10-K 1 ltd128201210k.htm ANNUAL REPORT LTD 1.28.2012 10K
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
______________________________________________________ 
FORM 10-K
______________________________________________________ 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 28, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from                  to                 
Commission file number 1-8344
______________________________________________________ 
LIMITED BRANDS, INC.
(Exact name of registrant as specified in its charter)
 ______________________________________________________
Delaware
(State or other jurisdiction
of incorporation or organization)
 
31-1029810
(I.R.S. Employer Identification No.)
 
 
 
Three Limited Parkway, P.O. Box 16000,
Columbus, Ohio
(Address of principal executive offices)
 
43216
(Zip Code)
Registrant’s telephone number, including area code (614) 415-7000
______________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $.50 Par Value
 
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý    Accelerated filer ¨    Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was: $9,222,266,781.
Number of shares outstanding of the registrant’s Common Stock as of March 9, 2012: 289,398,347.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the Registrant’s 2012 Annual Meeting of Stockholders to be held on May 26, 2012, are incorporated by reference into Part II and Part III.
 


Table of Contents
 
 
 
Page No.
Part I
 
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
Part II
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
Part III
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
Part IV
 
 
 
 
 
Item 15.
 


PART I

ITEM 1. BUSINESS.
General
We operate in the highly competitive specialty retail business. Founded in 1963 in Columbus, Ohio, we have evolved from an apparel-based specialty retailer to a segment leader focused on women’s intimate and other apparel, personal care and beauty categories that make customers feel sexy, sophisticated and forever young. We sell our merchandise through specialty retail stores in the United States (“U.S.”) and Canada, which are primarily mall-based, and through websites, catalogue and international franchise, license and wholesale partners. We are committed to building a family of the world’s best fashion retail brands, offering captivating customer experiences that drive long-term loyalty.
Victoria’s Secret
Victoria’s Secret, including Victoria’s Secret Pink, is the leading specialty retailer of women’s intimate and other apparel with fashion-inspired collections, prestige fragrances and cosmetics, celebrated supermodels and world-famous runway shows. We sell our Victoria’s Secret products at more than 1,000 Victoria’s Secret stores in the U.S. and Canada, through the Victoria’s Secret catalogue and online at www.VictoriasSecret.com. Additionally, Victoria’s Secret brand products are also available in Victoria's Secret Beauty and Accessories stores operated by partners under a franchise or wholesale model throughout the world.
Bath & Body Works
Bath & Body Works is one of the leading specialty retailers of home fragrance and personal care products including shower gels, lotions and antibacterial soaps. We sell our Bath & Body Works products at more than 1,600 Bath & Body Works stores in the U.S. and Canada and online at www.BathandBodyWorks.com. Additionally, Bath & Body Works brand products are available through franchise locations in the Middle East.
Other Brands
La Senza is a specialty retailer of women’s intimate apparel. We sell our La Senza products at more than 200 La Senza stores in Canada and online at www.LaSenza.com. Additionally, La Senza has approximately 300 stores in 30 countries operating under franchise and licensing arrangements.
Henri Bendel sells upscale accessory products through our New York flagship and 18 other stores, as well as online at www.HenriBendel.com.
Acquisitions and Divestitures
La Senza
In January 2007, we completed our acquisition of La Senza. The results of La Senza are included in the Other segment.
Express
In July 2007, we completed the divestiture of 75% of our ownership interest in Express to affiliates of Golden Gate Capital. From May 2010 through July 2011, we sold 10.4 million shares of Express common stock and contributed our remaining 7.2 million shares of common stock to The Limited Brands Foundation.
Limited Stores
In August 2007, we completed the divestiture of 75% of our ownership interest in Limited Stores to affiliates of Sun Capital. In June 2010, we completed the divestiture of our remaining 25% ownership interest in Limited Stores.

Third-party Apparel Sourcing Business
On October 31, 2011, we divested 51% of our ownership interest in our third-party apparel sourcing business to affiliates of Sycamore Partners. We continue to retain a 49% interest which we account for as an equity method investee.

1

Fiscal Year
Our fiscal year ends on the Saturday nearest to January 31. As used herein, “2011”, “2010”, “2009”, “2008” and “2007” refer to the 52 week periods ending January 28, 2012, January 29, 2011, January 30, 2010, January 31, 2009 and February 2, 2008, respectively. “2012” refers to the 53 week period ended February 2, 2013.

Real Estate
 
Company-owned Retail Stores
Our company-owned retail stores are located in shopping malls, lifestyle centers and street locations in the U.S. and Canada. As a result of our strong brand and established retail presence, we have been able to acquire high-traffic locations in most retail centers in which we operate. Substantially all of our stores were profitable in 2011.
The following table provides the retail businesses and the number of our company-owned retail stores in operation for each business as of January 28, 2012 and January 29, 2011.
 
January 28, 2012
 
January 29, 2011
Victoria’s Secret Stores U.S.
1,017
 
1,028

Bath & Body Works U.S.
1,587
 
1,606

La Senza Canada (a)
230
 
252

Bath & Body Works Canada
69
 
59

Victoria’s Secret Canada
19
 
12

Henri Bendel
19
 
11

Total
2,941
 
2,968

________________
(a)
During the fourth quarter of 2011, we initiated a restructuring program designed to resize a portion of La Senza's store fleet. Under this program, we plan to close 38 underperforming stores. Of these stores, 12 were closed as of January 28, 2012. The remainder were closed during the first quarter of 2012. For additional information, see Note 5 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

The following table provides the changes in the number of our company-owned retail stores operated for the past five fiscal years:
Fiscal Year
 
Beginning
of Year
 
Opened
 
Closed
 
Acquired/
Divested
Businesses
 
End of Year
2011
 
2,968

 
40

 
(67
)
 
—

 
2,941

2010
 
2,971

 
44

 
(47
)
 
—

  
2,968

2009
 
3,014

 
59

 
(102
)
 
—

  
2,971

2008
 
2,926

 
145

 
(57
)
 
—

  
3,014

2007
 
3,766

 
129

 
(100
)
 
(869
)
(a) 
2,926

________________
(a)
Express and Limited Stores were divested in July 2007 and August 2007, respectively.
Franchise, License and Wholesale Agreements
In addition to our company-owned stores, our products are sold at hundreds of franchise and other locations throughout the world. We have agreements with unaffiliated partners to operate Victoria's Secret, Bath & Body Works and La Senza stores throughout the world. Under these agreements, third parties operate stores that sell our products under our brand names. We continue to increase the number of countries under these types of arrangements as part of our efforts to expand internationally.
Our Strengths
We believe the following competitive strengths contribute to our leading market position, differentiate us from our competitors, and will drive future growth:

2

Industry Leading Brands
We believe that our two flagship brands, Victoria’s Secret and Bath & Body Works, are highly recognized and others, including Victoria’s Secret Pink and La Senza, exhibit brand recognition which provides us with a competitive advantage. These brands are aspirational at accessible price points and have a loyal customer base. These brands allow us to target markets across the economic spectrum, across demographics and across the world.
•
At Victoria’s Secret, we market products to the college-age woman with Victoria’s Secret Pink and then transition her into glamorous and sexy product lines, such as Angels, Very Sexy and Body by Victoria. While bras and panties are the core of what we do, these brands also give our customers choices in clothing, accessories, fragrances, personal care, swimwear and athletic attire.
•
Bath & Body Works caters to our customers’ entire well-being, providing shower gels and lotions, aromatherapy, antibacterial soaps, home fragrance and personal care accessories.
•
In Canada, La Senza is a leader in young women’s intimate apparel. La Senza offerings include bras, panties, sleepwear, loungewear and accessories.
In-Store Experience and Store Operations
We view the customers' in-store experience as an important vehicle for communicating the image of each brand. We utilize visual presentation of merchandise, in-store marketing, music and our sales associates to reinforce the image represented by the brands.
Our in-store marketing is designed to convey the principal elements and personality of each brand. The store design, furniture, fixtures and music are all carefully planned and coordinated to create a unique shopping experience. Every brand displays merchandise uniformly to ensure a consistent store experience, regardless of location. Store managers receive detailed plans designating fixture and merchandise placement to ensure coordinated execution of the company-wide merchandising strategy.
Our sales associates and managers are a central element in creating the atmosphere of the stores by providing a high level of customer service.
Product Development, Sourcing and Logistics
We believe a large part of our success comes from frequent and innovative product launches, which include bra launches at Victoria’s Secret and La Senza and new fragrance launches at Bath & Body Works. Our merchant, design and sourcing teams have a long history of bringing innovative products to our customers. Additionally, we believe that our sourcing function (Mast Global) has a long and deep presence in the key sourcing markets including those in the United States and Asia, which helps us partner with the best manufacturers and get high quality products quickly.
Experienced and Committed Management Team
We were founded in 1963 and have been led since inception by Leslie H. Wexner. Our senior management team has a wealth of retail and business experience at Limited Brands and other companies such as Neiman Marcus, Target, The Gap, Inc., The Home Depot, Carlson Companies, Land's End, Levi Strauss and Yum Brands. We believe that we have one of the most experienced management teams in retail.
Additional Information
Merchandise Suppliers
During 2011, we purchased merchandise from approximately 1,000 suppliers located throughout the world. No supplier provided 10% or more of our merchandise purchases.
Distribution and Merchandise Inventory
Most of the merchandise and related materials for our stores are shipped to our distribution centers in the Columbus, Ohio area. We use a variety of shipping terms that result in the transfer of title to the merchandise at either the point of origin or point of destination.
Our policy is to maintain sufficient quantities of inventories on hand in our retail stores and distribution centers to enable us to offer customers an appropriate selection of current merchandise. We emphasize rapid turnover and take markdowns as required to keep merchandise fresh and current.

3

Information Systems
Our management information systems consist of a full range of retail, financial and merchandising systems. The systems include applications related to point-of-sale, e-commerce, merchandising, planning, sourcing, logistics, inventory management and support systems including human resources and finance. We continue to invest in technology to upgrade core systems to continue to improve our efficiency and accuracy in the production and delivery of merchandise to our stores.
Seasonal Business
Our operations are seasonal in nature and consist of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). The fourth quarter, including the holiday season, accounted for approximately one-third of our net sales for 2011, 2010 and 2009 and is typically our most profitable quarter. Accordingly, cash requirements are highest in the third quarter as our inventories build in advance of the holiday season.
Working Capital
We fund our business operations through a combination of available cash and cash equivalents and cash flows generated from operations. In addition, our revolving credit facility is available for additional working capital needs and investment opportunities.
Regulation
We and our products are subject to regulation by various federal, state, local and foreign regulatory authorities. We are subject to a variety of customs regulations and international trade arrangements.
Trademarks and Patents
Our trademarks and patents, which constitute our primary intellectual property, have been registered or are the subject of pending applications in the United States Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law. We believe our products are identified by our intellectual property and, thus, our intellectual property is of significant value. Accordingly, we intend to maintain our intellectual property and related registrations and vigorously protect our intellectual property assets against infringement.
Segment Information
We have two reportable segments: Victoria’s Secret and Bath & Body Works. Prior to the fourth quarter of 2011, the Victoria’s Secret reportable segment consisted of the Victoria’s Secret and La Senza operating segments which were aggregated in accordance with the authoritative guidance included in Accounting Standards Codification Topic 280, Segment Reporting. In the fourth quarter of 2011, we ceased aggregating La Senza with Victoria's Secret. While this reporting change did not impact our consolidated results, segment data for previous years has been recast to be consistent with the current year presentation throughout the Form 10-K. For additional information, see Note 21 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
Other Information
For additional information about our business, including our net sales and profits for the last three years and selling square footage, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation. For the financial results of our reportable segments, see Note 21 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
Competition
The sale of women’s intimate and other apparel, personal care and beauty products and accessories through retail stores is a highly competitive business with numerous competitors, including individual and chain specialty stores, department stores and discount retailers. Brand image, marketing, design, price, service, assortment and quality are the principal competitive factors in retail store sales. Our direct response businesses compete with numerous national and regional direct response merchandisers. Image presentation, fulfillment and the factors affecting retail store sales discussed above are the principal competitive factors in direct response sales.
Associate Relations
As of January 28, 2012, we employed approximately 97,000 associates, 79,000 of whom were part-time. In addition, temporary associates are hired during peak periods, such as the holiday season.

