Columbus, Ohio, and approx-imately one-half of its interest in Brylane for cash proceeds of$343.2 million. • On February 17, 1998, a registration statement was filed with theSecurities and Exchange Commission in connection with a plan toestablish A&F as a fully independent company via a tax-free ex-change offer pursuant to which The Limited shareholders will begiven an opportunity to tender some or all of their shares of TheLimited in return for shares of A&F. The transaction is subject tocertain customary conditions.• On February 20, 1998, the Company entered into a definitiveagreement with Pinault Printemps-Radoute to sell its remaining 2.6 million shares of Brylane for $51 per share, generating net cashproceeds of $131 million. The transaction is expected to close in the first quarter of 1998.

The Company does not believe that the consummation of thetransactions and the taking of the other actions outlined above willhave a material effect on the Company’s liquidity (i.e., its ability toprovide the resources to support operations, projected growth, sea-sonal requirements and capital expenditures). Furthermore, althoughthe Company believes that such transactions and other actions shouldhave a favorable impact on the Company’s results of operations,there can be no assurance with respect to the effect of these actions.

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Net SalesFourth quarter 1997 sales as compared to sales for the fourth quar-ter 1996 increased 10% to $3.268 billion due to 5% comparablestore sales gains with the balance of the increase attributable to newand remodeled stores and increased catalogue sales. Thirteen-weekfourth quarter 1996 sales as compared to sales for the fourteen-weekfourth quarter 1995 increased 7% to $2.966 billion due to a 9%

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The following summarized financial data compares 1997 to the comparable periodsfor 1996 and 1995 (millions):

% Change

1997 1996 1995 1997–96 1996–95

NET SALES

Express $1,189 $1,386 $1,445 (14%) (4%)

Lerner New York 946 1,045 1,005 (9%) 4%

Lane Bryant 907 905 903 — —

The Limited 776 855 850 (9%) 1%

Henri Bendel 83 91 91 (9%) —

Total Women’s Brands $3,901 $4,282 $4,294 (9%) —

Structure 660 660 576 — 15%

Limited Too 322 259 214 24% 21%

Galyan’s Trading Co. (since 7/2/95) 160 108 45 48% n/m

Other 6 4 — n/m n/m

Total Emerging Brands $1,148 $1,031 $835 11% 23%

Victoria’s Secret Stores 1,702 1,450 1,286 17% 13%

Victoria’s Secret Catalogue 734 684 661 7% 3%

Bath & Body Works 1,057 753 475 40% 59%

Cacique 95 88 80 8% 10%

Other 30 22 15 n/m n/m

Total Intimate Brands $3,618 $2,997 $2,517 21% 19%

Abercrombie & Fitch $522 $335 $235 56% 43%

Total Net Sales $9,189 $8,645 $7,881 6% 10%

OPERATING INCOME

Women’s Brands ●A $(268) $64 ●E $54 n/m 19%

Emerging Brands and Other ●B 159 68 ●F 149 134% (54%)

Intimate Brands ●C 505 ●D 458 386 10% 19%

Abercrombie & Fitch 84 46 24 83% 92%

Total Operating Income $480 $636 $613 (25%) 4%

●A 1997 includes special and nonrecurring charges of approximately $187 millionrelating to the closure of five out of six Henri Bendel stores and charges associated with asset valuation impairment and the closure and downsizing ofcertain stores, plus $13 million in inventory liquidation charges associated with the Henri Bendel closings.

●B 1997 includes $42 million of special and nonrecurring income relating to the gain from the sale of approximately one-half of the Company’s interest in Brylane,offset by a valuation adjustment on an investment.

●C 1997 includes a $68 million charge related to the closing of the Cacique businesseffective January 31, 1998.

●D 1996 includes a special and nonrecurring charge of $12 million for revaluation ofcertain assets in connection with the sale of Penhaligon’s in April 1997.

●E 1995 includes a special and nonrecurring charge of approximately $48 million,primarily for store closings and downsizings.

●F 1995 includes 100% of WFNNB’s operating income of $114 million before interest expense versus $4 million, representing 40% of net income of $11 million in 1996; 1995 also includes an approximate $73 million gain from the sale of a 60% interest in WFNNB, partially offset by $23 million of specialand nonrecurring charges representing write-downs to net realizable value of certain assets.

n/m not meaningful

The following summarized financial data compares 1997 to the comparable periodsfor 1996 and 1995:

1997 1996 1995

COMPARABLE STORE SALES:

Express (15%) (6%) (2%)

Lerner New York (5%) 8% (1%)

Lane Bryant 1% 0% (8%)

The Limited (7%) 3% (4%)

Henri Bendel (13%) (5%) 6%

Total Women’s Brands (8%) 0% (3%)

Structure (3%) 7% (9%)

Limited Too 20% 8% (4%)

Galyan’s Trading Co. (since 7/2/96) 0% 12% —

Total Emerging Brands 3% 7% (8%)

Victoria’s Secret Stores 11% 5% (1%)

Bath & Body Works 11% 11% 21%

Cacique 10% 8% (20%)

Total Intimate Brands 11% 7% 1%

Abercrombie & Fitch 21% 13% 5%

Total Comparable Store Sales Increase (Decrease) 0% 3% (2%)

% Change

1997 1996 1995 1997–96 1996–95

STORE DATA:

Retail Sales Increase Attributable to New and Remodeled Stores 6% 8% 9%

Retail Sales per Average Selling Square Foot $295 $285 $272 4% 5%

Retail Sales per Average Store (thousands) $1,478 $1,453 $1,419 2% 2%

Average Store Size at End of Year (selling square feet) 5,035 5,043 5,172 — (2%)

Retail Selling Square Feet at End of Year (thousands) 28,400 28,405 27,403 — 4%

NUMBER OF STORES:

Beginning of Year 5,633 5,298 4,867

Opened 315 470 504

Acquired (Sold) (4) — 6

Closed (304) (135) (79)

End of Year 5,640 5,633 5,298

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increase in sales attributable to new and remodeled stores and a 3%increase in comparable store sales, offset by a 5% decrease due to thefifty-third week in 1995.

The 1997 retail sales increase of 6% was attributable to the Com-pany adding 315 new stores, remodeling 206 stores and closing 186stores (excluding closing 118 Cacique stores in January 1998 and the sale of four Penhaligon’s stores in the first quarter of 1997).This net addition of 129 stores represents over 365,000 square feetof new retail selling space. For the year, average sales productivityincreased 4% to $295 per square foot.

In 1997, IBI accounted for 114% of the Company’s total netsales increase and 39% of total Company sales. IBI posted a $620million sales gain over the prior year due to the net addition of 223stores (before the impact of the Cacique store closings and thePenhaligon’s sale) representing over 650,000 new retail sellingsquare feet, an 11% increase in comparable store sales and an 18%increase in catalogues mailed by Victoria’s Secret Catalogue. Addi-tionally, A&F reported a $186 million sales increase over the prioryear, bolstered by a 21% increase in comparable store sales, whileLimited Too experienced a $63 million sales increase over the prior year on a 20% increase in comparable store sales. However,sales at the women’s businesses in 1997 declined $382 million from1996, primarily due to an 8% decrease in comparable store sales, as well as a net decrease of 131 stores representing over 705,000retail selling square feet, due principally to closures of underper-forming locations.

The 1996 retail sales increase of 10% was attributable to an 8%increase in sales due to the Company adding 470 new stores, re-modeling 252 stores and closing 135 stores, and a 3% increase incomparable store sales, offset by a 1% decrease due to the fifty-thirdweek in 1995. This net addition of 335 stores represents approxi-mately 1 million square feet of new retail selling space. For the year,average sales productivity increased 5% to $285 per square foot.

In 1996, IBI accounted for 63% of the annual sales increase, andnearly 35% of total Company sales, posting a $480 million salesincrease over the prior year due to the net addition of 316 storesrepresenting over 817,000 selling square feet, a 7% increase incomparable store sales and an 11% increase in catalogues mailed by Victoria’s Secret Catalogue. Sales at the women’s businesses in1996 were flat to 1995, primarily due to flat comparable store sales.Disappointing results at Express, which experienced a 6% decline in comparable store sales, were offset by improved results at theLerner New York and Limited businesses, which had 8% and 3%increases in comparable store sales. In addition, the overall salesincrease for the Company included sales increases at Structure,A&F and Limited Too, which experienced 7%, 13% and 8%increases in comparable store sales.

