| LIMITED BRANDS INC ITEM 1A RISK FACTORS The following discussion of risk factors contains “forward-looking statements,” as discussed in Item 1 |
| These risk factors may be important to understanding any statement in this Form 10-K, other filings or in any other discussions of the Company’s business |
| The following information should be read in conjunction with Item 7 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), and the consolidated financial statements and related notes included in this report |
| In addition to the other information set forth in this report, the reader should carefully consider the following factors which could materially affect the Company’s business, financial condition or future results |
| The risks described below are not the only risks facing the Company |
| Additional risks and uncertainties not currently known or that are currently deemed to be immaterial may also adversely affect the business, financial condition and/or operating results of the Company in a material way |
| The Company’s revenue and profit results are sensitive to, and may be adversely affected by, general economic conditions, consumer confidence and spending patterns |
| The Company’s growth, sales and profitability may be adversely affected by negative local, regional, national or international political or economic trends or developments that reduce the consumers’ ability or willingness to spend, including the effects of national and international security concerns such as war, terrorism or the threat thereof |
| Purchases of women’s and men’s apparel, women’s intimate apparel, personal care and beauty products and accessories often decline during periods when economic or market conditions are unsettled or weak |
| In such circumstances, the Company may increase the number of promotional sales, which would further adversely affect its profitability |
| The Company’s net sales, operating income and inventory levels fluctuate on a seasonal basis |
| The Company experiences major seasonal fluctuations in its net sales and operating income, with a significant portion of its operating income typically realized during the fourth quarter holiday season |
| Any decrease in sales or margins during this period could have a disproportionate effect on the Company’s financial condition and results of operations |
| 4 ______________________________________________________________________ [33]Table of Contents Seasonal fluctuations also affect the Company’s inventory levels, since it usually orders merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases |
| The Company must carry a significant amount of inventory, especially before the holiday season selling period |
| If the Company is not successful in selling inventory during the holiday period, it may have to sell the inventory at significantly reduced prices or it may not be able to sell the inventory at all, which in each case may further adversely affect profitability |
| The Company may be unable to compete favorably in its highly competitive segment of the retail industry |
| The sale of intimate and other apparel, personal care products and accessories is highly competitive |
| The Company competes for sales with a broad range of other retailers, including individual and chain fashion specialty stores, department stores and discount retailers |
| In addition to the traditional store-based retailers, the Company also competes with direct marketers that sell similar lines of merchandise and who target customers through catalogues and e-commerce |
| Direct marketers also include traditional store-based retailers like the Company who are competing in the catalogue and e-commerce distribution channels |
| The Company’s direct response businesses compete with numerous national and regional catalogue and e-commerce merchandisers |
| Brand image, marketing, fashion design, price, service, quality, image presentation and fulfillment are all competitive factors in catalogue and e-commerce sales |
| Some of the Company’s competitors may have greater financial, marketing and other resources available to them |
| In many cases, the Company’s primary competitors sell their products in department stores that are located in the same shopping malls as the Company’s stores |
| In addition to competing for sales, the Company competes for favorable site locations and lease terms in shopping malls |
| Increased competition could result in price reductions, increased marketing expenditures and loss of market share, any of which could have a material adverse effect on the Company’s financial condition and results of operations |
| The Company may not be able to keep up with fashion trends and may not be able to launch new product lines successfully |
| The Company’s success depends in part on management’s ability to effectively anticipate and respond to changing fashion tastes and consumer demands and to translate market trends into appropriate, saleable product offerings far in advance of the actual time of sale to the customer |
| Customer tastes and fashion trends change rapidly |
| If the Company is unable to successfully anticipate, identify or react to changing styles or trends and misjudges the market for its products or any new product lines, the Company’s sales will be lower and it may be faced with a significant amount of unsold finished goods inventory |
| In response, the Company may be forced to increase its marketing promotions or price markdowns, which could have a material adverse effect on its business |
| The Company’s brand image may also suffer if customers believe merchandise misjudgments indicate that the Company is no longer able to identify and offer the latest fashions |
| The Company may lose key personnel |
| The Company believes that it has benefited substantially from the leadership and experience of its senior executives, including Leslie H Wexner (its Chairman of the Board of Directors and Chief Executive Officer) |
| The loss of the services of any of these individuals could have a material adverse effect on the business and prospects of the Company |
| Competition for key personnel in the retail industry is intense and the Company’s future success will also depend on its ability to recruit, train and retain other qualified personnel |