4

Executive Officers of Registrant
Set forth below is certain information regarding our executive officers.
Leslie H. Wexner, 74, has been our Chairman of the Board of Directors for more than thirty years and our Chief Executive Officer since our founding in 1963.
Martyn R. Redgrave, 59, has been our Executive Vice President and Chief Administrative Officer since March 2005.
Stuart B. Burgdoerfer, 48, has been our Executive Vice President and Chief Financial Officer since April 2007.
Sharen J. Turney, 55, has been our Chief Executive Officer and President of Victoria’s Secret since July 2006.
Nicholas P. M. Coe, 49, has been our Chief Executive Officer and President of Bath & Body Works since August 2011.
Charles C. McGuigan, 55, has been our Chief Executive Officer and President of Mast Global since February 2011.
Jane L. Ramsey, 54, has been our Executive Vice President, Human Resources, since April 2006.
All of the above officers serve at the discretion of our Board of Directors and are members of our Executive Committee.
Available Information
We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the U.S. Securities and Exchange Commission ("SEC"). Copies of these reports, proxy statements and other information can be read and copied at:
SEC Public Reference Room
100 F Street NE
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC's website at www.sec.gov. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available, free of charge, on our website www.LimitedBrands.com.
Copies of any of the above-referenced documents will also be made available, free of charge, upon written request to:
Limited Brands, Inc.
Investor Relations Department
Three Limited Parkway, P.O. Box 16000
Columbus, Ohio 43216

ITEM 1A. RISK FACTORS.
We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this report or made by our company or our management involve risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “planned,” “potential” and any similar expressions may identify forward-looking statements. Risks associated with the following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements included in this report or otherwise made by our company or our management:
•
general economic conditions, consumer confidence, consumer spending patterns and market disruptions including severe weather conditions, natural disasters, health hazards, terrorist activities, financial crises, political crises or other major events, or the prospect of these events;
•
the seasonality of our business;
•
the dependence on a high volume of mall traffic and the possible lack of availability of suitable store locations on

5

appropriate terms;
•
our ability to grow through new store openings and existing store remodels and expansions;
•
our ability to successfully expand into international markets and related risks;
•
our independent licensees and franchisees;
•
our direct channel business;
•
our failure to protect our reputation and our brand images;
•
our failure to protect our trade names, trademarks and patents;
•
the highly competitive nature of the retail industry generally and the segments in which we operate particularly;
•
consumer acceptance of our products and our ability to keep up with fashion trends, develop new merchandise and launch new product lines successfully;
•
our reliance on foreign sources of production, including risks related to:
•
political instability;
•
duties, taxes, other charges on imports;
•
legal and regulatory matters;
•
volatility in currency exchange rates;
•
local business practices and political issues;
•
potential delays or disruptions in shipping and related pricing impacts;
•
the disruption of imports by labor disputes; and
•
changing expectations regarding product safety due to new legislation;
•
stock price volatility;
•
our failure to maintain our credit rating;
•
our ability to service our debt;
•
our ability to retain key personnel;
•
our ability to attract, develop and retain qualified employees and manage labor costs;
•
the inability of our manufacturers to deliver products in a timely manner and meet quality standards;
•
fluctuations in product input costs;
•
fluctuations in energy costs;
•
increases in the costs of mailing, paper and printing;
•
claims arising from our self-insurance;
•
our ability to implement and maintain information technology systems;
•
our failure to comply with regulatory requirements;
•
tax matters; and
•
legal and compliance matters.
We are not under any obligation and do not intend to make publicly available any update or other revisions to any of the forward-looking statements contained in this report to reflect circumstances existing after the date of this report or to reflect the occurrence of future events even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized.
The following discussion of risk factors contains “forward-looking statements.” These risk factors may be important to understanding any statement in this Form 10-K, other filings or in any other discussions of our business. The following information should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation and Item 8. Financial Statements and Supplementary Data.
In addition to the other information set forth in this report, the reader should carefully consider the following factors which could materially affect our business, financial condition or future results. The risks described below are not our only risks.

6

Additional risks and uncertainties not currently known or that are currently deemed to be immaterial may also adversely affect our business, operating results and/or financial condition in a material way.
Our net sales, profit results and cash flow are sensitive to, and may be adversely affected by, general economic conditions, consumer confidence, spending patterns and market disruptions.
Our net sales, profit, cash flows and future growth 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. In addition, market disruptions due to severe weather conditions, natural disasters, health hazards or other major events or the prospect of these events could also impact consumer spending and confidence levels. In particular, our operating results are impacted by factors in the U.S. and Canadian economies. Purchases of women’s intimate and other apparel, beauty and personal care products and accessories often decline during periods when economic or market conditions are unsettled or weak. In such circumstances, we may increase the number of promotional sales, which could have a material adverse effect on our results of operations, financial condition and cash flows.
Our net sales, operating income and inventory levels fluctuate on a seasonal basis.
We experience major seasonal fluctuations in our net sales and operating income, with a significant portion of our operating income typically realized during the fourth quarter holiday season. Any decrease in sales or margins during this period could have a material adverse effect on our results of operations, financial condition and cash flows.
Seasonal fluctuations also affect our inventory levels, since we usually order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases. We must carry a significant amount of inventory, especially before the holiday season selling period. If we are not successful in selling inventory, we may have to sell the inventory at significantly reduced prices or may not be able to sell the inventory at all, which could have a material adverse effect on our results of operations, financial condition and cash flows.
Our net sales depend on a volume of traffic to our stores and the availability of suitable lease space.
Most of our stores are located in retail shopping areas including malls and other types of retail centers. Sales at these stores are derived, in part, from the volume of traffic in those retail areas. Our stores benefit from the ability of the retail center and other attractions in an area, including “destination” retail stores, to generate consumer traffic in the vicinity of our stores. Sales volume and retail traffic may be adversely affected by economic downturns in a particular area, competition from other retail and non-retail attractions and other retail areas where we do not have stores.
Part of our future growth is significantly dependent on our ability to operate stores in desirable locations with capital investment and lease costs providing the opportunity to earn a reasonable return. We cannot be sure as to when or whether such desirable locations will become available at reasonable costs.
These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
Our ability to grow depends in part on new store openings and existing store remodels and expansions.
Our continued growth and success will depend in part on our ability to open and operate new stores and expand and remodel existing stores on a timely and profitable basis. Accomplishing our new and existing store expansion goals will depend upon a number of factors, including the ability to partner with developers and landlords to obtain suitable sites for new and expanded stores at acceptable costs, the hiring and training of qualified personnel, particularly at the store management level, and the integration of new stores into existing operations. There can be no assurance we will be able to achieve our store expansion goals, manage our growth effectively, successfully integrate the planned new stores into our operations or operate our new, remodeled and expanded stores profitably. These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
Our plans for international expansion include risks that could adversely impact our results and reputation.
We intend to further expand into international markets through license and franchise agreements and/or company-owned stores. The risks associated with our expansion into international markets include difficulties in attracting customers due to a lack of customer familiarity with our brands, our lack of familiarity with local customer preferences and seasonal differences in the market. Further, entry into other markets may bring us into competition with new competitors or with existing competitors with an established market presence. Other risks include general economic conditions in specific countries or markets, disruptions or delays in shipments, changes in diplomatic and trade relationships, political instability and foreign governmental regulation.

7

We also have risks related to identifying suitable partners as licensees, franchisees or in a similar capacity. In addition, certain aspects of these arrangements are not directly within our control, such as the ability of these third parties to meet their projections regarding store openings and sales. We cannot ensure the profitability or success of our expansion into international markets.
In addition, our results of operations and financial condition may be adversely affected by fluctuations in currency exchange rates. More specifically, an increase in the value of the U.S. dollar relative to other currencies could have an adverse effect on our earnings and our financial condition.
These risks could have a material adverse effect on our brand image and reputation as well as our results of operations, financial condition and cash flows.
Our licensees and franchisees could take actions that could harm our business or brand images.
We have global representation through independently owned stores operated by licensees and franchisees (“partners”). Although we have criteria to evaluate and select prospective partners, the level of control we can exercise over our partners is limited and the quality and success of their operations may be diminished by any number of factors beyond our control. Our partners may not have the business acumen or financial resources necessary to successfully operate stores in a manner consistent with our standards and may not hire and train qualified store managers and other personnel. Our brand image and reputation may suffer materially and our sales could decline if our partners do not operate successfully. These risks could have an adverse effect on our results of operations, financial condition and cash flows.
Our direct channel business includes risks that could have an adverse effect on our results.
Our direct operations are subject to numerous risks that could have a material adverse effect on our results. Risks include, but are not limited to, the (a) diversion of sales from our stores, which may impact comparable store sales figures, (b) difficulty in recreating the in-store experience through our direct channels, (c) domestic or international resellers purchasing merchandise and reselling it overseas outside our control, (d) the failure of and risks related to the systems that operate the websites and their related support systems, including computer viruses, theft of customer information, privacy concerns, telecommunication failures and electronic break-ins and similar disruptions, and (e) risks related to the fulfillment of direct-to-consumer orders. Any of these events could have a material adverse effect on our results of operations, financial condition and cash flows.
Our failure to protect our reputation could have a material adverse effect on our brand images.
Our ability to maintain our reputation is critical to our brand images. Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and integrity. Any negative publicity about these types of concerns may reduce demand for our merchandise. Failure to comply with ethical, social, product, labor and environmental standards, or related political considerations, could also jeopardize our reputation and potentially lead to various adverse consumer actions, including boycotts. Failure to comply with local laws and regulations, to maintain an effective system of internal controls or to provide accurate and timely financial statement information could also hurt our reputation. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations, financial condition and cash flows, as well as require additional resources to rebuild our reputation.
Our failure to adequately protect our trade names, trademarks and patents could have a negative impact on our brand images and limit our ability to penetrate new markets.
We believe that our trade names, trademarks and patents are an essential element of our strategy. We have obtained or applied for federal registration of these trade names, trademarks and patents and have applied for or obtained registrations in many foreign countries. There can be no assurance that we will obtain such registrations or that the registrations we obtain will prevent the imitation of our products or infringement of our intellectual property rights by others. If any third-party copies our products in a manner that projects lesser quality or carries a negative connotation, it could have a material adverse effect on our brand image and reputation as well as our results of operations, financial condition and cash flows.

Our inability to compete favorably in our highly competitive segment of the retail industry could negatively impact our results.
The sale of women’s intimate and other apparel, personal care products and accessories is highly competitive. We compete for sales with a broad range of other retailers, including individual and chain specialty stores, department stores and discount retailers. In addition to the traditional store-based retailers, we also compete with direct marketers or retailers that sell similar lines of merchandise and who target customers through direct response channels. Brand image, marketing, design, price, service, quality, image presentation and fulfillment are all competitive factors in both the store-based and direct response channels.

8

Some of our competitors may have greater financial, marketing and other resources available. In many cases, our competitors sell their products in stores that are located in the same shopping malls as our stores. In addition to competing for sales, we compete 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 our results of operations, financial condition and cash flows.
Our inability to remain current with fashion trends and launch new product lines successfully could negatively impact the image and relevance of our brands.
Our success depends in part on management’s ability to effectively anticipate and respond to changing fashion preferences and consumer demands and to translate market trends into appropriate, saleable product offerings in advance of the actual time of sale to the customer. Customer demands and fashion trends change rapidly. If we are unable to successfully anticipate, identify or react to changing styles or trends or we misjudge the market for our products or any new product lines, our sales will be lower, potentially resulting in significant amounts of unsold finished goods inventory. In response, we may be forced to increase our marketing promotions or price markdowns. These risks could have a material adverse effect on our brand image and reputation as well as our results of operations, financial condition and cash flows.
We rely significantly on foreign sources of production and maintenance of operations in foreign countries.
We purchase merchandise directly in foreign markets and in our domestic market. Many of our imports are subject to a variety of customs regulations and international trade arrangements, including existing or potential duties, tariffs or safeguard quotas. We compete with other companies for production facilities.
We also face a variety of other risks generally associated with doing business in foreign markets and importing merchandise from abroad, such as:
•
political instability;
•
imposition of duties, taxes and other charges on imports;
•
legal and regulatory matters;
•
volatility in currency exchange rates;
•
local business practice and political issues (including issues relating to compliance with domestic or international labor standards) which may result in adverse publicity or threatened or actual adverse consumer actions, including boycotts;
•
potential delays or disruptions in shipping and related pricing impacts;
•
disruption of imports by labor disputes; and
•
changing expectations regarding product safety due to new legislation.
New initiatives may be proposed impacting 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, environmental hazards or natural disasters may occur which could have a negative effect on the economies, financial markets and business activity. Our purchase of merchandise from these manufacturing operations may be affected by this risk.
Our future performance will depend upon these and the other factors listed above which are beyond our control and could have a material adverse effect on our results of operations, financial condition and cash flows.
Our stock price may be volatile.
Our stock price may fluctuate substantially as a result of quarter to quarter variations in our actual or projected performance or the financial performance of other companies in the retail industry. 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.