Gross IncomeGross income increased to 35.4% as a percentage of sales for thefourth quarter 1997 from 33.0% for the fourth quarter 1996. Themerchandise margin rate (representing gross income before deduc-tion of buying and occupancy costs), increased 2.3%, expressed asa percentage of sales, due principally to improved initial markup(“IMU”), which was partially offset by a slightly higher markdownrate and the $13 million Henri Bendel inventory liquidation charge(.4% of sales). Buying and occupancy costs, expressed as a percen-tage of sales, were flat for the fourth quarter as compared to last year.

Gross income, expressed as a percentage of sales, was 33.0% for the fourth quarter 1996 compared to 29.2% for the fourth quar-ter 1995. The merchandise margin rate increased 3.4%, expressed as a percentage of sales, due principally to improved IMU and low-er markdown rates, as the Company was less price-promotional than the year before. Buying and occupancy costs decreased .4%,expressed as a percentage of sales, primarily due to sales produc-tivity associated with the 3% increase in comparable store sales.

The Company’s 1997 gross income rate increased 1.8% to 30.7%as compared to 1996. The merchandise margin rate increased 1.7%due principally to improved IMU, while buying and occupancy costs,expressed as a percentage of sales, were flat to last year.

The 1996 gross income rate of 28.9% increased 2.4% as com-pared to 1995. Merchandise margins, expressed as a percentage ofsales, increased 1.7%, due principally to improved initial markup.Buying and occupancy costs decreased .7% expressed as a percent-age of sales, primarily due to sales productivity associated with the3% increase in comparable store sales.

General, Administrative and Store Operating ExpensesGeneral, administrative and store operating expenses increased to20.8%, expressed as a percentage of sales, in the fourth quarter of 1997, compared to 18.7% in the fourth quarter of 1996. Thisincrease was attributable to: 1) a 2.5% rate increase at the IBI bus-inesses (discussed below) combined with an increase of IBI sales in the total Company mix to 42.7% from 39.1%; 2) the inability toleverage these expenses at the women’s businesses due to disap-pointing sales performance; and 3) additional compensation chargesfor restricted stock plans.

IBI’s increase is primarily the result of advertising costs at Vic-toria’s Secret Stores, the growth of Bath & Body Works in the over-all mix of IBI net sales from 25.1% in fiscal 1996 to 29.2% in fiscal 1997 and an increase in restricted stock plan compensationexpense. Due to an emphasis on point-of-sale marketing and salesfloor coverage for personal care products, Bath & Body Works hashigher store operating expenses as a percentage of net sales, whichhas been more than offset by higher gross margins.

The Company anticipates that these expenses, expressed as a per-centage of sales, will increase slightly in 1998, since the IBI busi-nesses, in particular Bath & Body Works, will represent a greaterportion of total Company sales.

General, administrative and store operating expenses, expressedas a percentage of sales, increased to 18.7% in the fourth quarter of 1996 compared to 17.7% in the fourth quarter of 1995. This

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increase as a percentage of sales was attributable to a 2.2% rateincrease at the IBI businesses and the inability to leverage expensesdue to disappointing sales performance at the women’s businesses,particularly Express.

General, administrative and store operating expenses increased,expressed as a percentage of sales, to 23.1% in 1997, compared to21.4% in 1996. This increase was primarily attributable to the rea-sons discussed above for the 1997 fourth quarter. These costsincreased, expressed as a percentage of sales, to 21.4% in 1996 com-pared to 20.0% in 1995, also primarily due to reasons discussedabove for fourth quarter 1996.

Special and Nonrecurring ItemsAs described in Note 2 to the Consolidated Financial Statements,the Company recognized special and nonrecurring charges of $276million during the fourth quarter of 1997 comprised of: 1) a $68 mil-lion charge for the closing of the Cacique lingerie business effectiveJanuary 31, 1998; 2) an $82 million charge related to streamliningthe Henri Bendel business from six stores to one store; 3) an $86million impaired-asset charge in accordance with SFAS No. 121,related principally to the women’s apparel businesses, covering certain store locations where the asset carrying values are perma-nently impaired; and 4) a $28 million provision for closing anddownsizing approximately 80 oversized stores primarily within the Limited, Lerner New York, Lane Bryant and Express women’sbusinesses and for a $12 million write-down to net realizable valueof a real estate investment previously acquired in connection withclosing and downsizing certain stores. Additionally, the Companyrecognized a $13 million charge to cost of sales in the fourth quarter of 1997 for inventory liquidation in accordance with EITF Issue No. 96-9. The Company, in accordance with EITF IssueNo. 94-3, anticipates charges for severance and other associate ter-mination costs for Henri Bendel in the first quarter of 1998 (theperiod the associates are notified). Additionally, the Company rec-ognized a net $62.8 million pretax gain during the third quarter of1997 relating to the sale of approximately one-half of its investmentin Brylane, partially offset by valuation adjustments on certainassets where the carrying values were permanently impaired.

In 1996, the Company recorded a $12 million pretax, special and nonrecurring charge in connection with the 1997 sale of Pen-haligon’s, a U.K.–based subsidiary of IBI.

In the fourth quarter of 1995, the Company recognized a $73.2million pretax gain in connection with the sale of a 60% interest in the Company’s wholly-owned credit card bank, World FinancialNetwork National Bank (“WFN”). In addition, the Company rec-ognized a special and nonrecurring charge during the fourth quar-ter of 1995 of approximately $71.9 million. Of this amount, $25.8 million was provided for the closing of 26 stores and $19.8 millionwas provided for the downsizing of 33 stores, primarily at Limitedand Lerner New York. The remaining charge of approximately$26.3 million represented the write-down to market or net realiz-able value of certain assets arising from nonoperating activities. The net pretax gain from these special and nonrecurring items was$1.3 million.

Operating IncomeFourth quarter operating income, expressed as a percentage of sales,was 6.1% in 1997, compared to 13.9% in 1996, and for the year was5.2% in 1997 compared to 7.4% in 1996. Excluding charges for spe-cial and nonrecurring items in both years and the Henri Bendelinventory liquidation charge in 1997, fourth quarter operatingincome, expressed as a percentage of sales, would have been 15.0%in 1997 compared to 14.3% in 1996, and for the year would havebeen 7.7% in 1997 compared to 7.5% in 1996. These increases weredue to increases in the gross income rate, which more than offset thegeneral, administrative and store operating expense rate increase.

The fourth quarter operating income rate increased 2.4% in1996, from 11.5% on an adjusted basis in 1995, and for the yearincreased .9% in 1996 from 6.5% on an adjusted basis in 1995. The1995 rates were adjusted to reflect the 1995 sale of a 60% interestin WFN as if the sale was consummated at the beginning of theyear. These increases were also due to increases in gross income,which more than offset the general, administrative and store oper-ating expense rate increase.

Interest Expense

Interest expense decreased by $1.5 million in the fourth quarter of1997 and decreased by $6.6 million for the year. For the quarter,lower average borrowing levels reduced interest expense by $2.8million, offset by a $1.3 million increase resulting from higherrates. For the year, lower average borrowing levels reduced interestexpense by $10.0 million, offset by $3.4 million of increasedexpense due to higher interest rates.

Other IncomeThe $5.1 million decrease in other income for 1997 compared to1996 was primarily attributable to approximately $10.5 million ofinterest income earned in the first quarter of 1996, which arose from$1.615 billion of temporarily invested funds that were used to con-summate the Company’s self-tender in March 1996. Excluding this$10.5 million in 1996, interest earnings increased $5.4 million fromhigher temporary investments in 1997, $3.5 million of which wasrealized in the fourth quarter.