| The Company’s manufacturers may be unable to manufacture and deliver products in a timely manner or meet quality standards |
| The Company purchases apparel through its wholly-owned subsidiary, Mast, an apparel importer, through other contract manufacturers and importers and directly from third-party manufacturers |
| Personal care, fragrance and 5 ______________________________________________________________________ [34]Table of Contents beauty products are also purchased through contract manufacturers and importers and directly from third-party manufacturers |
| Similar to most other specialty retailers, the Company has narrow sales window periods for much of its inventory |
| Factors outside the Company’s control, such as manufacturing or shipping delays or quality problems, could disrupt merchandise deliveries and result in lost sales, cancellation charges or excessive markdowns which could have a material adverse effect on the Company’s financial condition and results of operations |
| The Company relies significantly on foreign sources of production |
| The Company purchases apparel merchandise directly in foreign markets and in the domestic market, some of which is manufactured overseas |
| The Company does not have any material long-term merchandise supply contracts and many of its imports are subject to a variety of customs regulations and international trade arrangements, including existing or potential duties, tariffs or quotas |
| The Company competes with other companies for production facilities and import quota capacity |
| The Company also faces a variety of other risks generally associated with doing business in foreign markets and importing merchandise from abroad, such as: • political instability; • imposition of new legislation or rules relating to imports that may limit the quantity of goods which may be imported into the United States from countries in a particular region; • imposition of duties, taxes and other charges on imports; • currency and exchange risks; • local business practice and political issues, including issues relating to compliance with domestic or international labor standards which may result in adverse publicity; • potential delays or disruptions in shipping and related pricing impacts; and • disruption of imports by labor disputes |
| New initiatives may be proposed that may have an impact on the trading status of certain countries and may include retaliatory duties or other trade sanctions which, if enacted, would limit or reduce the products purchased from suppliers in such countries |
| In addition, significant health hazards or environmental or natural disasters may occur which could have a negative effect on the economies, financial markets and business activity |
| In particular, the outbreak of avian influenza and concerns over its spread throughout Asia and elsewhere could have a negative effect on the economies, financial markets and business activity in Asia and elsewhere |
| The Company’s purchases of merchandise from these manufacturing operations may be affected by this risk |
| The future performance of the Company will depend upon these and the other factors listed above which are beyond its control |
| These factors may have a material adverse effect on the business of the Company |
| The Company depends on a high volume of mall traffic and the availability of suitable lease space |
| Many of the Company’s stores are located in shopping malls |
| Sales at these stores are derived, in part, from the high volume of traffic in those malls |
| The Company’s stores benefit from the ability of the mall’s “anchor” tenants, generally large department stores, and other area attractions to generate consumer traffic in the vicinity of its stores and the continuing popularity of malls as shopping destinations |
| Sales volume and mall traffic may be adversely affected by economic downturns in a particular area, competition from non-mall retailers and other malls where the Company does not have stores and the closing of anchor department stores |
| In addition, a decline 6 ______________________________________________________________________ [35]Table of Contents in the desirability of the shopping environment in a particular mall, or a decline in the popularity of mall shopping among the Company’s target consumers, would adversely affect its business |
| Part of the Company’s future growth is significantly dependent on its ability to operate stores in desirable locations with capital investment and lease costs that allow the Company to earn a reasonable return |
| The Company cannot be sure as to when or whether such desirable locations will become available at reasonable costs |
| Increases in costs of mailing, paper and printing may affect the Company’s business |
| Postal rate increases and paper and printing costs will affect the cost of the Company’s order fulfillment and catalogue and promotional mailings |
| The Company relies on discounts from the basic postal rate structure, such as discounts for bulk mailings and sorting |
| Future paper and postal rate increases could adversely impact the Company’s earnings if it was unable to pass such increases directly onto its customers or by implementing more efficient printing, mailing, delivery and order fulfillment systems |
| The Company’s stock price may be volatile |
| The Company’s stock price may fluctuate substantially as a result of quarter to quarter variations in the actual or anticipated financial results of the Company or other companies in the retail industry or markets served by the Company |
| In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks and that have often been unrelated or disproportionate to the operating performance of these companies |
| The Company may be unable to service its debt |
| The Company may be unable to service the debt drawn under its credit facilities and/or any other debt it incurs |
| Additionally, the agreements related to such debt require the Company to maintain certain financial ratios which limit the total amount the Company may borrow, and also prohibit certain types of liens on property or assets |