Our failure to maintain our credit rating could negatively affect our ability to access capital and would increase our interest expense.
The credit ratings agencies periodically review our capital structure and the quality and stability of our earnings. Any negative ratings actions could constrain the capital available to our company or our industry and could limit our access to funding for

9

our operations. We are dependent upon our ability to access capital at rates and on terms we determine to be attractive. If our ability to access capital becomes constrained, our interest costs will likely increase, which could have a material adverse effect on our results of operations, financial condition and cash flows. Additionally, changes to our credit rating would affect our interest costs.
We may be unable to service our debt.
Some of our debt agreements contain covenants which require maintenance of certain financial ratios and also, under certain conditions, restrict our ability to pay dividends, repurchase common shares and make other restricted payments as defined in those agreements. Our cash flow from operations provides the primary source of funds for our debt service payments. If our cash flow from operations declines, we may be unable to service or refinance our current debt.
We may be unable to retain key personnel.
We believe we have benefited substantially from the leadership and experience of our senior executives, including Leslie H. Wexner (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 our business and prospects. Competition for key personnel in the retail industry is intense and our future success will also depend on our ability to recruit, train and retain other qualified key personnel.
We may be unable to attract, develop and retain qualified employees and manage labor costs.
We believe our competitive advantage is providing a positive, engaging and satisfying experience for each individual customer, which requires us to have highly trained and engaged employees. Our success depends in part upon our ability to attract, develop and retain a sufficient number of qualified employees, including store personnel and talented merchants. The turnover rate in the retail industry is generally high and qualified individuals of the requisite caliber and number needed to fill these positions may be in short supply in some areas. Competition for such qualified individuals or changes in labor and healthcare laws could require us to incur higher labor costs. Our inability to recruit a sufficient number of qualified individuals in the future may delay planned openings of new stores or affect the speed with which we expand. Delayed store openings, significant increases in employee turnover rates or significant increases in labor costs could have a material adverse effect on our results of operations, financial condition and cash flows.
Our manufacturers may not be able to manufacture and deliver products in a timely manner and meet quality standards.
We purchase products through contract manufacturers and importers and directly from third-party manufacturers. Factors outside our control, such as manufacturing or shipping delays or quality problems, could disrupt merchandise deliveries and result in lost sales, cancellation charges or excessive markdowns. In addition, quality problems could result in a product liability judgment or a widespread product recall that may negatively impact our sales and profitability for a period of time depending on product availability, competition reaction and consumer attitudes. Even if the product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertions could adversely impact our reputation with existing and potential customers and our brand image. These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
Our results may be adversely affected by fluctuations in product input costs.
Product input costs, including manufacturing labor and raw materials, fluctuate. These fluctuations may result in an increase in our production costs. We may not be able to, or may elect not to, pass these increases on to our customers which may adversely impact our profit margins. These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
Our results may be adversely affected by fluctuations in energy costs.
Energy costs have fluctuated dramatically in the past. These fluctuations may result in an increase in our transportation costs for distribution, utility costs for our retail stores and costs to purchase products from our manufacturers. A continual rise in energy costs could adversely affect consumer spending and demand for our products and increase our operating costs, both of which could have a material adverse effect on our results of operations, financial condition and cash flows.
We may be adversely impacted by increases in costs of mailing, paper and printing.
Postal rate increases and paper and printing costs will affect the cost of our order fulfillment and catalogue and promotional mailings. We rely 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 our earnings if we are unable to recover these costs or if we are unable

10

to implement more efficient printing, mailing, delivery and order fulfillment systems. These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
We self-insure certain risks and may be adversely impacted by unfavorable claims experience.
We are self-insured for various types of insurable risks including associate medical benefits, workers’ compensation, property, general liability and automobile up to certain stop-loss limits. Claims are difficult to predict and may be volatile. Any adverse claims experience could have a material adverse effect on our results of operations, financial condition and cash flows.
We significantly rely on our ability to implement and sustain information technology systems.
Our success depends, in part, on the secure and uninterrupted performance of our information technology systems. Our information technology systems, as well as those of our service providers, are vulnerable to damage from a variety of sources, including telecommunication failures, malicious human acts and natural disasters. Moreover, despite network security measures, some of our servers and those of our service providers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Additionally, these types of problems could result in a breach of confidential customer information which could result in damage to our reputation and/or litigation. Despite the precautions we have taken, unanticipated problems may nevertheless cause failures in our information technology systems. Sustained or repeated system failures that interrupt our ability to process orders and deliver products to the stores or impact our consumers ability to access our websites in a timely manner or expose confidential customer information could have a material adverse effect on our results of operations, financial condition and cash flows.
In addition, we will make modifications and upgrades to the information technology systems for point-of-sale, e-commerce, merchandising, planning, sourcing, logistics, inventory management and support systems including human resources and finance. Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. We are aware of inherent risks associated with replacing these systems, including accurately capturing data and system disruptions. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.
We may fail to comply with regulatory requirements.
As a public company, we are subject to numerous regulatory requirements. Our policies, procedures and internal controls are designed to comply with all applicable foreign and domestic laws and regulations, including those required by the Sarbanes-Oxley Act of 2002, the SEC and the New York Stock Exchange (the “NYSE”). Failure to comply with such laws and regulations could have an adverse effect on our reputation, market price of our common stock, results of operations, financial condition and cash flows.
We may be adversely impacted by changes in taxation requirements.
We are subject to income tax in local, national and international jurisdictions. In addition, our products are subject to import and excise duties and/or sales or value-added taxes in many jurisdictions. Fluctuations in tax rates and duties and changes in tax legislation or regulation could have a material adverse effect on our results of operations, financial condition and cash flows.
We may be adversely impacted by certain compliance or legal matters.
We along with our third-party business partners are subject to complex compliance and litigation risks. Actions filed against our Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities, anti-corruption and other claims, including purported class action lawsuits. Difficulty can exist in complying with sometimes conflicting regulations in local, national or foreign jurisdictions as well as new or changing regulations that affect how we operate. In addition, we may be impacted by litigation trends, including class action lawsuits involving consumers and shareholders that could have a material adverse effect on our reputation, market price of our common stock, results of operations, financial condition and cash flows.

ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.


11

ITEM 2. PROPERTIES.
The following table provides the location, use and size of our distribution, corporate and product development facilities as of January 28, 2012:
 
Location
 
Use
 
Approximate
Square
Footage
Columbus, Ohio
 
Corporate, distribution and shipping
 
6,388,000

Montreal, Quebec, Canada
 
Office, distribution and shipping
 
452,000

New York, New York
 
Office, sourcing and product development/design
 
479,000

Kettering, Ohio
 
Call center
 
94,000

Hong Kong
 
Office and sourcing
 
80,000

Rio Rancho, New Mexico
 
Call center
 
75,000

Various foreign locations
 
Office and sourcing
 
74,000


United States
Our business for both the Victoria’s Secret and Bath & Body Works segments is principally conducted from office, distribution and shipping facilities located in the Columbus, Ohio area. Additional facilities are located in New York, New York; Kettering, Ohio; and Rio Rancho, New Mexico.
Our distribution and shipping facilities consist of seven buildings located in the Columbus, Ohio area. These buildings, including attached office space, comprise approximately 6.4 million square feet.
As of January 28, 2012, we operate 2,623 retail stores located in leased facilities, primarily in malls and shopping centers, throughout the U.S. A substantial portion of these lease commitments consists of store leases generally with an initial term of ten years. The leases expire at various dates between 2012 and 2026.
Typically, when space is leased for a retail store in a mall or shopping center, we supply all improvements, including interior walls, floors, ceilings, fixtures and decorations. The cost of improvements varies widely, depending on the design, size and location of the store. In certain cases, the landlord of the property may provide an allowance to fund all or a portion of the cost of improvements, serving as a lease incentive. Rental terms for new locations usually include a fixed minimum rent plus a percentage of sales in excess of a specified amount. We usually pay certain operating costs such as common area maintenance, utilities, insurance and taxes. For additional information, see Note 16 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
International
Canada
We own and lease office, distribution and shipping facilities in the Montreal, Quebec area. Additional leased office facilities are located in Toronto, Ontario.
Our distribution and shipping facilities consist of two buildings located in the Montreal, Quebec area. These buildings, including attached office space, comprise approximately 387,000 square feet. Additionally, we lease additional office facilities in the Montreal area comprised of approximately 65,000 square feet. During the fourth quarter of 2011, we initiated a restructuring program designed to relocate a substantial portion of its Canadian home office from Montreal to Columbus, Ohio. For additional information, see Note 5 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
As of January 28, 2012, we operate 318 retail stores located in leased facilities, primarily in malls and shopping centers, throughout the Canadian provinces. A substantial portion of these lease commitments consists of store leases generally with an initial term of ten years. The leases expire on various dates between 2012 and 2023.
Other International
As of January 28, 2012, we also have global representation through the following:
•
349 independently owned La Senza stores operated under licensing arrangements in 30 countries;
•
18 independently owned Bath & Body Works stores operated by a franchisee in 6 Middle Eastern countries; and

12

•
57 independently owned Victoria’s Secret Beauty and Accessories stores as well as various duty free locations in 39 countries.
We also operate sourcing-related office facilities in various foreign locations.

ITEM 3. LEGAL PROCEEDINGS.
We are a defendant in a variety of lawsuits arising in the ordinary course of business. Actions filed against our Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, our current legal proceedings are not expected to have a material adverse effect on our financial position or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

13

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock (“LTD”) is traded on the New York Stock Exchange. As of January 28, 2012, there were approximately 46,000 shareholders of record. However, including active associates who participate in our stock purchase plan, associates who own shares through our sponsored retirement plans and others holding shares in broker accounts under street names, we estimate the shareholder base to be approximately 179,000.
The following table provides our quarterly market prices and cash dividends per share for 2011 and 2010:
 
 
Market Price
 
Cash Dividend
per Share
 
 
High
 
Low
 
2011
 
 
 
 
 
 
Fourth quarter
$
44.46

 
$
37.57

 
$
2.20

(a)
Third quarter
45.45
 
31.43
 
0.20

 
Second quarter
42.75
 
35.08
 
1.20

(b)
First quarter
41.48
 
28.64
 
0.20

(c)
2010

 

 

 
Fourth quarter
$
35.48

 
$
28.05

 
$
3.15

(d)
Third quarter
29.95

 
23.57

 
0.15

  
Second quarter
28.19

 
21.78

 
0.15

  
First quarter
28.78

 
19.12

 
1.15

(e)
________________ 

(a)
In December 2011, our Board of Directors declared a special dividend of $2 per share which was distributed on December 23, 2011 to shareholders of record at the close of business on December 12, 2011.
(b)
In May 2011, our Board of Directors declared a special dividend of $1 per share which was distributed on July 1, 2011 to shareholders of record at the close of business on June 17, 2011.
(c)
In January 2011, our Board of Directors declared an increase in our quarterly common stock dividend from $0.15 to $0.20 per share.
(d)
In November 2010, our Board of Directors declared a special dividend of $3 per share which was distributed on December 21, 2010 to shareholders of record at the close of business on December 7, 2010.
(e)
In March 2010, our Board of Directors declared a special dividend of $1 per share which was distributed on April 19, 2010 to shareholders of record at the close of business on April 5, 2010.

In February 2012, our Board of Directors declared an increase in our first quarter 2012 common stock dividend from $0.20 to $0.25 per share. The dividend was paid on March 9, 2012 to shareholders of record at the close of business on February 24, 2012 and included the $0.05 per share increase.