Gains in Connection with Initial Public OfferingsAs discussed in Note 1 to the Consolidated Financial Statements,the Company recognized a pretax gain of $8.6 million during the first quarter of 1997, in connection with the IPO of Brylane, a 26% owned (post-IPO) catalogue retailer. In 1996, the Companyrecognized a $118.2 million gain in connection with the IPO ofa 15.8% interest (8.05 million shares) of A&F. In 1995, the Com-pany recognized a $649.5 million gain in connection with the IPO

FOURTH QUARTER YEAR

1997 1996 1997 1996 1995

Average Daily Borrowings (millions) $891.4 $1,039.5 $835.9 $964.3 $887.7

Average Effective Interest Rate 8.07% 7.49% 8.22% 7.82% 8.73%

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of 16.9% (42.7 million shares) of the stock of IBI. The gains re-corded by the Company in 1996 and 1995 were not subject to tax.

Other DataThere were a number of significant events in fiscal years 1997 and1996 that impacted the comparability of the Company’s net incomeper diluted share data. Although the following information is notintended to be presented in accordance with SEC guidelines for proforma financial information, it is provided to assist in investors’understanding of the Company’s results of operations.• In 1997 and 1996, the Company recognized $213.2 million and $12million in special and nonrecurring charges along with the $13 million Henri Bendel inventory liquidation charge in 1997 as morefully described in Note 2 to the Consolidated Financial Statements.The impact of these charges also reduced earnings attributable tominority interest by $6.8 million and $1.0 million in 1997 and 1996.• The Company recognized pretax gains in connection with IPOs of $8.6 million and $118.2 million in 1997 and 1996 (see Note 1 tothe Consolidated Financial Statements).• The Company repurchased 85 million shares via a self-tender and, as a result of investing funds used to facilitate the self-tender,recognized approximately $10.5 million of interest income in 1996up to the effective date.

Adjusted for the income tax effect (an $87 million expense in1997 and a $1.0 million expense in 1996), earnings per diluted sharewould have increased $.45 per share in 1997 to $1.24 and would have decreased $.38 per share to $1.16 in 1996.

AcquisitionEffective July 2, 1995, the Company acquired all of the outstandingcommon stock of Galyan’s for $18 million in cash and stock. TheCompany’s financial statements include the results of operations ofGalyan’s since the acquisition date.

Financial ConditionThe Company’s balance sheet at January 31, 1998, provides con-tinuing evidence of financial strength and flexibility. The Com-pany’s long-term debt-to-equity ratio declined to 32% at the end of1997 from 34% in 1996, and working capital increased 47% over1996 to $938 million. A more detailed discussion of liquidity, capi-tal resources and capital requirements follows.

Liquidity and Capital ResourcesCash provided by operating activities, commercial paper backed byfunds available under committed long-term credit agreements, andthe Company’s capital structure continue to provide the resourcesto support current operations, projected growth, seasonal require-ments and capital expenditures.

Net cash provided by operating activities totaled $590.0 million,$712.1 million and $340.7 million for 1997, 1996 and 1995 and con-tinued to serve as the Company’s primary source of liquidity.

The Company considers the following to be several measures of liquidity and capitalresources:

●A Adjusted1997 1996 1995 1995

Debt-to-Equity Ratio 32% 34% 41% 20%(Long-Term Debt Divided by Shareholders’ Equity)

Debt-to-Capitalization Ratio 24% 25% 29% 17%(Long-Term Debt Divided by Total Capitalization)

Interest Coverage Ratio 11x 12x 12x 12x(Income, Excluding Gain in Connection with Initial Public Offerings, Before Interest Expense, Depreciation, Amortization and Income Taxes Divided by Interest Expense)

Cash Flow to Capital Investment 146% 174% 91% 91%(Net Cash Provided by Operating Activities Divided by Capital Expenditures)

●A Adjusted 1995 reflects the impact of the $1.615 billion repurchase of 85 millionshares of common stock.

A summary of the Company’s working capital position and capitalization follows(thousands):

●A Adjusted1997 1996 1995 1995

Cash Provided by Operating Activities $589,981 $712,069 $340,732 $340,732

Working Capital $937,739 $638,204 $403,960 $2,018,960

Capitalization:

Long-Term Debt $650,000 $650,000 $650,000 $650,000

Shareholders’ Equity 2,044,957 1,922,582 1,586,041 3,201,041

Total Capitalization $2,694,957 $2,572,582 $2,236,041 $3,851,041

Additional Amounts Available Under Long-Term Credit Agreements $1,000,000 $1,000,000 $1,000,000 $1,000,000

●A Adjusted 1995 reflects the impact of the $1.615 billion repurchase of 85 millionshares of common stock.

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Net cash provided from operating activities in 1997 decreased$122.1 million from the prior year principally due to an increase inincome tax payments, that was partially offset by slightly higherincome from operations adjusted for special and nonrecurringitems and gains from initial public offerings.

Investing activities included capital expenditures of $405 mil-lion, about half of which was for new and remodeled stores. Invest-ing activities also included $235 million in net proceeds from thesales of the Newport Tower, an office building in Jersey City, NewJersey, and the Company’s interest in The Mall at Tuttle Crossingin Columbus, Ohio, and $108.3 million of net proceeds from thethird quarter sale of slightly less than one-half of the Company’sinvestment in Brylane. In 1996, $41.3 million was invested in theAlliance Data Systems (formerly WFN) credit card venture. 1995reflects the acquisition of Galyan’s, the proceeds from the securiti-zation of WFN’s credit card receivables of $1.2 billion (see Note 3to the Consolidated Financial Statements) and the transfer of$351.6 million to a restricted cash account (see Note 6 to the Con-solidated Financial Statements).

Cash used for financing activities for 1997 reflects an increase in the quarterly dividend to $.12 per share from $.10 per share in1996. Financing activities in 1996 included proceeds from andrepayment of $150 million in short-term debt borrowed by A&Fand net proceeds of $118.2 million from A&F’s initial public offer-ing. Financing activities also included $1.615 billion used to repur-chase 85 million shares of the Company’s common stock via the self-tender consummated in March 1996. Cash dividends paid in 1996and 1995 were $.40 per share.

At January 31, 1998, the Company had available $1 billion underits long-term credit agreement. The Company also has the abilityto offer up to $250 million of additional debt securities under itsshelf registration statement.

Stores and Selling Square Feet

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A summary of actual stores and selling square feet by business for 1997 and 1996, and the 1998 goals by business (including the impact of the estimated 280 stores thatwill be closed/downsized during the year) follows:

End of Year Change From

Goal 1998 1997 1996 1998–97 1997–96

EXPRESS

Stores 712 753 753 (41) —

Selling Square Ft. 4,481,000 4,739,000 4,726,000 (258,000) 13,000

LERNER NEW YORK

Stores 668 746 784 (78) (38)

Selling Square Ft. 5,041,000 5,698,000 5,984,000 (657,000) (286,000)

LANE BRYANT

Stores 760 773 832 (13) (59)


THE LIMITED

Stores 570 629 663 (59) (34)


HENRI BENDEL

Stores 1 6 6 (5) —

Selling Square Ft. 35,000 113,000 113,000 (78,000) —

STRUCTURE

Stores 545 544 542 1 2

Selling Square Ft. 2,161,000 2,143,000 2,117,000 18,000 26,000

LIMITED TOO

Stores 317 312 308 5 4

Selling Square Ft. 1,002,000 979,000 967,000 23,000 12,000

GALYAN’S TRADING CO.

Stores 15 11 9 4 2

Selling Square Ft. 1,026,000 641,000 488,000 385,000 153,000

VICTORIA’S SECRET STORES

Stores 874 789 736 85 53


BATH & BODY WORKS

Stores 1,101 921 750 180 171


CACIQUE

Stores — — 119 — (119)

Selling Square Ft. — — 365,000 — (365,000)

PENHALIGON’S

Stores — — 4 — (4)

Selling Square Ft. — — 2,000 — (2,000)

ABERCROMBIE & FITCH

Stores 186 156 127 30 29


ABERCROMBIE (KIDS)

Stores 13 — — 13 —

Selling Square Ft. 42,000 — — 42,000 —

TOTAL RETAIL BUSINESSES

Stores 5,762 5,640 5,633 122 7


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Capital ExpendituresCapital expenditures amounted to $404.6 million, $409.3 millionand $374.4 million for 1997, 1996 and 1995, of which $194.4 mil-lion, $235.7 million and $274.5 million were for new stores andremodeling and expanding existing stores. In 1997 and 1996 theCompany expended $55.3 million and $53.1 million on land acqui-sition and development costs. Also, in 1997 and 1996 the Companyexpended $30.2 million and $42.1 million in connection with theBath & Body Works distribution center.