| The Company is implementing certain changes to its IT systems that may disrupt operations |
| The Company is currently implementing modifications and upgrades to the information technology systems for merchandise, distribution and support systems, including finance |
| Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality |
| The Company is aware of inherent risks associated with replacing these systems, including accurately capturing data and system disruptions |
| The launch of these successor systems will take place in a phased approach over an approximate three year period that began in 2005 |
| Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on the Company’s operations |
| The Company’s results can be adversely affected by market disruptions |
| Market disruptions due to severe weather conditions, health hazards, terrorist activities or the prospect of these events can affect consumer spending and confidence levels and adversely affect the Company’s results or prospects in affected markets |
| The receipt of proceeds under any insurance the Company maintains for these purposes may be delayed or the proceeds may be insufficient to fully offset its losses |
| Statement and Item 1A Risk Factors |
| Easton Investment The Company has land and other investments in Easton, a 1cmam300 acre planned community in Columbus, Ohio, that integrates office, hotel, retail, residential and recreational space |
| These investments, at cost, totaled dlra65 million at January 28, 2006 and dlra57 million at January 29, 2005 |
| Included in the Company’s Easton investments is an equity interest in Easton Town Center, LLC (“ETC”), an entity that owns and has developed a commercial entertainment and shopping center |
| The Company’s investment in ETC, which the Company accounts for using the equity method, was dlra10 million at January 28, 2006 and dlra14 million at January 29, 2005 |
| The Company has a majority financial interest in ETC, but another member that is unaffiliated with the Company is the managing member |
| Certain significant decisions regarding ETC require the consent of the unaffiliated members in addition to the Company |
| 28 ______________________________________________________________________ [57]Table of Contents Total assets of ETC were approximately dlra244 million as of January 28, 2006 and dlra238 million as of January 29, 2005 |
| ETC’s principal funding source is a dlra290 million secured bank loan, of which dlra221 million was outstanding at January 28, 2006 |
| The loan is payable in full on May 31, 2010, with the option of two 12-month extensions if certain requirements are met |
| Contingent Liabilities and Contractual Obligations In connection with the disposition of certain businesses, the Company has remaining guarantees of approximately dlra266 million related to lease payments of Abercrombie & Fitch, Too, Inc |
| (formerly Limited Too), Dick’s Sporting Goods (formerly Galyan’s), Lane Bryant and New York & Company under the current terms of noncancelable leases expiring at various dates through 2015 (see Note 6 to the Consolidated Financial Statements in Item 8 |
| These guarantees include minimum rent and additional payments covering taxes, common area costs and certain other expenses, and relate to leases that commenced prior to the disposition of the businesses |
| In certain instances, the Company’s guarantee may remain in effect if the term of a lease is extended |
| The Company believes the likelihood of material liability being triggered under these guarantees is remote |
| The following table includes aggregated information about the Company’s contractual obligations |
| These contractual obligations impact the Company’s short and long-term liquidity and capital resource needs |
| The table includes information about payments due under specified contractual obligations, aggregated by type of contractual obligation, including the maturity profile of the Company’s long-term debt, operating leases and other long-term liabilities as of January 28, 2006 |
| Payments Due by Period Contractual Obligations (Millions) Total Less than 1 Year 1 – 3 Years 4 – 5 Years More than 5 Years Other Long-term debt obligations (1) $ 2cmam792 $ 81 $ 403 $ 459 $ 1cmam849 $ — Operating lease obligations (2) 3cmam269 539 889 746 1cmam095 — Purchase obligations (3) 1cmam335 1cmam125 152 52 6 Other long-term liabilities (4) 163 — — — — 163 Total $ 7cmam559 $ 1cmam745 $ 1cmam444 $ 1cmam257 $ 2cmam950 $ 163 _______ (1) Long-term debt obligations relate to principal and interest payments for the Company’s outstanding notes, debentures and Term Loan and line of credit borrowings (see Note 9 to the Consolidated Financial Statements in Item 8 |
| Financial Statements and Supplementary Data) |
| Interest payments have been estimated based on the coupon rate for fixed rate obligations or the variable rate in effect at January 28, 2006 for the Term Loan and the Mast Credit Facility |
| Interest obligations exclude amounts which have been accrued through January 28, 2006 |
| On March 22, 2006, the Company amended the Facility and Term Loan agreement |
| As a result of the amendment, the term of the Facility and Term Loan was extended to March 2011 and the repayment schedule of the Term Loan was changed to a single repayment in March 2011 |
| (2) Operating lease obligations primarily relate to minimum payments due under store lease agreements (see Note 6 to the Consolidated Financial Statements in Item 8 |
| Financial Statements and Supplementary Data) |
| (3) Purchase obligations primarily include purchase orders for merchandise inventory and other agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transactions |
| (4) Other long-term liabilities reflect future payments relating to the Company’s nonqualified supplemental retirement plan and have been reflected under “Other” as the timing of these future payments is not known until an associate leaves the Company or otherwise requests an in-service distribution |
| (see Note 12 to the Consolidated Financial Statements in Item 8 |
| 29 ______________________________________________________________________ [58]Table of Contents Off Balance Sheet Arrangements Other than those disclosed, the Company has no off balance sheet |