14

The following graph shows the changes, over the past five-year period, in the value of $100 invested in our common stock, the Standard & Poor’s 500 Composite Stock Price Index and the Standard & Poor’s 500 Retail Composite Index. The plotted points represent the closing price on the last day of the fiscal year indicated.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN (a) (b) (c)
AMONG LIMITED BRANDS, INC., THE S&P 500 INDEX AND THE S&P RETAIL COMPOSITE INDEX

_______________
(a)
This table represents $100 invested in stock or in index at the closing price on February 3, 2007 including reinvestment of dividends.
(b)
The January 28, 2012 cumulative total return includes the $1.00 and $2.00 special dividends in May 2011 and December 2011, respectively.
(c)
The January 29, 2011 cumulative total return includes the $1.00 and $3.00 special dividends in March 2010 and December 2010, respectively.
The following table provides our repurchases of our common stock during the fourth quarter of 2011:
 
Period
 
Total
Number of
Shares
Purchased(a)
 
Average Price
Paid per
Share(b)
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Programs(c)
 
Maximum
Number of Shares (or
Approximate
Dollar Value) that May
Yet be Purchased
Under the Programs(c)
 
 
(in thousands)
 
 
 
(in thousands)
November 2011
 
1,414

 
$
41.84

 
1,392

 
$
223,932

December 2011
 
936

 
40.23

 
920

 
186,976

January 2012
 
570

 
40.31

 
562

 
164,309

Total
 
2,920

 
41.03

 
2,874

 
 
 ________________
(a)
The total number of shares repurchased includes shares repurchased as part of publicly announced programs, with the remainder relating to shares repurchased in connection with tax payments due upon vesting of employee restricted stock awards and the use of our stock to pay the exercise price on employee stock options.
(b)
The average price paid per share includes any broker commissions.
(c)
For additional share repurchase program information, see Note 19 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

15

ITEM 6. SELECTED FINANCIAL DATA.
 
 
 
Fiscal Year Ended
 
 
January 28, 2012
 
January 29, 2011
 
January 30, 2010
 
January 31, 2009
 
February 2, 2008
 
 
(in millions)
Summary of Operations
 
 
 
 
 
 
 
 
 
 
Net Sales
 
$
10,364

 
$
9,613

 
$
8,632

 
$
9,043

 
$
10,134

Gross Profit
 
4,057

 
3,631

 
3,028

 
3,006

 
3,509

Operating Income (a)
 
1,238

 
1,284

 
868

 
589

 
1,110

Net Income (b)
 
850

 
805

 
448

 
220

 
718

 
 
(as a percentage of net sales)
Gross Profit
 
39.1
%
 
37.8
%
 
35.1
%
 
33.2
%
 
34.6
%
Operating Income
 
11.9
%
 
13.4
%
 
10.1
%
 
6.5
%
 
11.0
%
Net Income
 
8.2
%
 
8.4
%
 
5.2
%
 
2.4
%
 
6.9
%
 
 
 
 
 
 
 
 
 
 
 
Per Share Results
 
 
 

 

 

 

Net Income Per Basic Share
 
$
2.80

 
$
2.49

 
$
1.39

 
$
0.66

 
$
1.91

Net Income Per Diluted Share
 
$
2.70

 
$
2.42

 
$
1.37

 
$
0.65

 
$
1.89

Dividends per Share
 
$
3.80

 
$
4.60

 
$
0.60

 
$
0.60

 
$
0.60

Weighted Average Diluted Shares Outstanding (in millions)
 
314

 
333

 
327

 
337

 
380

 
 
 
 
 
 
 
 
 
 
 
Other Financial Information
 
(in millions)
Cash and Cash Equivalents
 
$
935

 
$
1,130

 
$
1,804

 
$
1,173

 
$
1,018

Total Assets
 
6,108

 
6,451

 
7,173

 
6,972

 
7,437

Working Capital
 
842

 
1,088

 
1,928

 
1,612

 
1,545

Net Cash Provided by Operating Activities
 
1,266

 
1,284

 
1,174

 
954

 
765

Capital Expenditures
 
426

 
274

 
202

 
479

 
749

Long-term Debt
 
3,481

 
2,507

 
2,723

 
2,897

 
2,905

Other Long-term Liabilities
 
780

 
761

 
731

 
732

 
709

Shareholders’ Equity
 
137

 
1,476

 
2,183

 
1,874

 
2,219

 
 
 
 
 
 
 
 
 
 
 
Return on Average Shareholders’ Equity
 
105
%
 
44
%
 
22
%
 
11
%
 
28
%
Comparable Store Sales Increase (Decrease) (c)
 
10
%
 
9
%
 
(4
)%
 
(9
)%
 
(2
)%
Return on Average Assets
 
14
%
 
12
%
 
6
%
 
3
%
 
10
%
Current Ratio
 
1.6

 
1.7

 
2.5

 
2.3

 
2.1

 
 
 
 
 
 
 
 
 
 
 
Stores and Associates at End of Year
 
 
 
 
 
 
 
 
 
 
Number of Stores (d)
 
2,941

 
2,968

 
2,971

 
3,014

 
2,926

Selling Square Feet (in thousands) (d)
 
10,934

 
10,974

 
10,934

 
10,898

 
10,310

Number of Associates
 
97,000

 
96,500

 
92,100

 
90,900

 
97,500

 ________________
(a)
Operating income includes the effect of the following items:
(i)
In 2011, a $232 million impairment charge related to goodwill and other intangible assets for our La Senza business; a $111 million gain related to the divestiture of 51% of our third-party apparel sourcing business; $163 million of expense related to the charitable contribution of our remaining shares of Express, Inc. to the Limited Brands Foundation; and $24 million of restructuring expenses at La Senza.
(ii)
In 2009, a $9 million pre-tax gain, $14 million net of related tax benefits, associated with the reversal of an accrued contractual liability as a result of the divestiture of a joint venture.

16

(iii)
In 2008, a $215 million impairment charge related to goodwill and other intangible assets for our La Senza business; a $128 million gain related to the divestiture of a personal care joint venture; $23 million of expense related to restructuring activities; and a $19 million impairment charge related to a joint venture.
(iv)
In 2007, a $302 million gain related to the divestiture of Express; a $72 million loss related to the divestiture of Limited Stores; $48 million related to initial recognition of income for unredeemed gift cards at Victoria’s Secret; $53 million of expense related to various restructuring activities; and $37 million of gains related to asset sales.

For additional information on 2011, 2010 and 2009 items, see the Notes to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
(b)
In addition to the items previously discussed in (a), net income includes the effect of the following items:
(i)
In 2011, a $147 million gain related to the charitable contribution of our remaining shares of Express, Inc. to the Limited Brands Foundation; an $86 million gain related to the sale of Express, Inc. common stock; and $56 million of favorable income tax benefits related to certain discrete tax matters.
(ii)
In 2010, a $52 million gain related to the initial public offering of Express including the sale of a portion of our shares; a $49 million pre-tax gain related to a $57 million cash distribution from Express; a $45 million pre-tax gain related to the sale of Express stock; a $25 million pre-tax loss associated with the early retirement of portions of our 2012 and 2014 notes; a $20 million pre-tax gain associated with the sale of our remaining 25% ownership interest in Limited Stores; and a $7 million pre-tax gain related to a dividend payment from Express.
(iii)
In 2009, $23 million of favorable income tax benefits in the fourth quarter primarily related to the reorganization of certain foreign subsidiaries and $9 million of favorable income tax benefits in the third quarter primarily due to the resolution of certain tax matters.
(iv)
In 2008, $15 million of favorable tax benefits in the fourth quarter primarily related to certain discrete foreign and state income tax items and a $13 million pre-tax gain related to a cash distribution from Express.
(v)
In 2007, a $100 million pre-tax gain related to a cash distribution from Easton Town Center, LLC; a $17 million pre-tax gain related to an interest rate hedge; and $67 million of favorable tax benefits primarily relating to: 1) the reversal of state net operating loss carryforward valuation allowances and other favorable tax benefits associated with the Apparel divestitures; 2) a decline in the Canadian federal tax rate; 3) audit settlements and 4) other items.
For additional information on 2011, 2010 and 2009 items, see the Notes to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
The effect of the items described in (a) and (b) above increased (decreased) earnings per share by $0.10 in 2011, $0.36 in 2010, $0.14 in 2009, $(0.40) in 2008 and $0.68 in 2007.
(c)
A store is typically included in the calculation of comparable store sales when it has been open or owned 12 months or more and it has not had a change in selling square footage of 20% or more. Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store.
(d)
Number of stores and selling square feet excludes independently owned La Senza, Bath & Body Works and Victoria’s Secret stores operated by licensees and franchisees.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") as codified in the Accounting Standards Codification ("ASC"). The following information should be read in conjunction with our financial statements and the related notes included in Item 8. Financial Statements and Supplementary Data.
Our operating results are generally impacted by changes in the U.S. and Canadian economies and, therefore, we monitor the retail environment using, among other things, certain key industry performance indicators such as the University of Michigan Consumer Sentiment Index (which measures consumers’ views on the future course of the U.S. economy), the National Retail Traffic Index (which measures traffic levels in malls nationwide) and National Retail Sales (which reflects sales volumes of 5,000 businesses as measured by the U.S. Census Bureau). These indices provide insight into consumer spending patterns and shopping behavior in the current retail environment and assist us in assessing our performance as well as the potential impact of

17

industry trends on our future operating results. Additionally, we evaluate a number of key performance indicators including comparable store sales, gross profit, operating income and other performance metrics such as sales per average selling square foot and inventory per selling square foot in assessing our performance.
Executive Overview
Strategy
Our strategy supports our mission to build a family of the world’s best fashion retail brands offering captivating customer experiences that drive long-term loyalty.
To execute our strategy, we are focused on these key strategic imperatives:
•
Grow and maximize profitability of our core brands in current channels and geographies;
•
Extend our core brands into new channels and geographies;
•
Incubate and grow new brands in current channels;
•
Build enabling infrastructure and capabilities;
•
Become the top destination for talent; and
•
Optimize our capital structure.
The following is a discussion of certain of these key strategic imperatives:
Grow and maximize profitability of our core brands in current channels and geographies
The core of Victoria’s Secret is bras and panties. We see clear opportunities for substantial growth in these categories by focusing on product newness and innovation and expanding into under-penetrated market and price segments. In our direct channel, we have the infrastructure in place to support growth well into the future. We believe our direct channel is an important form of brand advertising given the ubiquitous nature of the internet and our large customer file.
The core of Bath & Body Works is its home fragrance and personal care product lines including shower gels, lotions and antibacterial soaps which together make up the majority of sales and profits for the business. Additionally, www.BathandBodyWorks.com continues to exhibit year-over-year growth.
We have a multi-year goal to substantially increase operating margins for our brands through increased sales productivity, merchandise margin expansion and expense control. With regard to merchandise margin expansion, we actively manage our inventory to minimize the level of promotional activity and we will continue to work with our merchandise vendors on innovation, quality, speed and cost. Additionally, we have made a concerted effort to manage home office headcount and overhead expenses. Finally, we have and will continue to optimize our marketing expense by concentrating our expenditures on efficient and return-generating programs. In 2011, we made significant progress towards improving our operating income rate.
Extend our core brands into new channels and geographies
We began our international expansion with the acquisition of La Senza at the beginning of 2007. Since 2008, we have opened 69 Bath & Body Works stores, 11 Victoria’s Secret full assortment stores and 8 Victoria’s Secret Pink stores in Canada. Based on the success we have experienced in Canada, we plan to open an additional 3 Bath & Body Works stores, 5 Victoria’s Secret stores and 2 Victoria’s Secret Pink stores in Canada in 2012.
We continue to expand our presence outside of North America. In 2011, we accomplished the following:
•
Victoria's Secret Beauty and Accessories Stores (formerly Victoria's Secret Travel and Tourism Stores)—Our partners opened 40 additional Victoria’s Secret Beauty and Accessories stores bringing the total to 57. These stores are principally located in airports and tourist destinations. These stores are focused on Victoria’s Secret branded beauty and accessory products and are operated by partners under a franchise or wholesale model. Our partners plan to open an additional 75 Victoria’s Secret Beauty and Accessories stores in 2012.
•
Bath & Body Works Franchise Stores—Our partners opened 12 Bath & Body Works stores in the Middle East in 2011 bringing the total to 18. Our partners plan to open approximately 32 additional stores in 2012.
•
Victoria’s Secret Full Assortment Stores—We announced plans to open a company-owned Victoria’s Secret full assortment store on the corner of New Bond Street and Brook Street in London in 2012 as well as a company-owned mall-based store in London. Additionally, a partner plans to open a total of 3 stores in Dubai and Kuwait City in 2012.