The Company anticipates spending $480 to $500 million for cap-ital expenditures in 1998, of which $270 to $295 million will be fornew stores, the remodeling of existing stores and related improve-ments for the retail businesses, $50 to $60 million will be for infor-mation technology related to Year 2000 expenditures and $30 to $40million will be for land acquisition and development costs, princi-pally the Easton development project in Columbus, Ohio. TheCompany expects that substantially all 1998 capital expenditureswill be funded by net cash provided by operating activities.

The Company intends to reduce selling square footage byapproximately 117,000 selling square feet in 1998, which representsa .4% decrease from year-end 1997. It is anticipated that thedecrease will result from the closing of 250 stores offset by the addi-tion of approximately 370 stores (over half of which are Bath &Body Works stores averaging 2,300 square feet) and the remodelingof approximately 125 stores.

Information Systems and “Year 2000” ComplianceThe Company recently completed a comprehensive review of itsinformation systems and is involved in an enterprise-wide programto update computer systems and applications in preparation for the year 2000. The Company will incur internal staff costs as wellas outside consulting and other expenditures related to this initia-tive. Total expenditures related to remediation, testing, conversion,replacement and upgrading system applications are expected torange from $85 to $100 million from 1997 through 2000. Of thetotal, approximately $50 to $60 million will be capital expendi-tures related to acquisition and implementation of new package systems. The balance, approximately $35 to $40 million, will beexpenses associated with remediation and testing of existing systems. Total incremental expenses, including depreciation andamortization of new package systems, remediation to bring currentsystems into compliance and writing off legacy systems, are notexpected to have a material impact on the Company’s financial con-dition during any year during the conversion process from 1997through 2000. However, incremental expenses could total approx-imately $30 to $35 million in 1998, of which the majority willimpact the first three fiscal quarters of 1998, at a rate of $9 to $10million per quarter.

The Company is attempting to contact vendors and others onwhom it relies to assure that their systems will be converted in atimely fashion. However, there can be no assurance that the systemsof other companies on which the Company’s systems rely will alsobe converted in a timely fashion, or that any such failure to convertby another company would not have an adverse effect on the Com-

pany’s systems. Furthermore, no assurance can be given that any or all of the Company’s systems are or will be Year 2000 compliant,or that the ultimate costs required to address the Year 2000 issue or the impact of any failure to achieve substantial Year 2000 com-pliance will not have a material adverse effect on the Company’sfinancial condition.

Impact of InflationThe Company’s results of operations and financial condition arepresented based upon historical cost. While it is difficult to accu-rately measure the impact of inflation due to the imprecise natureof the estimates required, the Company believes that the effects ofinflation, if any, on the results of operations and financial conditionhave been minor.

Adoption of New Accounting StandardsDuring the fourth quarter of 1997, the Company adopted SFASNo. 128, “Earnings Per Share,” which requires the Company to dis-close basic and diluted earnings per share for all periods presented.

In June 1997, the Financial Accounting Standards Board issuedSFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information.” While the standard has no impact in deter-mining earnings and earnings per share, the Company will adopt thedisclosure standards in 1998.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995The Company cautions that any forward-looking statements (assuch term is defined in the Private Securities Litigation Reform Actof 1995) contained in this Report, the Company’s Form 10-K ormade by management of the Company involve risks and uncertain-ties, and are subject to change based on various important factors.The following factors, among others, in some cases have affected and in the future could affect the Company’s financial performanceand actual results and could cause actual results for 1998 andbeyond to differ materially from those expressed or implied in any such forward-looking statements: changes in consumer spend-ing patterns, consumer preferences and overall economic condi-tions, the impact of competition and pricing, changes in weatherpatterns, political stability, currency and exchange risks andchanges in existing or potential duties, tariffs or quotas, postal rateincreases and charges, paper and printing costs, availability ofsuitable store locations at appropriate terms, ability to develop new merchandise and ability to hire and train associates.

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(Thousands except per share amounts)

1997 1996 1995

Net Sales $9,188,804 $8,644,791 $7,881,437

Costs of Goods Sold, Occupancy and Buying Costs (6,370,827) (6,148,212) (5,793,905)

Gross Income 2,817,977 2,496,579 2,087,532

General, Administrative and Store Operating Expenses (2,124,663) (1,848,512) (1,475,497)

Special and Nonrecurring Items, Net (213,215) (12,000) 1,314

Operating Income 480,099 636,067 613,349

Interest Expense (68,728) (75,363) (77,537)

Other Income, Net 36,886 41,972 21,606

Minority Interest (56,473) (45,646) (22,374)

Gain in Connection with Initial Public Offerings 8,606 118,178 649,467

Income Before Income Taxes 400,390 675,208 1,184,511

Provision for Income Taxes 183,000 241,000 223,000

Net Income $217,390 $434,208 $961,511

Net Income Per Share:

Basic $.80 $1.55 $2.69

Diluted $.79 $1.54 $2.68

The accompanying Notes are an integral part of these Consolidated Financial Statements.

Consolidated Statements of Income

Consolidated Statements of Shareholders’ Equity

(Thousands)

COMMON STOCK Treasury TotalShares Retained Stock, Shareholders’

Outstanding Par Value Paid-In Capital Earnings at Cost Equity

Balance, January 28, 1995 357,604 $189,727 $132,938 $2,716,516 $(278,225) $2,760,956

Net Income — — — 961,511 — 961,511

Cash Dividends — — — (143,091) — (143,091)

Purchase of Treasury Stock (3,361) — — — (55,239) (55,239)

Common Shares Subject to Contingent Stock Redemption Agreement — (9,375) (7,639) (334,586) — (351,600)

Stock Issued for Acquisition 730 — 7,769 — 8,231 16,000

Exercise of Stock Options and Other 393 — 4,066 — 8,438 12,504

Balance, February 3, 1996 355,366 $180,352 $137,134 $3,200,350 $(316,795) $3,201,041

Net Income — — — 434,208 — 434,208

Cash Dividends — — — (108,302) — (108,302)

Purchase of Treasury Stock (85,000) — — — (1,615,000) (1,615,000)

Exercise of Stock Options and Other 705 — 5,726 — 4,909 10,635

Balance, February 1, 1997 271,071 $180,352 $142,860 $3,526,256 $(1,926,886) $1,922,582

Net Income — — — 217,390 — 217,390

Cash Dividends — — — (130,472) — (130,472)

Exercise of Stock Options and Other 1,729 — 5,158 — 30,299 35,457

Balance, January 31, 1998 272,800 $180,352 $148,018 $3,613,174 $(1,896,587) $2,044,957


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Consolidated Balance Sheets

(Thousands)

January 31, 1998 February 1, 1997

ASSETS

Current Assets:

Cash and Equivalents $746,395 $312,796

Accounts Receivable 83,370 69,337

Inventories 1,002,710 1,007,303

Store Supplies 99,167 90,400

Other 99,509 65,261

Total Current Assets 2,031,151 1,545,097

Property and Equipment, Net 1,519,908 1,828,869

Restricted Cash 351,600 351,600

Deferred Income Taxes 56,586 —

Other Assets 341,516 394,436

Total Assets $4,300,761 $4,120,002

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:

Accounts Payable $300,703 $307,841

Accrued Expenses 676,715 481,744

Income Taxes 115,994 117,308

Total Current Liabilities 1,093,412 906,893

Long-Term Debt 650,000 650,000

Deferred Income Taxes — 169,932

Other Long-Term Liabilities 58,720 51,659

Minority Interest 102,072 67,336

Contingent Stock Redemption Agreement 351,600 351,600

Shareholders’ Equity:

Common Stock 180,352 180,352

Paid-In Capital 148,018 142,860

Retained Earnings 3,613,174 3,526,256

3,941,544 3,849,468

Less: Treasury Stock, at Cost (1,896,587) (1,926,886)

Total Shareholders’ Equity 2,044,957 1,922,582

Total Liabilities and Shareholders’ Equity $4,300,761 $4,120,002


Consolidated Statements of Cash Flows

(Thousands)

1997 1996 1995

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income $217,390 $434,208 $961,511

IMPACT OF OTHER OPERATING ACTIVITIES ON CASH FLOWS

Depreciation and Amortization 313,292 289,643 285,889

Special and Nonrecurring Items, Net 128,215 7,200 (1,314)

Minority Interest, Net of Dividends Paid 34,736 21,637 17,250

Gain in Connection with Initial Public Offerings, Net (5,606) (118,178) (649,467)

CHANGE IN ASSETS AND LIABILITIES

Accounts Receivable (14,033) 8,179 (104,121)

Inventories (5,407) (48,350) (70,813)

Accounts Payable and Accrued Expenses 81,833 116,599 50,883

Income Taxes (145,832) (5,915) (132,560)

Other Assets and Liabilities (14,607) 7,046 (16,526)

Net Cash Provided by Operating Activities 589,981 712,069 340,732

INVESTING ACTIVITIES

Capital Expenditures (404,602) (409,260) (374,374)

Proceeds from Sale of Property and Related Interests 234,976 — —

Net Proceeds from Partial Sale of Interest in Investee 108,259 — —

Businesses Acquired — (41,255) (2,000)

Increase in Restricted Cash — — (351,600)

Proceeds from Credit Card Securitization — — 1,212,630

Net Cash Provided by (Used for) Investing Activities (61,367) (450,515) 484,656

FINANCING ACTIVITIES

Net Repayments of Commercial Paper Borrowings and Certificates of Deposit — — (25,200)

Proceeds from Short-Term Borrowings — 150,000 250,000

Repayment of Short-Term Borrowings — (150,000) (250,000)

Net Proceeds from Issuance and Sale of Subsidiary Stock — 118,178 788,589

Dividends Paid (130,472) (108,302) (143,091)

Purchase of Treasury Stock — (1,615,000) (55,239)

Stock Options and Other 35,457 10,635 12,504

Net Cash Provided by (Used for) Financing Activities (95,015) (1,594,489) 577,563

Net Increase (Decrease) in Cash and Equivalents 433,599 (1,332,935) 1,402,951

Cash and Equivalents, Beginning of Year 312,796 1,645,731 242,780

Cash and Equivalents, End of Year $746,395 $312,796 $1,645,731

Noncash investing activities included $2.2 million in 1997 and $16 million in 1995 forstock issued in connection with the acquisition of Galyan’s.


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Notes to Consolidated Financial Statements1. Summary of Significant Accounting Policies Principles of ConsolidationThe consolidated financial statements include the accounts ofThe Limited, Inc. (the “Company”) and all significant subsidiariesthat are more than 50% owned and controlled. All significantintercompany balances and transactions have been eliminated inconsolidation.

Investments in other entities (including joint ventures) where theCompany has the ability to significantly influence operating andfinancial policies are accounted for on the equity method. Fiscal YearThe Company’s fiscal year ends on the Saturday closest to January31. Fiscal years are designated in the financial statements andnotes by the calendar year in which the fiscal year commences. Theresults for fiscal years 1997 and 1996 represent the fifty-two-weekperiods ended January 31, 1998, and February 1, 1997. The resultsfor fiscal year 1995 represent the fifty-three-week period ended Feb-ruary 3, 1996.Cash and EquivalentsCash and equivalents include amounts on deposit with financialinstitutions and money-market investments with maturities ofless than 90 days.InventoriesInventories are principally valued at the lower of average cost ormarket, on a first-in first-out basis, utilizing the retail method.Store SuppliesThe initial inventory of supplies for new stores including, but not limited to, hangers, signage, security tags and point-of-salesupplies, are capitalized at the store opening date. Subsequentshipments are expensed, except for new merchandise presentationprograms, which are capitalized.Property and EquipmentDepreciation and amortization of property and equipment arecomputed for financial reporting purposes on a straight-line basis,using service lives ranging principally from 10–30 years for build-ings and improvements and 3–10 years for other property andequipment. The cost of assets sold or retired and the related accu-mulated depreciation or amortization are removed from theaccounts with any resulting gain or loss included in net income.Maintenance and repairs are charged to expense as incurred. Majorrenewals and betterments that extend service lives are capitalized.Long-lived assets are reviewed for impairment whenever events orchanges in circumstances indicate that full recoverability is ques-tionable. Factors used in the valuation include, but are not limitedto, management’s plans for future operations, brand initiatives,recent operating results and projected cash flows.Goodwill AmortizationGoodwill represents the excess of the purchase price over the fairvalue of the net assets of acquired companies and is amortized on astraight-line basis, principally over 30 years.Catalogue Costs and AdvertisingCatalogue costs, primarily consisting of catalogue production andmailing costs, are amortized over the expected future revenue

stream, which is principally from three to six months from the datecatalogues are mailed. All other advertising costs are expensed atthe time the promotion first appears in media or in the store. Cat-alogue and advertising costs amounted to $275 million, $242 mil-lion and $237 million in 1997, 1996 and 1995.Interest Rate Swap AgreementsThe difference between the amount of interest to be paid and theamount of interest to be received under interest rate swap agree-ments due to changing interest rates is charged or credited tointerest expense over the life of the swap agreement. Gains andlosses from the disposition of swap agreements are deferred andamortized over the term of the related agreements. Income TaxesThe Company accounts for income taxes in accordance with State-ment of Financial Accounting Standards (“SFAS”) No. 109,“Accounting for Income Taxes,” which requires the use of the lia-bility method. Under this method, deferred tax assets and liabili-ties are recognized based on the difference between the financialstatement carrying amounts of existing assets and liabilities andtheir respective tax bases. Deferred tax assets and liabilities are mea-sured using enacted tax rates in effect in the years in which thosetemporary differences are expected to reverse. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recog-nized in income in the period that includes the enactment date. Shareholders’ EquityFive hundred million shares of $.50 par value common stock areauthorized, of which 272.8 million shares and 271.1 million shareswere outstanding, net of 106.7 million shares and 108.4 millionshares held in treasury at January 31, 1998, and February 1, 1997.Ten million shares of $1.00 par value preferred stock are authorized,none of which have been issued.

On March 17, 1996, the Company completed the repurchase of 85 million shares of its common stock under a self-tender offer at $19.00 per share. Approximately $1.615 billion was paid inexchange for the outstanding shares which was funded with fundsmade available from a series of transactions that included: 1) theinitial public offering of a 16.9% interest in Intimate Brands, Inc. (“IBI”); 2) the securitization of World Financial NetworkNational Bank (“WFN”) credit card receivables; and 3) the sale ofa 60% interest in WFN.Revenue RecognitionSales are recorded upon purchase by customers. A reserve is pro-vided equal to the gross profit on projected catalogue merchandisereturns, based on prior experience.Earnings Per ShareNet income per share is computed in accordance with SFAS No. 128, “Earnings Per Share,” which the Company adopted in the fourth quarter of 1997. Earnings per basic share are computedbased on the weighted average number of outstanding commonshares. Earnings per diluted share include the weighted averageeffect of dilutive options and restricted stock.

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Options to purchase .7 million, 5.9 million and 7.9 million sharesof common stock were outstanding at year-end 1997, 1996 and 1995,but were not included in the computation of earnings per dilutedshare because the options’ exercise price was greater than the aver-age market price of the common shares. Exercise of the 18.75 mil-lion shares subject to the Contingent Stock Redemption Agreement(see Notes 6 and 10) was determined not to dilute earnings per share.

Subsequent to January 31, 1998, the Company announced anexchange offer for Abercrombie & Fitch Co. (“A&F”) shares that, ifconsummated, would result in a substantial decrease in total com-mon shares outstanding (see Note 14).Gains in Connection With Initial Public Offerings Gains in connection with initial public offerings are recognized inthe current year’s income. During the first quarter of 1997, theCompany recognized a pretax gain of $8.6 million in connectionwith the initial public offering (“IPO”) of Brylane, Inc. (“Brylane”),a 26% owned (post-IPO) catalogue retailer. In 1996, the Companyrecognized a $118.2 million gain in connection with the IPO of a15.8% interest (8.05 million shares) of A&F. In 1995, the Compa-ny recognized a $649.5 million gain in connection with the IPO of a16.9% interest (42.7 million shares) of IBI. IBI consists of the Vic-toria’s Secret Stores, Victoria’s Secret Catalogue, Bath & BodyWorks and Gryphon businesses. The IPO gains recorded by theCompany in 1996 and 1995 were not subject to income tax.