18

•
La Senza Franchise Stores—Our partners opened 49 additional La Senza stores and plan to open a total of approximately 45 new La Senza stores globally in 2012.
Incubate and grow new brands in current channels
Our most successful brands have either been conceived or incubated within Limited Brands, including Victoria’s Secret and

19

Bath & Body Works. We are constantly experimenting with new ideas and our current efforts include standalone Victoria’s Secret Pink and VSX stores and Henri Bendel stores focused on accessories. In 2011, we accomplished the following:
•
Victoria's Secret Pink Stores—We have opened 2 Victoria's Secret Pink stores in the United States in 2011 bringing the total to 15. We plan to open approximately 20 additional stores in 2012.
•
Victoria's Secret VSX Stores—We have opened 1 Victoria's Secret VSX store in the United States in 2011 bringing the total to 2.
•
Henri Bendel—We have opened 8 Henri Bendel stores in the United States in 2011 bringing the total to 19. We plan to open approximately 10 additional stores in 2012.
Build enabling infrastructure and capabilities
Over the past five years, we have opened a new Direct to Consumer distribution center, launched new merchandise planning systems, new supply chain management systems, new financial and other support systems and a new point-of-sale system in our stores. We are using these capabilities to be able to more productively react to current market conditions, improve inventory accuracy, turnover and in-stock levels and deliver more targeted assortments at the store level. In 2012, we plan to continue to roll out new point-of-sale systems to our stores, continue to build new cross-channel functionality at Victoria’s Secret and invest in international support systems.
2011 Overview
Our net sales increased $751 million to $10.364 billion driven by a comparable store sales increase of 10%. Our operating income decreased $46 million to $1.238 billion including $308 million of special items. For additional information on the special items, see the "Adjusted Financial Information" table below. Excluding these special items, we had record performance in 2011 as our adjusted operating income increased $262 million to $1.546 billion driven by the strength of our assortments and store selling efforts, coupled with continued disciplined inventory and expense management.
For additional information related to our 2011 financial performance, see “Results of Operations – 2011 Compared to 2010.”
During 2011, we continued to focus on conservative management and retail fundamentals including:
•
Inventory levels— Our inventory ended 2011 down 3% compared to 2010 and our inventory per selling square foot ended 2011 flat compared to 2010.
•
Capital expenditures—Our capital expenditures of $426 million included $281 million for opening new stores and remodeling and improving existing stores. Remaining capital expenditures were primarily related to spending on technology and infrastructure to support growth.
•
Cash and liquidity—We generated cash flow from operations of $1.266 billion in 2011 and ended the year with $935 million in cash.
We also accomplished the following in terms of the execution of our business strategy in 2011:
•
Significantly improved adjusted operating income and adjusted operating income rate driven primarily by the increase in net sales and related expense leverage;
•
At Victoria's Secret, sales increased 11% and operating income increased 22%;
•
At Bath & Body Works, sales increased 6% and operating income increased 11%;
•
Returned over $2.3 billion to our shareholders through special dividends, share repurchases and our ongoing regular dividends. In January 2012, our Board of Directors approved an increase in our first quarter 2012 common stock dividend from $0.20 to $0.25 per share;
•
Continued expansion of company-owned Bath & Body Works and Victoria’s Secret stores into Canada;
•
Continued expansion of Bath & Body Works stores in the Middle East with a franchise partner;
•
Continued expansion of Victoria’s Secret Beauty and Accessories stores throughout the world;
•
Divested 51% of our third-party apparel sourcing business for pre-tax cash proceeds of $124 million; and
•
Continued repositioning of the La Senza brand. During the fourth quarter of 2011, we initiated a restructuring program designed to resize a portion of La Senza's store fleet and relocate its home office from Montreal, Canada to Columbus,

20

Ohio. We recognized a pre-tax charge consisting of contract termination costs, severance and other costs of $24 million in the fourth quarter of 2011.

21

Adjusted Financial Information
In addition to our results provided in accordance with GAAP above and throughout this Form 10-K, we have provided non-GAAP measurements which present operating income, net income and earnings per share in 2011, 2010 and 2009 on an adjusted basis which removes certain special items. We believe that these special items are not indicative of our ongoing operations due to their size and nature. We use adjusted financial information as key performance measures of results of operations for the purpose of evaluating performance internally. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Instead, we believe that the presentation of adjusted financial information provides additional information to investors to facilitate the comparison of past and present operations. Further, our definition of adjusted financial information may differ from similarly titled measures used by other companies. The table below reconciles the GAAP financial measures to the non-GAAP financial measures. For additional information regarding the special items, see the footnotes to the table in Item 6. Selected Financial Data.
 
2011
 
2010
 
2009
Detail of Special Items included in Operating Income - Income (Expense)
 
 
 
 
 
La Senza Goodwill and Intangible Asset Impairment Charges
$
(232
)
 
$
—

 
$
—

Expense related to Contribution of Express Common Stock to The Limited Brands Foundation
(163
)
 
—

 
—

Gain on Divestiture of Third-party Apparel Sourcing Business
111

 
—

 
—

La Senza Restructuring Charges
(24
)
 
—

 
—

Gain on Divestiture of Joint Venture
—

 
—

 
9

Total Special Items included in Operating Income
$
(308
)
 
$
—

 
$
9

 
 
 
 
 
 
Detail of Special Items included in Other Income - Income (Expense)
 
 
 
 
 
Gain on Sale of Express Common Stock
$
86

 
$
45

 
$
—

Gain on Contribution of Express Common Stock to The Limited Brands Foundation
147

 
—

 
—

Gain on Express Initial Public Offering
—

 
52

 
—

Gain on Distributions from Express
—

 
49

 
—

Gain on Sale of Limited Stores Ownership Interest
—

 
20

 
—

Loss on Extinguishment of Debt
—

 
(25
)
 
—

Gain on Express Dividend
—

 
7

 
—

Total Special Items included in Other Income
$
233

 
$
148

 
$
—

 
 
 
 
 
 
Detail of Special Items included in Provision for Income Taxes - Benefit (Provision)
 
 
 
 
 
Tax effect of Special Items included in Operating Income
$
83

 
$
—

 
$
5

Tax effect of Special Items included in Other Income
(31
)
 
(27
)
 
—

Tax benefit related to favorable resolution of certain discrete income tax matters
56

 
—

 
32

Total Special Items included in Provision for Income Taxes
$
108

 
$
(27
)
 
$
37

 
 
 
 
 
 
Reconciliation of Reported Operating Income to Adjusted Operating Income
 
 
 
 
 
Reported Operating Income
$
1,238

 
$
1,284

 
$
868

Special Items included in Operating Income
308

 
—

 
(9
)
Adjusted Operating Income
$
1,546

 
$
1,284

 
$
859

 
 
 
 
 
 
Reconciliation of Reported Net Income to Adjusted Net Income
 
 
 
 
 
Reported Net Income
$
850

 
$
805

 
$
448

Special Items included in Net Income
(33
)
 
(121
)
 
(46
)
Adjusted Net Income
$
817

 
$
684

 
$
402

 
 
 
 
 
 
Reconciliation of Reported Earnings Per Share to Adjusted Earnings Per Share
 
 
 
 
 
Reported Earnings Per Share
$
2.70

 
$
2.42

 
$
1.37

Special Items included in Earnings Per Share
(0.10
)
 
(0.36
)
 
(0.14
)
Adjusted Earnings Per Share
$
2.60

 
$
2.06

 
$
1.23


22

2012 Outlook
The global retail sector and our business continue to face an uncertain environment and, as a result, we continue to take a conservative stance in terms of the financial management of our business. We will continue to manage our business carefully and we will focus on the execution of the retail fundamentals.
At the same time, we are aggressively focusing on bringing compelling merchandise assortments, marketing and store experiences to our customers. We will look for, and capitalize on, those opportunities available to us in this uncertain environment. We believe that our brands, which lead their categories and offer high emotional content at accessible prices, are well positioned heading into 2012.
Company-Owned Store Data

23

The following table compares 2011 company-owned store data to the comparable periods for 2010 and 2009:
 
 
 
 
 
 
 
 
% Change
  
2011
 
2010
 
2009
 
2011
 
2010
Sales per Average Selling Square Foot
 
 
 
 
 
 
 
 
 
Victoria’s Secret Stores (a)
$
754

 
$
663

 
$
581

 
14
%
 
14
%
Bath & Body Works (a)
658

 
620

 
587

 
6
%
 
6
%
La Senza (b)
409

 
397

 
420

 
3
%
 
(5
)%
Sales per Average Store (in thousands)

 

 

 

 

Victoria’s Secret Stores (a)
$
4,463

 
$
3,886

 
$
3,356

 
15
%
 
16
%
Bath & Body Works (a)
1,561

 
1,468

 
1,393

 
6
%
 
5
%
La Senza (b)
1,362

 
1,333

 
1,335

 
2
%
 
—
 %
Average Store Size (selling square feet)

 

 

 

 

Victoria’s Secret Stores (a)
5,941

 
5,892

 
5,830

 
1
%
 
1
%
Bath & Body Works (a)
2,374

 
2,369

 
2,370

 
—
%
 
—
 %
La Senza
3,312

 
3,343

 
3,366

 
(1
)%
 
(1
)%
Total Selling Square Feet (in thousands)

 

 

 

 

Victoria’s Secret Stores (a)
6,042

 
6,057

 
6,063

 
—
 %
 
—
 %
Bath & Body Works (a)
3,768

 
3,805

 
3,856

 
(1
)%
 
(1
)%
La Senza
762

 
843

 
869

 
(10
)%
 
(3
)%
________________
(a)
Metric relates to company-owned stores in the U.S.
(b)
Metric is presented in Canadian dollars to eliminate the impact of foreign currency fluctuations.


24

The following table compares 2011 company-owned store data to the comparable periods for 2010 and 2009:
 

25

Number of Stores (a)
 
2011
 
2010
 
2009
Victoria’s Secret U.S.
 
 
 
 
 
 
Beginning of Period
 
1,028

 
1,040

 
1,043

Opened
 
8

 
6

 
13

Closed
 
(19
)
 
(18
)
 
(16
)
End of Period
 
1,017

 
1,028

 
1,040

Bath & Body Works U.S.
 

 

 

Beginning of Period
 
1,606

 
1,627

 
1,638

Opened
 
6

 
2

 
9

Closed
 
(25
)
 
(23
)
 
(20
)
End of Period
 
1,587

 
1,606

 
1,627

La Senza
 

 

 

Beginning of Period
 
252

 
258

 
322

Opened
 
—

 
—

 
2

Closed (b)
 
(22
)
 
(6
)
 
(66
)
End of Period
 
230

 
252

 
258

Bath & Body Works Canada
 

 

 

Beginning of Period
 
59

 
31

 
6

Opened
 
10

 
28

 
25

Closed
 
—

 
—

 
—

End of Period
 
69

 
59

 
31

Victoria’s Secret Canada
 

 

 

Beginning of Period
 
12

 
4

 
—

Opened
 
8

 
8

 
4

Closed
 
(1
)
 
—

 
—

End of Period
 
19

 
12

 
4

Henri Bendel
 

 

 

Beginning of Period
 
11

 
11

 
5

Opened
 
8

 
—

 
6

Closed
 
—

 
—

 
—

End of Period
 
19

 
11

 
11

Total
 

 

 

Beginning of Period
 
2,968

 
2,971

 
3,014

Opened
 
40

 
44

 
59

Closed
 
(67
)
 
(47
)
 
(102
)
End of Period
 
2,941

 
2,968

 
2,971

 ________________
(a)
Number of stores excludes independently owned La Senza, Bath & Body Works and Victoria’s Secret stores operated by licensees and franchisees.
(b)
In 2009, we closed 53 La Senza Girl stores.