Minority interest of $102.1 million at January 31, 1998, repre-sents a 16.9% interest in the net equity of IBI and a 15.8% interestin the net equity of A&F. Use of Estimates in the Preparation of Financial StatementsThe preparation of financial statements in conformity with gener-ally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts ofassets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reportingperiod. Since actual results may differ from those estimates, theCompany revises its estimates and assumptions as new informationbecomes available.ReclassificationsCertain amounts on previously reported financial statement captionshave been reclassified to conform with current year presentation.

2. Special and Nonrecurring ItemsAs a result of an ongoing review of the Company’s retail business-es and investments as well as implementation of initiatives intend-ed to promote and strengthen the Company’s various retail brands

(including closing businesses, identification and disposal of non-coreassets and identification of store locations not consistent with a particular brand), the Company recognized special and nonre-curring charges of $276 million during the fourth quarter of 1997comprised of: 1) a $68 million charge for the closing of the 118 storeCacique lingerie business effective January 31, 1998. The amountincludes noncash charges of $30 million comprised principally of write-offs and liquidations of store assets and accruals of $38 million related to cancellations of merchandise on order and otherexit costs such as severance, service contract termination fees andlease termination costs. Other than contractual obligations of $5million, the accrued costs are expected to be paid in fiscal year 1998;2) an $82 million charge related to streamlining the Henri Bendelbusiness from six stores to one store by September 1, 1998. Theamount includes $26 million of noncash charges related primarily to write-offs of store assets, and accruals of $56 million related pri-marily to contract cancellations and lease termination costs. Otherthan contractual obligations of $18 million, the accrued costs areexpected to be paid in 1998. Termination costs related to HenriBendel closings will be recognized in first quarter 1998 when theassociates are notified; 3) $86 million of impaired asset charges,related principally to the women’s businesses, covering certainstore locations where the carrying values are permanently impaired;and 4) a $28 million provision for closing and downsizing approxi-mately 80 oversized stores, primarily within the Limited, LernerNew York, Lane Bryant and Express women’s businesses and a $12 million write-down to net realizable value of a real estateinvestment previously acquired in connection with closing anddownsizing certain stores. The $28 million charge includes $13 million of noncash charges related to write-offs of store assets and accruals of $15 million related to lease termination costs.Other than contractual obligations of $7 million, the accrued costsare expected to be paid within 18 months. Additionally, the Com-pany recognized a $13 million cost of sales charge in the fourth quarter for inventory liquidation at Henri Bendel. The after-taxcash impact of these charges is estimated to be approximately $30million. The Company will recognize charges for severance andother associate termination costs for Henri Bendel in the first quarter of 1998 (at the time the associates are notified).

Additionally, the Company recognized a $75.3 million pretaxgain during the third quarter of 1997 in connection with the sale of2.4 million shares of Brylane, which is carried on the equitymethod, for $46 per share generating cash proceeds of $108 mil-lion. This sale represented approximately one-half of its investment in Brylane. This gain was partially offset by valuation adjust-ments of $12.5 million on certain assets where the carrying valueswere permanently impaired. On February 20, 1998, the Companyentered into an agreement with Pinault Printemps-Radoute to sellits remaining 2.6 million shares of Brylane for $51 per share, or cash proceeds of $131 million. The transaction is expected to close in April 1998.

The $86 million impaired asset charge was in accordance withSFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed Of.” As a result of

(Thousands)

1997 1996 1995

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

Common Shares Issued 379,454 379,454 379,454

Treasury Shares (107,556) (98,755) (21,862)

Basic Shares 271,898 280,699 357,592

Dilutive Effect of Options and Restricted Shares 2,585 1,354 779

Diluted Shares 274,483 282,053 358,371

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the Company’s strategic review process, including the implemen-tation of brand initiatives within individual businesses, updatedanalyses were prepared to determine if there was impairment of anylong-lived assets. The revised carrying values of these assets werecalculated on the basis of discounted cash flows. The impaired assetcharge had no impact on the Company’s 1997 or future cash flows.As a result of this charge, depreciation and amortization expenserelated to these assets will decrease in future periods.

In 1996, the Company recorded a $12 million pretax, special andnonrecurring charge in connection with the April 1997 sale of Pen-haligon’s, a U.K.–based subsidiary of IBI.

In the fourth quarter of 1995, the Company recognized a $73.2million pretax gain from the sale of a 60% interest in the Company’swholly-owned credit card bank, WFN. Along with the sale of the60% interest in WFN, the Company recognized a special and non-recurring charge during the fourth quarter of 1995 of approxi-mately $71.9 million. Of this amount, $25.8 million was providedfor the closing of 26 stores and $19.8 million was provided for thedownsizing of 33 stores, primarily at Limited and Lerner New York.The remaining charge of approximately $26.3 million representedthe write-down to market or net realizable value of certain assetsarising from nonoperating activities. The net pretax gain from thesespecial and nonrecurring items was $1.3 million.

3. Accounts ReceivableAs discussed in Note 2, the sale of a 60% interest in WFN was com-pleted in the fourth quarter of 1995, and WFN’s outstanding debtto the Company of approximately $1.2 billion was repaid. Financecharge revenue on the deferred payment accounts amounted to$235.6 million in 1995 and the provision for uncollectible accountsamounted to $91.4 million in 1995. These amounts are classified as components of the cost to administer the deferred payment pro-gram and are included in the Company’s general, administrative andstore operating expenses for that year.

4. Property and Equipment

5. Leased Facilities and CommitmentsAnnual store rent is comprised of a fixed minimum amount, pluscontingent rent based on a percentage of sales exceeding a stipulat-ed amount. Store lease terms generally require additional paymentscovering taxes, common area costs and certain other expenses.

At January 31, 1998, the Company was committed to noncance-lable leases with remaining terms generally from one to twentyyears. A substantial portion of these commitments are store leaseswith initial terms ranging from ten to twenty years, with options torenew at varying terms.

6. Restricted CashAt January 31, 1998, Special Funding, Inc., a wholly-owned sub-sidiary of the Company, had $351.6 million of restricted cashinvested in short-term, highly liquid securities. This amount is classified as a noncurrent asset, since it has been reserved for use in the event that the Wexner Children’s Trust, established byLeslie H. Wexner, the Company’s principal shareholder, exercises itsopportunity to require the Company to redeem, or the Companyexercises its opportunity to redeem from the Trust, shares of TheLimited, Inc. common stock in accordance with the terms of theContingent Stock Redemption Agreement (see Note 10). Interestearnings of $18.6 million and $17.9 million in 1997 and 1996 on thesegregated cash accrued to the Company.

7. Accrued Expenses

(Thousands)1997 1996

ACCRUED EXPENSES

Compensation, Payroll Taxes and Benefits $135,701 $100,526

Rent 152,850 123,421

Taxes, Other than Income 42,321 47,297

Interest 21,129 21,510

Store Closings 86,803 3,509

Other 237,911 185,481

Total $676,715 $481,744

(Thousands)1997 1996 1995

RENT EXPENSE

Fixed Minimum $721,283 $689,319 $643,200

Contingent 26,630 23,117 18,812

Total Store Rent 747,913 712,436 662,012

Equipment and Other 23,492 25,163 26,101

Total Rent Expense $771,405 $737,599 $688,113

(Thousands)

MINIMUM RENT COMMITMENTS UNDER NONCANCELABLE LEASES

1998 $731,233

1999 712,804

2000 688,317

2001 645,229

2002 595,377

Thereafter $2,062,453


PROPERTY AND EQUIPMENT, AT COST

Land, Buildings and Improvements $394,885 $530,259

Furniture, Fixtures and Equipment 1,951,172 1,929,951

Leaseholds and Improvements 539,047 641,200

Construction in Progress 219,508 188,834

Total 3,104,612 3,290,244

Less: Accumulated Depreciation and Amortization 1,584,704 1,461,375

Property and Equipment, Net $1,519,908 $1,828,869

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8. Long-Term Debt

The Company maintains a $1 billion unsecured credit agreement(the “Agreement”), established on September 29, 1997 (the “Effec-tive Date”). Borrowings outstanding under the Agreement are due September 28, 2002. However, the revolving term of the Agree-ment may be extended an additional two years upon notification by the Company on the second and fourth anniversaries of theEffective Date, subject to the approval of the lending banks. TheAgreement has several borrowing options, including interest ratesthat are based on either the lender’s “Base Rate,” as defined, LIBOR,CD-based options or at a rate submitted under a bidding process.Facilities fees payable under the Agreement are based on the Com-pany’s long-term credit ratings, and currently approximate .1% of the committed amount per annum. The Agreement containscovenants relating to the Company’s working capital, debt and networth. No amounts were outstanding under the Agreement at Jan-uary 31, 1998.