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


26

Results of Operations—2011 Compared to 2010
Operating Income
The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for 2011 in comparison to 2010:
 
 
 
 
 
 
Operating Income Rate
 
2011
 
2010
 
2011
 
2010
 
(in millions)
 
 
 
 
Victoria’s Secret
$
1,081

 
$
889

 
17.7
%
 
16.1
%
Bath & Body Works
513

 
464

 
19.2
%
 
18.4
%
Other (a) (b) (c) (d) (e)
(356
)
 
(69
)
 
(22.7
)%
 
(4.3
)%
Total
$
1,238

 
$
1,284

 
11.9
%
 
13.4
%
 ________________
(a)
Includes Corporate, Mast Global, Henri Bendel and our international operations including La Senza. In the fourth quarter of 2011, we divested 51% of our third-party apparel sourcing business. As such, results of this business are only included through the first three quarters of 2011. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
(b)
2011 includes a $232 million impairment of goodwill, trade name and a lease-related intangible asset at La Senza. For additional information, see Note 8 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
(c)
2011 includes $163 million of expense associated with the charitable contribution of shares of Express, Inc. to The Limited Brands Foundation. For additional information, see Note 9 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
(d)
2011 includes an $111 million gain associated with the divestiture of the third-party apparel sourcing business. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
(e)
2011 includes $24 million of expense at associated with the restructuring at La Senza. For additional information, see Note 5 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
For 2011, operating income decreased $46 million to $1.238 billion and the operating income rate decreased to 11.9% from 13.4%. Our 2011 operating income includes the impact of $308 million in special items. For additional information, see "Adjusted Financial Information". Excluding these special items, our adjusted operating income increased $262 million to $1.546 billion and the operating income rate increased to 14.9% from 13.4%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for 2011 in comparison to 2010:
 
 
2011
 
2010
 
% Change
 
(in millions)
 
 
Victoria’s Secret Stores
$
4,564

 
$
4,018

 
14
%
Victoria’s Secret Direct
1,557

 
1,502

 
4
%
Total Victoria’s Secret
6,121

 
5,520

 
11
%
Bath & Body Works
2,674

 
2,515

 
6
%
Other (a)
1,569

 
1,578

 
(1
%)
Total Net Sales
$
10,364

 
$
9,613

 
8
%
________________
(a)
Includes Corporate, Mast Global, Henri Bendel and our international operations including La Senza. In the fourth quarter of 2011, we divested 51% of our third-party apparel sourcing business. As such, results of this business are only included through the first three quarters of 2011. Fourth quarter 2010 sales for the third-party apparel sourcing business were $235 million. For additional information, See Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

27

The following tables provide a reconciliation of net sales for 2010 to 2011:
 
 
Victoria’s
Secret
 
Bath &
Body Works
 
Other
 
Total
 
(in millions)
2010 Net Sales
$
5,520

 
$
2,515

 
$
1,578

 
$
9,613

Comparable Store Sales
521

 
132

 
(18
)
 
635

Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
25

 
(14
)
 
126

 
137

Foreign Currency Translation
—

 
—

 
20

 
20

Direct Channels
55

 
41

 
—

 
96

Mast Global Third-party Sales and Other
—

 
—

 
(137
)
 
(137
)
2011 Net Sales
$
6,121

 
$
2,674

 
$
1,569

 
$
10,364


The following table compares 2011 comparable store sales to 2010:
 
 
2011
 
2010
Victoria’s Secret
14
%
 
14
%
Bath & Body Works
6
%
 
5
%
Total Comparable Store Sales (a)
10
%
 
9
%
 ________________
(a)
Includes La Senza, Bath & Body Works Canada, Victoria’s Secret Canada and Henri Bendel.
For 2011, our net sales increased $751 million to $10.364 billion and comparable store sales increased 10%. The increase in our net sales was primarily a result of:
Victoria’s Secret
For 2011, net sales increased $601 million to $6.121 billion and comparable store sales increased 14%. The net sales result was primarily driven by:
•
At Victoria's Secret Stores, net sales increased across most categories including Pink, core lingerie, beauty and loungewear driven by a compelling merchandise assortment that incorporated newness, innovation and fashion as well as in-store execution; and
•
At Victoria's Secret Direct, net sales increased 4% with increases across most categories including Pink, swimwear, core lingerie and apparel driven by a compelling merchandise assortment.
The increase in comparable store sales was driven by an increase in total transactions and higher average dollar sales.
Bath & Body Works
For 2011, net sales increased $159 million to $2.674 billion and comparable store sales increased 6%. From a merchandise category perspective, net sales were driven by growth in the Signature Collection, home fragrance and antibacterial categories partially offset by a decrease in our giftset business. The increase in comparable store sales was driven by an increase in total transactions and a slight increase in average dollar sales.
Other
For 2011, net sales decreased $9 million to $1.569 billion primarily related to the divestiture of the third-party apparel sourcing business in the fourth quarter of 2011. This decrease was partially offset by new Victoria's Secret and Bath & Body Works stores in Canada, revenue from our international wholesale and franchise business and favorable currency fluctuations related to our Canadian businesses.
Gross Profit
For 2011, our gross profit increased $426 million to $4.057 billion and our gross profit rate (expressed as a percentage of net sales) increased to 39.1% from 37.8% primarily as a result of:

28

Victoria’s Secret
For 2011, the gross profit increase was primarily driven by:
•
At Victoria's Secret Stores, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales. The increase in merchandise margin was partially offset by an increase in buying and occupancy expenses primarily driven by higher net sales and store related activity; and
•
At Victoria's Secret Direct, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales. In addition, buying and occupancy expenses decreased primarily due to lower catalogue and fulfillment costs.
The gross profit rate increase was driven primarily by leverage on buying and occupancy expenses from the increase in net sales partially offset by a decrease in the merchandise margin rate due to increased product costs and promotional activity.
Bath & Body Works
For 2011, the gross profit increase was driven by higher merchandise margin dollars related to the increase in net sales. The increase in merchandise margin dollars was partially offset by an increase in buying and occupancy expenses driven by higher occupancy costs related to the increase in net sales and store related activity. The gross profit rate was flat driven by a decrease in the merchandise margin rate offset by leverage on buying and occupancy expense.
Other
For 2011, the gross profit increase was primarily driven by net sales increases in our Canadian Victoria's Secret and Bath & Body Works stores, increases in Mast Global sales as well as revenue increases from our international wholesale and franchise business. These increases were partially offset by decline in gross profit at La Senza driven by promotional activities and restructuring charges. The gross profit rate increased due to the divestiture of our third-party apparel sourcing business.
General, Administrative and Store Operating Expenses
For 2011, our general, administrative and store operating expenses increased $357 million to $2.698 billion primarily driven by $163 million of expense associated with the charitable contribution to The Limited Brands Foundation. Additionally, store selling and marketing expenses increased related to the increase in net sales, partially offset by a decrease in incentive compensation.
The general, administrative and store operating expense rate increased to 26.0% from 24.4% due to the charitable contribution to The Limited Brands Foundation.
Impairment of Goodwill and Other Intangible Assets
In the fourth quarter of 2011, we recognized charges totaling $232 million related to the impairment of goodwill, trade name, and a lease-related intangible asset at La Senza. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2011 Consolidated Statement of Income. For additional information, see Critical Accounting Policies and Estimates and Note 8 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
In the fourth quarter of 2010, we recognized charges totaling $6 million related to the impairment of a sub-brand trade name at Victoria’s Secret. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2010 Consolidated Statement of Income. For additional information, see Critical Accounting Policies and Estimates and Note 8 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
Divestiture of Third-party Apparel Sourcing Business
In the fourth quarter of 2011, we recognized a pre-tax gain of $111 million associated with the divestiture of 51% of our ownership interest in our third-party apparel sourcing business for pre-tax cash proceeds of $124 million. The proceeds are included in Proceeds from Divestiture of Third-party Apparel Sourcing Business within the Investing Activities section on the 2011 Consolidated Statement of Cash Flows. The pre-tax gain is included in Gain on Divestiture of Third-party Apparel Sourcing Business on the 2011 Consolidated Statement of Income. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

29

Other Income and Expenses
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for 2011 and 2010:
 
 
2011
 
2010
Average daily borrowings (in millions)
$
3,401

 
$
2,602

Average borrowing rate (in percentages)
6.6
%
 
7.0
%

For 2011, our interest expense increased $38 million to $246 million. The increase was primarily driven by an increase in average borrowings related to the March 2011 $1 billion note issuance partially offset by decrease in the average borrowing rate.
Other Income
For 2011, our other income increased $60 million to $235 million primarily due to a $147 million gain related to the charitable contribution of our remaining shares of Express, Inc. to The Limited Brands Foundation completed in July 2011 and an $86 million gain related to the sale of a portion of our shares of Express, Inc. completed in April 2011. These 2011 items are partially offset by the following 2010 items:
•
a $52 million gain related to the initial public offering of Express including the sale of a portion of our shares;
•
a $49 million gain related to a $57 million cash distribution from Express;
•
a $45 million gain related to the sale of Express stock;
•
a $20 million gain related to the divestiture of our remaining 25% ownership in Limited Stores;
•
a $25 million loss on the extinguishment of debt; and
•
a $7 million gain related to a dividend payment from Express.
Provision for Income Taxes
For 2011, our effective tax rate decreased to 30.7% from 35.6%. The 2011 rate was lower than our combined estimated federal and state statutory rate of 39.0% primarily due to the tax benefit associated with our charitable contribution of Express shares to The Limited Brands Foundation as well as the nontaxable foreign portion of the divestiture of our third-party apparel sourcing business. The 2010 rate was lower than our combined estimated federal and state statutory rate of 38.5% primarily due to the divestiture of our remaining 25% ownership in Limited Stores, which resulted in the recognition of the capital loss associated with the 2007 divestiture of 75% of our ownership in Limited Stores.
Results of Operations—Fourth Quarter of 2011 Compared to Fourth Quarter of 2010
Operating Income
The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for the fourth quarter of 2011 in comparison to the fourth quarter of 2010:
 
Fourth Quarter
 
Operating Income Rate
 
2011
 
2010
 
2011
 
2010
 
(in millions)
 
 
 
 
Victoria’s Secret
$
447

 
$
398

 
21.4
%
 
21.0
%
Bath & Body Works
348

 
330

 
30.9
%
 
30.5
%
Other (a) (b) (c) (d)
(154
)
 
(14
)
 
(51.8
)%
 
(3.0
)%
Total
$
641

 
$
714

 
18.2
%
 
20.6
%
 ________________
(a)
Includes Corporate, Mast Global, Henri Bendel and our international operations including La Senza. In the fourth quarter of 2011, we divested 51% of our third-party apparel sourcing business. As such, results of this business are only included through the first three quarters of 2011. For additional information, See Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
(b)
2011 includes a $232 million impairment of goodwill, the trade name, and a lease-related intangible asset at La Senza. For additional information, see Note 8 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

30

(c)
2011 includes a $111 million gain associated with the divestiture of the third-party apparel sourcing business. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
(d)
2011 includes $24 million of expense associated with the restructuring of our La Senza business. For additional information, see Note 5 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
For the fourth quarter of 2011, operating income decreased $73 million to $641 million and the operating income rate decreased to 18.2% from 20.6%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for the fourth quarter of 2011 in comparison to the fourth quarter of 2010:
 
 
 
2011
 
2010
 
% Change
Fourth Quarter
 
(in millions)
 
 
Victoria’s Secret Stores
 
$
1,572

 
$
1,393

 
13
%
Victoria’s Secret Direct
 
518

 
503

 
3
%
Total Victoria’s Secret
 
2,090

 
1,896

 
10
%
Bath & Body Works
 
1,127

 
1,081

 
4
%
Other (a)
 
298

 
479

 
(38
)%
Total Net Sales
 
$
3,515

 
$
3,456

 
2
%
 ________________
(a)
Includes Corporate, Mast Global, Henri Bendel and our international operations including La Senza. In the fourth quarter of 2011, we divested 51% of our third-party apparel sourcing business. As such, results of this business are only included through the first three quarters of 2011. Fourth quarter 2010 sales for the third-party apparel sourcing business were $235 million. For additional information, See Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
The following table provides a reconciliation of net sales for the fourth quarter of 2010 to the fourth quarter of 2011:
 
 
 
Victoria’s
Secret
 
Bath & Body
Works
 
Other
 
Total
Fourth Quarter
 
(in millions)
2010 Net Sales
 
$
1,896

 
$
1,081

 
$
479

 
$
3,456

Comparable Store Sales
 
163

 
33

 
(7
)
 
189

Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
 
16

 
—

 
41

 
57

Foreign Currency Translation
 
—

 
—

 
(3
)
 
(3
)
Direct Channels
 
15

 
13

 
—

 
28

Mast Global Third-party Sales and Other
 
—

 
—

 
(212
)
 
(212
)
2011 Net Sales
 
$
2,090

 
$
1,127

 
$
298

 
$
3,515


The following table compares fourth quarter of 2011 comparable store sales to fourth quarter of 2010:
 
Fourth Quarter
 
2011
 
2010
Victoria’s Secret Stores
 
12
%
 
15
%
Bath & Body Works
 
3
%
 
6
%
Total Comparable Store Sales (a)
 
7
%
 
10
%
________________
(a)
Includes La Senza, Bath & Body Works Canada, Victoria’s Secret Canada and Henri Bendel.

31

For the fourth quarter of 2011, our net sales increased $59 million to $3.515 billion and comparable store sales increased 7%. The increase in our net sales was primarily as a result of:
Victoria’s Secret
For the fourth quarter of 2011, net sales increased $194 million to $2.090 billion and comparable store sales increased 12%. The increase in net sales was primarily driven by:
•
At Victoria’s Secret Stores, net sales increased across most categories, including Pink, core lingerie, loungewear and beauty driven by a compelling merchandise assortment that incorporated newness, innovation and fashion as well as in-store execution; and
•
At Victoria’s Secret Direct, net sales increased 3% related to increases in Pink, apparel, and core lingerie.

The increase in comparable store sales was primarily driven by an increase in total transactions and higher average dollar sales at Victoria's Secret Stores.
Bath & Body Works
For the fourth quarter of 2011, net sales increased $46 million to $1.127 billion and comparable store sales increased 3%. From a merchandise category perspective, net sales were driven by growth in the Signature Collection, home fragrance and antibacterial categories which all incorporated newness and innovation, partially offset by a decline in our giftset business. The increase in comparable store sales was driven by an increase in total transactions partially offset by our slightly lower average dollar sales.
Other
For the fourth quarter of 2011, net sales decreased $181 million to $298 million primarily related to the divestiture of the third-party apparel sourcing business in the fourth quarter of 2011. This decrease was partially offset by new Victoria's Secret and Bath & Body Works stores in Canada and revenue from our international wholesale and franchise business.
Gross Profit
For the fourth quarter of 2011, our gross profit increased $83 million to $1.528 billion and our gross profit rate (expressed as a percentage of net sales) increased to 43.5% from 41.8% primarily as a result of:
Victoria’s Secret
For the fourth quarter of 2011, gross profit increased primarily driven by:
•
At Victoria's Secret Stores, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses driven by higher net sales and store related activity; and
•
At Victoria's Secret Direct, gross profit was flat as the decrease in merchandise margin dollars driven by increased product costs and promotional activity was offset by a decrease in buying and occupancy expense.
The gross profit rate was flat driven primarily by leverage on buying and occupancy expenses from the increase in net sales offset by a decrease in the merchandise margin rate from increased product costs and promotional activity.
Bath & Body Works
For the fourth quarter of 2011, the gross profit increase was driven by higher merchandise margin dollars related to the increase in net sales.
The gross profit rate decreased driven by a decrease in the merchandise margin rate related to increased product costs and promotional activity partially offset by a decrease in buying and occupancy expense rate due to leverage associated with higher sales.
Other
For the fourth quarter of 2011, the gross profit decrease was primarily driven by the restructuring charges at La Senza and the divestiture of the third-party apparel sourcing business partially offset by net sales increases in our Canadian Victoria's Secret and Bath & Body Works stores as well as revenue increases from our international wholesale and franchise business. The gross profit rate increased due to the divestiture of the third-party apparel sourcing business in the fourth quarter of 2011 which removed lower margin sales.

32

General, Administrative and Store Operating Expenses
For the fourth quarter of 2011, our general, administrative and store operating expenses increased $40 million to $765 million primarily driven by an increase in store selling expenses and $7 million in restructuring charges related to our La Senza business.
The general, administrative and store operating expense rate increased to 21.8% from 21.0% due to the factors cited above.
Impairment of Goodwill and Other Intangible Assets
In the fourth quarter of 2011, we recognized charges totaling $232 million related to the impairment of goodwill, the trade name and a lease-related intangible asset at La Senza. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2011 Consolidated Statement of Income. For additional information, see Critical Accounting Policies and Estimates and Note 8 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
In the fourth quarter of 2010, we recognized charges totaling $6 million related to the impairment of a sub-brand trade name at Victoria’s Secret. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2010 Consolidated Statement of Income. For additional information, see Critical Accounting Policies and Estimates and Note 8 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
Gain on Divestiture of Third-party Apparel Sourcing Business
In the fourth quarter of 2011, we recognized a pre-tax gain of $111 million associated with the divestiture of 51% of our ownership interest in our third-party apparel sourcing business for pre-tax cash proceeds of $124 million. The proceeds are included in Proceeds from Divestiture of Third-party Apparel Sourcing Business within the Investing Activities section on the 2011 Consolidated Statement of Cash Flows. The pre-tax gain is included in Gain on Divestiture of Third-party Apparel Sourcing Business on the 2011 Consolidated Statement of Income. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
Other Income and Expense
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for the fourth quarter of 2011 and 2010:
 
Fourth Quarter
 
2011
 
2010
Average daily borrowings (in millions)
 
$
3,556

 
$
2,560

Average borrowing rate (in percentages)
 
6.8
%
 
7.1
%

For the fourth quarter of 2011, our interest expense increased $15 million to $63 million primarily driven by an increase in average borrowings related to the March 2011 $1 billion note issuance, partially offset by a decrease in the average borrowing rate.
Other Income
For the fourth quarter of 2011, our other income decreased $51 million to $2 million. The decrease was primarily driven by a $45 million gain related to the sale of Express common stock in 2010 and a $7 million gain related to a dividend payment from Express in 2010.
Provision for Income Taxes
For the fourth quarter of 2011, our effective tax rate increased to 38.0% from 37.0%. The 2011 rate was lower than our combined estimated federal and state statutory rate of 39.0% primarily due to the tax benefit associated with the nontaxable foreign portion of the divestiture of our third-party apparel sourcing business. The 2010 rate was lower than our combined estimated federal and state statutory rate of 38.5% primarily due to the resolution of certain tax matters.


33

Results of Operations—2010 Compared to 2009
Operating Income
The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for 2010 in comparison to 2009:
 
 
 
 
 
 
Operating Income Rate
 
2010
 
2009
 
2010
 
2009
 
(in millions)
 
 
 
 
Victoria’s Secret
$
888

 
$
579

 
16.1
%
 
11.8
%
Bath & Body Works
464

 
358

 
18.4
%
 
15.0
%
Other (a) (b)
(68
)
 
(69
)
 
(4.3
)%
 
(5.0
)%
Total
$
1,284

 
$
868

 
13.4
%
 
10.1
%
 ________________
(a)
Includes Corporate, Mast Global, Henri Bendel and our international operations including La Senza. See "Segment Reporting Change".
(b)
2009 includes a $9 million gain associated with the reversal of an accrued contractual liability. For additional information, see Note 9 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
For 2010, operating income increased $416 million to $1.284 billion and the operating income rate increased to 13.4% from 10.1%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for 2010 in comparison to 2009:
 
 
2010
 
2009
 
% Change
 
(in millions)
 
 
Victoria’s Secret Stores
$
4,018

 
$
3,496

 
15
%
Victoria’s Secret Direct
1,502

 
1,388

 
8
%
Total Victoria’s Secret
5,520

 
4,884

 
13
%
Bath & Body Works
2,515

 
2,383

 
6
%
Other (a)
1,578

 
1,365

 
16
%
Total Net Sales
$
9,613

 
$
8,632

 
11
%
________________
(a)
Includes Corporate, Mast Global, Henri Bendel and our international operations including La Senza. See "Segment Reporting Change".
The following tables provide a reconciliation of net sales for 2009 to 2010:
 
Victoria’s
Secret
 
Bath &
Body Works
 
Other
 
Total
 
(in millions)
2009 Net Sales
$
4,884

 
$
2,383

 
$
1,365

 
$
8,632

Comparable Store Sales
453

 
105

 
(8
)
 
550

Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
69

 
(6
)
 
51

 
114

Foreign Currency Translation
—

 
—

 
41

 
41

Direct Channels
114

 
33

 
—

 
147

Mast Global Third-party Sales and Other
—

 
—

 
129

 
129

2010 Net Sales
$
5,520

 
$
2,515

 
$
1,578

 
$
9,613



34

The following table compares 2010 comparable store sales to 2009:
 
 
2010
 
2009
Victoria’s Secret
14
%
 
(6
)%
Bath & Body Works
5
%
 
(1
)%
Total Comparable Store Sales (a)
9
%
 
(4
)%
 ________________
(a)
Includes La Senza, Bath & Body Works Canada, Victoria’s Secret Canada and Henri Bendel.
For 2010, our net sales increased $981 million to $9.613 billion and comparable store sales increased 9%. The increase in our net sales was primarily a result of:
Victoria’s Secret
For 2010, net sales increased $636 million to $5.520 billion and comparable store sales increased 14%. The net sales result was primarily driven by:
•
At Victoria’s Secret Stores, net sales increased across most categories including Pink, core lingerie and beauty driven by a compelling merchandise assortment that incorporated newness, innovation and fashion; and
•
At Victoria’s Secret Direct, net sales increased 8% with increases across most categories, including intimates and swimwear driven by a compelling merchandise assortment.
The increase in comparable store sales was driven by an increase in total transactions and higher average dollar sales.
Bath & Body Works
For 2010, net sales increased $132 million to $2.515 billion and comparable store sales increased 5%. From a merchandise category perspective, net sales were driven by growth in the Signature Collection (including the re-launch of the men’s line), home fragrance and antibacterial categories which all incorporated newness and innovation. The increase in comparable store sales was driven by an increase in total transactions and higher average dollar sales.
Other
For 2010, net sales increased $213 million to $1.578 billion related to new Bath & Body Works stores in Canada, the introduction of Victoria’s Secret stores in Canada, revenue from our international wholesale and franchise business and an increase in third-party sales at Mast Global. In addition, Mast Global recognized 100% of merchandise sourcing sales to Express and Limited Stores in the third and fourth quarters of 2010. For additional information, see Note 9 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data. The increase in net sales was partially offset by a decrease in net sales at La Senza due to the closure of the La Senza Girl freestanding stores, a decline in the La Senza International business due to exiting the La Senza Girl concept as well as decreases in the sales of sleepwear and beauty in our Canadian stores.
Gross Profit
For 2010, our gross profit increased $603 million to $3.631 billion and our gross profit rate (expressed as a percentage of net sales) increased to 37.8% from 35.1% primarily as a result of:
Victoria’s Secret
For 2010, gross profit increased at Victoria’s Secret Stores and Victoria’s Secret Direct driven by higher merchandise margin dollars as a result of the increase in net sales and decreased promotional activity.
The increase in the gross profit rate was driven primarily by an increase in the merchandise margin rate due to the factors cited above. In addition, the buying and occupancy expense rate decreased due to leverage associated with higher net sales.
Bath & Body Works
For 2010, gross profit increased primarily driven by higher merchandise margin dollars due to an increase in net sales and a decrease in cost of goods sold due to cost reductions.
The increase in the gross profit rate was driven by increases in the merchandise margin rate due to the factors cited above.