The Agreement supports the Company’s commercial paper pro-gram, which is used from time to time to fund working capital andother general corporate requirements. No commercial paper wasoutstanding at January 31, 1998.

Up to $250 million of debt securities and warrants to purchasedebt securities may be issued under the Company’s shelf registrationstatement. The Company periodically enters into interest rate swapagreements with the intent to manage interest rate exposure. At Jan-uary 31, 1998, the Company had an interest rate swap position of$100 million notional principal amount outstanding. This contracteffectively changed the Company’s interest rate exposure on $100 mil-lion of variable rate debt to a fixed rate of 8.09% through July 2000.

Long-term debt maturities within the next five years consist of$100 million which matures August 15, 1999, $150 million whichmatures February 1, 2001, and $150 million which matures May 15,2002. Interest paid approximated $69.1 million, $65.5 million and$88.4 million in 1997, 1996 and 1995.

9. Income Taxes

The foreign component of pretax income, arising principally fromoverseas sourcing operations, was $62.3 million, $45.9 million and$60.8 million in 1997, 1996 and 1995.

The reconciliation between the statutory Federal income tax rate and the effective income tax rate on pretax earnings excludesthe nontaxable gains from sales of subsidiary stock in 1996 and 1995and minority interest.

(Thousands)

1997 1996 1995

PROVISION FOR INCOME TAXES

Currently Payable:

Federal $304,300 $210,400 $190,900

State 33,800 34,000 24,700

Foreign 3,700 2,400 4,500

Total 341,800 246,800 220,100

Deferred:

Federal (156,600) (13,800) (9,400)

State (2,200) 8,000 12,300

Total (158,800) (5,800) 2,900

Total Provision $183,000 $241,000 $223,000

1997 1996 1995

STATUTORY FEDERAL INCOME TAX RATE RECONCILIATION

Federal Income Tax Rate 35.0% 35.0% 35.0%

State Income Tax, Net of Federal Income Tax Effect 4.5% 4.5% 4.5%

Other Items, Net .6% .5% .7%

Total 40.1% 40.0% 40.2%

(Thousands)

1997 1996

Assets Liabilities Total Assets Liabilities Total

DEFERRED INCOME TAXES

Excess of Tax Over Book Depreciation — $(1,400) $(1,400) — $(20,000) $(20,000)

Undistributed Earnings of Foreign Affiliates — (102,400) (102,400) — (116,600) (116,600)

Special and Nonrecurring Items $99,200 — 99,200 $24,100 — 24,100

Rent 62,100 — 62,100 — (17,500) (17,500)

Inventory 43,700 — 43,700 40,000 — 40,000

Investments in Affiliates — (24,900) (24,900) — (54,000) (54,000)

State Income Taxes 24,900 — 24,900 9,600 — 9,600

Other 18,500 — 18,500 — (35,300) (35,300)

Total Deferred Income Taxes $248,400 $(128,700) $119,700 $73,700 $(243,400) $(169,700)


UNSECURED LONG-TERM DEBT

87⁄ 8% Notes due August 1999 $100,000 $100,000

91⁄8% Notes due February 2001 150,000 150,000

74⁄5% Notes due May 2002 150,000 150,000

71⁄2% Debentures due March 2023 250,000 250,000

Total $650,000 $650,000

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Income taxes payable included net current deferred tax assets of$63.1 million and $.3 million at January 31, 1998 and February 1, 1997.

Income tax payments approximated $410.8 million, $233.8 mil-lion and $306.1 million for 1997, 1996 and 1995.

The Internal Revenue Service has assessed the Company for addi-tional taxes and interest for the years 1992 to 1994 relating to thetreatment of transactions involving the Company’s foreign opera-tions for which the Company has provided deferred taxes on theundistributed earnings of foreign affiliates. The Company strong-ly disagrees with the assessment and is vigorously contesting thematter. Management believes resolution of this matter will not have a material adverse effect on the Company’s results of opera-tions or financial condition.

10. Contingent Stock Redemption AgreementIn connection with the reconfiguration of its business, the Companypurchased from shareholders, via a self-tender offer, 85 millionshares of The Limited, Inc. common stock for approximately $1.615billion on March 17, 1996. Leslie H. Wexner, Chairman and CEO ofthe Company, as well as the Company’s founder and principal share-holder, did not participate in the self-tender. However, the Companyentered into an agreement, as amended in 1996, which provides theWexner Children’s Trust the opportunity, commencing on February 1,1998, and for a period of eight years thereafter (the exercise period),to require the Company to redeem up to 18.75 million shares for aprice per share equal to $18.75 (a price equal to the price per sharepaid in the self-tender less $.25 per share). Under certain circum-stances, lenders to the Trust, if any, may exercise this opportunity,beginning February 1, 1997. The Company received the opportu-nity to redeem an equivalent number of shares from the Trust at$25.07 per share for a period beginning on July 31, 2006, and for sixmonths thereafter. As a result of these events, the Company hastransferred $351.6 million to temporary equity identified as Con-tingent Stock Redemption Agreement in the Consolidated BalanceSheets. In addition, approximately $351.6 million has been desig-nated as restricted cash to consummate either of the above rights(see Note 6). The terms of this agreement were approved by theCompany’s Board of Directors.

11. Stock Options and Restricted StockUnder the Company’s stock plans, associates may be granted up toa total of 17.3 million restricted shares and options to purchase theCompany’s common stock at the market price on the date of grant.In 1997, the Company granted approximately 5.6 million optionswith a graduated vesting schedule over six years. The remainingoptions generally vest 25% per year over the first four years of thegrant. Virtually all options have a maximum term of ten years.

Under separate stock plans, up to 17.5 million IBI shares and 3.5million A&F shares are available to grant restricted shares andoptions to IBI and A&F associates. As of January 31, 1998, optionsto purchase 4.3 million IBI shares and 1.9 million A&F shares wereoutstanding, of which 418,000 IBI options and 35,000 A&F optionswere exercisable. Under these plans, options generally vest overperiods from four to six years.

The Company adopted the disclosure requirements of SFASNo. 123, “Accounting for Stock-Based Compensation,” effectivewith the 1996 financial statements, but elected to continue to mea-sure compensation expense in accordance with APB Opinion No.25,“Accounting for Stock Issued to Employees.” Accordingly, no com-pensation expense for stock options has been recognized. If com-pensation expense had been determined based on the estimated fairvalue of options granted since 1995, consistent with the methodol-ogy in SFAS No. 123, the pro forma effects on net income and earn-ings per diluted share, including the impact of options issued by IBIand A&F, would have been a reduction of approximately $11.4 mil-lion or $.04 per share in 1997 and $4.0 million or $.01 per share in1996. The weighted-average per share fair value of options granted($5.79, $4.72 and $5.48 during 1997, 1996 and 1995) was estimatedusing the Black-Scholes option-pricing model with the followingweighted-average assumptions for 1997, 1996 and 1995: dividendyields of 2.8%; volatility of 27%, 31% and 31%; risk-free interestrates of 6%, 5.25% and 7%; assumed forfeiture rates of 15%, 20%and 20%; and expected lives of 6.5 years, 5 years and 5 years. Thepro forma effect on net income for 1997 and 1996 is not representa-tive of the pro forma effect on net income in future years because itdoes not take into consideration pro forma compensation expenserelated to grants made prior to 1995.

Approximately 2,120,000, 468,000 and 569,000 restricted Limitedshares were granted in 1997, 1996 and 1995, with market values at date of grant of $43.9 million, $8.3 million and $10.0 million.Included in the 1997 grants were 1.7 million restricted shares, ofwhich 685,000 had performance requirements, with a graduatedvesting schedule over six years. The remaining restricted shares gen-erally vest either on a graduated scale over four years or 100% at theend of a fixed vesting period, principally five years. Additionally, IBI granted 1,442,000, 169,000 and 357,000 restricted shares in1997, 1996 and 1995 and A&F granted 540,000 and 50,000 restrict-ed shares in 1997 and 1996. Vesting terms for the IBI and A&Frestricted shares are similar to those of The Limited. The marketvalue of restricted shares, subject to adjustment at measurementdate for the performance awards, is being amortized as compen-sation expense over the vesting period, generally four to six years.Compensation expense related to restricted stock awards, includingexpense related to awards granted at IBI and A&F, amounted to$29.0 million in 1997 and $9.1 million in both 1996 and 1995.

STOCK OPTIONS OUTSTANDING

OPTIONS OUTSTANDING OPTIONS EXERCISABLE

Weighted Average Weighted Weighted

Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercisable

Prices at 1/31/98 Life Price at 1/31/98 Price

$15–$16 1,350,000 6.1 $16 618,000 $16

$17–$18 2,827,000 7.3 $17 1,227,000 $17

$19–$21 5,658,000 7.9 $20 1,651,000 $21

$22–$27 2,646,000 7.9 $23 773,000 $24

$9–$31 1,589,000 7.5 $20 638,000 $20

$9–$31 14,070,000 7.5 $20 4,907,000 $20

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12. Retirement BenefitsThe Company sponsors a qualified defined contribution retire-ment plan and a nonqualified supplemental retirement plan. Par-ticipation in the qualified plan is available to all associates who have completed 1,000 or more hours of service with the Companyduring certain 12-month periods and attained the age of 21. Par-ticipation in the nonqualified plan is subject to service and com-pensation requirements. Company contributions to these plans arebased on a percentage of associates’ eligible annual compensation.The cost of these plans was $36.4 million in 1997, $36.2 million in1996 and $33.3 million in 1995.

13. Fair Value of Financial InstrumentsThe following methods and assumptions were used to estimate thefair value of each class of financial instruments for which it is prac-ticable to estimate that value.Current Assets, Current Liabilities and Restricted CashThe carrying value of cash equivalents, restricted cash, accountspayable and accrued expenses approximates fair value because oftheir short maturity.Long-Term DebtThe fair value of the Company’s long-term debt is estimated basedon the quoted market prices for the same or similar issues or on thecurrent rates offered to the Company for debt of the same remain-ing maturities.

Interest Rate Swap AgreementThe fair value of the interest rate swap is the estimated amount thatthe Company would receive or pay to terminate the swap agreementat the reporting date, taking into account current interest rates andthe current creditworthiness of the swap counterparty.

14. Subsequent Event—Registration Statement for A&F Exchange OfferOn February 17, 1998, a registration statement was filed with theSecurities and Exchange Commission in connection with a plan to establish A&F as a fully independent company via a tax-freeexchange offer pursuant to which The Limited shareholders will begiven an opportunity to tender some or all of their shares of TheLimited in return for shares of A&F. The transaction is subject tocertain customary conditions.

15. Quarterly Financial Data (Unaudited)


Carrying Fair Carrying FairAmount Value Amount Value

ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS

Long-Term Debt $(650,000) $(667,391) $(650,000) $(638,798)

Interest Rate Swaps $(328) $(5,345) $(351) $(5,267)

(Thousands except per share amounts):First Second Third Fourth

1997 QUARTERLY FINANCIAL DATA (UNAUDITED)

Net Sales $1,829,780 $2,020,084 $2,070,559 $3,268,381

Gross Income 501,471 538,907 620,982 1,156,617

Net Income 24,873 27,574 79,682 85,261

Net Income Per Basic Share .09 .10 .29 .31

Net Income Per Diluted Share ●A .09 .10 ●A .29 ●A .31

1996 QUARTERLY FINANCIAL DATA (UNAUDITED)

Net Sales $1,787,943 $1,895,601 $1,994,986 $2,966,261

Gross Income 469,541 491,909 555,374 979,755

Net Income 28,152 33,150 159,513 213,393

Net Income Per Basic Share .09 .12 .59 .79

Net Income Per Diluted Share .09 .12 ●A .59 ●A .78

●A Gains in connection with initial public offerings included an $8.6 million ($.02 per diluted share) pretax gain in the first quarter of 1997 in connection withthe Company’s ownership portion of Brylane a 26% owned (post-IPO) catalogue retailer and a $118.2 million ($.44 per diluted share) gain in the thirdquarter of 1996 in connection with the IPO of a 15.8% interest of A&F (see Note 1). Special charges included $276 million ($.57 per diluted share) inspecial and nonrecurring items and an additional $13 million ($.03 per diluted share) in inventory liquidation charges during the fourth quarter of 1997, a net $62.8 million ($.14 per diluted share) pretax gain during the third quarter of 1997 relating to the sale of approximately one-half of the Company’sinvestment in Brylane, and $12 million ($.02 per diluted share) in special and nonrecurring charges during the fourth quarter of 1996 in connection with thesale of the Penhaligon’s business (see Note 2).

Weighted Average Number of Option Price

Shares Per Share

STOCK OPTION ACTIVITY

1995

Outstanding at Beginning of Year 8,414,000 $19.56

Granted 2,196,000 17.81

Exercised (280,000) 12.43

Canceled (1,188,000) 19.90

Outstanding at End of Year 9,142,000 $19.32

Options Exercisable at Year-End 4,800,000 $19.62

1996


Granted 1,899,000 17.30

Exercised (531,000) 14.89

Canceled (1,311,000) 19.45



1997


Granted 7,331,000 20.02

Exercised (1,377,000) 17.70

Canceled (1,083,000) 19.64



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PROOF 1 2 3 4 5 6 7 8

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19

Market Price and Dividend Information

The Company’s common stock is traded on the New York StockExchange (“LTD”) and the London Stock Exchange. On January 31,1998, there were 81,534 shareholders of record. However, whenincluding active associates who participate in the Company’s stock purchase plan, associates who own shares through Company-sponsored retirement plans and others holding shares in brokeraccounts under street names, the Company estimates the share-holder base to be approximately 241,000.

Report of Independent AccountantsTo the Board of Directors and Shareholders of The Limited, Inc.

We have audited the accompanying consolidated balance sheetsof The Limited, Inc. and subsidiaries as of January 31, 1998 andFebruary 1, 1997, and the related consolidated statements of in-come, shareholders’ equity, and cash flows for each of the three fis-cal years in the period ended January 31, 1998 (on pages 11–18).These financial statements are the responsibility of the Com-pany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally acceptedauditing standards. Those standards require that we plan and per-form the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financialstatement presentation.We believe that our audits provide a rea-sonable basis for our opinion.

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position of The Limited, Inc. and subsidiaries as of January 31, 1998 andFebruary 1, 1997 and the consolidated results of their operationsand their cash flows for each of the three fiscal years in the periodended January 31, 1998 in conformity with generally acceptedaccounting principles.

Coopers & Lybrand L.L.P.Columbus, OhioFebruary 20, 1998

Market Price Cash DividendHigh Low Per Share

FISCAL YEAR END 1997

4th Quarter $271⁄4 $239⁄16 $.12

3rd Quarter 251⁄2 213⁄8 .12

2nd Quarter 225⁄16 185⁄8 .12

1st Quarter $201⁄8 $17 $.12

FISCAL YEAR END 1996

4th Quarter $201⁄8 $165⁄8 $.10

3rd Quarter 201⁄4 173⁄4 .10

2nd Quarter 22 181⁄4 .10

1st Quarter $203⁄4 $165⁄8 $.10

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PROOF 1 2 3 4 5 6 7 8

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cial

s Our actions in

1997 demonstrate our

ongoing commitment

to building and

delivering value to

shareholders through

heightened focus

and disciplined asset

management.

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096_FIN.qxd 4/28/98 1:18 PM Page CV3

limited brands annual report 1997_full

Economy & Finance

Transcript of limited brands annual report 1997_full