35

Other
For 2010, gross profit increased primarily driven by higher merchandise margin dollars primarily related to the expansion of our Canadian Bath & Body Works and Victoria’s Secret stores. The gross profit rate decreased due to an increase in lower margin Mast Global third-party sales, including the impact of recognizing 100% of Mast Global’s sales to Express and Limited Stores in the third and fourth quarters of 2010. For additional information, see Note 9 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
General, Administrative and Store Operating Expenses
For 2010, our general, administrative and store operating expenses increased $175 million to $2.341 billion primarily driven by:
•
an increase in store selling expenses, which includes costs related to new stores in Canada;
•
higher payroll including incentive compensation costs;
•
higher stock compensation costs due to a lower forfeiture rate as a result of lower associate turnover; and
•
an increase in marketing expenses.
The general, administrative and store operating expense rate decreased to 24.3% from 25.1% due to leverage associated with higher net sales.
Impairment of Goodwill and Other Intangible Assets
In the fourth quarter of 2010, we recognized charges totaling $6 million related to the impairment of a sub-brand trade name at Victoria’s Secret. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2010 Consolidated Statement of Income. For additional information, see Critical Accounting Policies and Estimates and Note 8 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
In the fourth quarter of 2009, we recognized charges totaling $3 million related to the impairment of the La Senza Girl trade name and other minor trade names. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2009 Consolidated Statement of Income. For additional information, see Critical Accounting Policies and Estimates and Note 8 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
Net Gain on Joint Ventures
In July 2009, we recognized a pre-tax gain of $9 million ($14 million net of related tax benefits) associated with the reversal of an accrued contractual liability as a result of the divestiture of a joint venture. The pre-tax gain is included in Net Gain on Joint Ventures on the 2009 Consolidated Statement of Income.
Other Income and Expenses
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for 2010 and 2009:
 
 
2010
 
2009
Average daily borrowings (in millions)
$
2,602

 
$
2,982

Average borrowing rate (in percentages)
7.0
%
 
6.7
%

For 2010, our interest expense decreased $29 million to $208 million. The decrease was primarily driven by a decrease in average borrowings, partially offset by the increase in average borrowing rates. For 2010, our interest expense included $10 million of expense associated with terminating our remaining participating interest rate swap arrangements. For 2009, our interest expense included $10 million in fees which were expensed associated with the amendment of our Revolving Facility and Term Loan and $8 million of expense associated with terminating certain participating interest rate swap arrangements.
Other Income
For 2010, our other income increased $156 million to $173 million primarily due to:
•
a $52 million gain related to the initial public offering of Express including the sale of a portion of our shares;
•
a $49 million gain related to a $57 million cash distribution from Express;

36

•
a $45 million gain related to the sale of Express stock;
•
a $20 million gain related to the divestiture of our remaining 25% ownership in Limited Stores;
•
a $7 million gain related to a dividend payment from Express; and
•
higher income from our equity investments in Express and Limited Stores.
Partially offset by:
•
a $25 million loss on extinguishment of a portion of our 2012 and 2014 Notes.
Provision for Income Taxes
For 2010, our effective tax rate increased to 35.6% from 31.1%. The 2010 rate was lower than our combined estimated federal and state statutory rate of 38.5% primarily due to the divestiture of our remaining 25% ownership in Limited Stores, which resulted in the recognition of the capital loss associated with the 2007 divestiture of 75% of our ownership in Limited Stores. The 2009 rate was lower than our combined estimated federal and state statutory rate primarily due to the reversal of deferred tax liabilities on unremitted foreign earnings due to international restructuring and the resolution of certain tax matters in 2009.
Results of Operations—Fourth Quarter of 2010 Compared to Fourth Quarter of 2009
Operating Income
The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for the fourth quarter of 2010 in comparison to the fourth quarter of 2009:
 
 
Fourth Quarter
 
Operating Income Rate
 
2010
 
2009
 
2010
 
2009
 
(in millions)
 
 
 
 
Victoria’s Secret
$
398

 
$
318

 
21.0
%
 
19.1
%
Bath & Body Works
330

 
294

 
30.5
%
 
29.2
%
Other (a)
(14
)
 
(26
)
 
(3.0
)%
 
(6.8
)%
Total
$
714

 
$
586

 
20.6
%
 
19.1
%
 ________________
(a)
Includes Corporate, Mast Global, Henri Bendel and our international operations including La Senza. See "Segment Reporting Change".
For the fourth quarter of 2010, operating income increased $128 million to $714 million and the operating income rate increased to 20.6% from 19.1%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for the fourth quarter of 2010 in comparison to the fourth quarter of 2009:
 
 
2010
 
2009
 
% Change
Fourth Quarter
 
(in millions)
 
 
Victoria’s Secret Stores
 
$
1,393

 
$
1,201

 
16
%
Victoria’s Secret Direct
 
503

 
463

 
9
%
Total Victoria’s Secret
 
1,896

 
1,664

 
14
%
Bath & Body Works
 
1,081

 
1,008

 
7
%
Other (a)
 
479

 
391

 
23
%
Total Net Sales
 
$
3,456

 
$
3,063

 
13
%
 ________________
(a)
Includes Corporate, Mast Global, Henri Bendel and our international operations including La Senza. See "Segment Reporting Change".

37

The following table provides a reconciliation of net sales for the fourth quarter of 2009 to the fourth quarter of 2010:
 
 
 
Victoria’s
Secret
 
Bath & Body
Works
 
Other
 
Total
Fourth Quarter
 
(in millions)
2009 Net Sales
 
$
1,664

 
$
1,008

 
$
391

 
$
3,063

Comparable Store Sales
 
173

 
53

 
(6
)
 
220

Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
 
18

 
3

 
30

 
51

Foreign Currency Translation
 
—

 
—

 
9

 
9

Direct Channels
 
41

 
17

 
—

 
58

Mast Global Third-party Sales and Other
 
—

 
—

 
55

 
55

2010 Net Sales
 
$
1,896

 
$
1,081

 
$
479

 
$
3,456


The following table compares fourth quarter of 2010 comparable store sales to fourth quarter of 2009:
 
Fourth Quarter
 
2010
 
2009
Victoria’s Secret
 
15
%
 
—
%
Bath & Body Works
 
6
%
 
2
%
Total Comparable Store Sales (a)
 
10
%
 
1
%
________________
(a)
Includes La Senza, Bath & Body Works Canada, Victoria’s Secret Canada and Henri Bendel.
For the fourth quarter of 2010, our net sales increased $393 million to $3.456 billion and comparable store sales increased 10%. The increase in our net sales was primarily as a result of:
Victoria’s Secret
For the fourth quarter of 2010, net sales increased $232 million to $1.896 billion and comparable store sales increased 15%. The increase in net sales was primarily driven by:
•
At Victoria’s Secret Stores, net sales increased across most categories, including Pink, core lingerie and beauty driven by a compelling merchandise assortment that incorporated newness, innovation and fashion; and
•
At Victoria’s Secret Direct, net sales increased 9% with increases across most categories, including intimates and swimwear, driven by a compelling merchandise assortment. This was partially offset by a decrease in apparel.
The increase in comparable store sales was driven by an increase in total transactions and higher average dollar sales.
Bath & Body Works
For the fourth quarter of 2010, net sales increased $73 million to $1.081 billion and comparable store sales increased 6%. From a merchandise category perspective, net sales were driven by the Signature Collection (including the re-launch of the men’s line), home fragrance and antibacterial categories which all incorporated newness and innovation.
The increase in comparable store sales was driven by an increase in total transactions and higher average dollar sales.
Other
For the fourth quarter of 2010, net sales increased $88 million to $479 million primarily related to new Bath & Body Works stores in Canada, the introduction of Victoria’s Secret stores in Canada, revenue from our international wholesale and franchise business and an increase in third-party sales at Mast Global. In addition, Mast Global recognized 100% of merchandise sourcing sales to Express and Limited Stores in the fall season of 2010. For additional information, see Note 9 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data. The increase in net sales was partially offset by a decrease in net sales at La Senza due to declines in the sleepwear and beauty categories and the closure of the La Senza Girl freestanding stores.

38

Gross Profit
For the fourth quarter of 2010, our gross profit increased $196 million to $1.445 billion and our gross profit rate (expressed as a percentage of net sales) increased to 41.8% from 40.8% primarily as a result of:
Victoria’s Secret
For the fourth quarter of 2010, gross profit increased primarily driven by:
•
At Victoria’s Secret Stores, gross profit increased driven by higher merchandise margin dollars as a result of the increase in net sales and decreased promotional activity. The increase in merchandise margin dollars was slightly offset by an increase in buying and occupancy expenses primarily related to increased occupancy costs driven by higher net sales; and
•
At Victoria’s Secret Direct, gross profit increased driven by higher merchandise margin dollars as a result of an increase in net sales and a decrease in promotional activity.
The increase in the gross profit rate was driven primarily by the decrease in the buying and occupancy expense rate due to leverage associated with higher net sales as well as an increase in the merchandise margin rate due the factors cited above.
Bath & Body Works
For the fourth quarter of 2010, gross profit increased primarily driven by higher merchandise margin dollars as a result of an increase in net sales and a decrease in cost of goods sold due to cost reductions. Buying and occupancy expenses increased driven by higher occupancy and direct fulfillment costs, primarily due to the increase in net sales.
The increase in the gross profit rate was driven by an increase in the merchandise margin rate, partially offset by an increase in the buying and occupancy expense rate due to the factors cited above.
Other
For the fourth quarter of 2010, gross profit increased primarily driven by the expansion of our Canadian Bath & Body Works and Victoria’s Secret stores. The gross profit rate decreased due to an increase in lower margin Mast Global third-party sales, including the impact of recognizing 100% of Mast Global’s sales to Express and Limited Stores in the fourth quarter. For additional information, see Note 9 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
General, Administrative and Store Operating Expenses
For the fourth quarter of 2010, our general, administrative and store operating expenses increased $65 million to $725 million primarily driven by:
•
an increase in store selling expenses, which includes costs related to new stores in Canada;
•
higher stock compensation costs due to a lower forfeiture rate as a result of lower associate turnover; and
•
an increase in marketing expenses.
The general, administrative and store operating expense rate decreased to 21.0% from 21.5% due to leverage associated with higher net sales.
Impairment of Goodwill and Other Intangible Assets
In the fourth quarter of 2010, we recognized charges totaling $6 million related to the impairment of a sub-brand trade name at Victoria’s Secret. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2010 Consolidated Statement of Income. For additional information, see Critical Accounting Policies and Estimates and Note 8 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
In the fourth quarter of 2009, we recognized charges totaling $3 million related to the impairment of the La Senza Girl trade name and other minor trade names. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2009 Consolidated Statement of Income. For additional information, see Critical Accounting Policies and Estimates and Note 8 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

39

Other Income and Expense
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for the fourth quarter of 2010 and 2009:
 
Fourth Quarter
 
2010
 
2009
Average daily borrowings (in millions)
 
$
2,560

 
$
2,857

Average borrowing rate (in percentages)
 
7.1
%
 
6.8
%

For the fourth quarter of 2010, our interest expense decreased $13 million to $48 million. The decrease was primarily driven by $8 million of expense in 2009 associated with terminating a portion of our participating interest rate swap arrangements as well as a decrease in average borrowings, partially offset by an increase in average borrowing rates.
Other Income
For the fourth quarter of 2010, our other income increased $42 million to $53 million. The increase was primarily driven by a $45 million gain related to the sale of Express common stock and a $7 million gain related to a dividend payment from Express. The increase in other income was partially offset by ceasing recognition of equity method income from Express beginning in the third quarter of 2010 as a result of the change in accounting from the equity method to the cost method. We also ceased recognizing equity method income from Limited Stores beginning in the second quarter of 2010 in conjunction with the divestiture of our remaining ownership interest.
Provision for Income Taxes
For the fourth quarter of 2010, our effective tax rate increased to 37.0% from 33.6%. The 2010 rate was lower than our combined estimated federal and state statutory rate of 38.5% primarily due to the resolution of certain tax matters. The 2009 rate was lower than our combined estimated federal and state statutory rate primarily due to the reversal of deferred tax liabilities on unremitted foreign earnings due to international restructuring in 2009.

FINANCIAL CONDITION
Liquidity and Capital Resources
Liquidity, or access to cash, is an important factor in determining our financial stability. We are committed to maintaining adequate liquidity. Cash generated from our operating activities provides the primary resources to support current operations, growth initiatives, seasonal funding requirements and capital expenditures. Our cash provided from operations is impacted by our net income and working capital changes. Our net income is impacted by, among other things, sales volume, seasonal sales patterns, success of new product introductions and profit margins. Historically, sales are higher during the fourth quarter of the fiscal year due to seasonal and holiday-related sales patterns. Generally, our need for working capital peaks during the summer and fall months as inventory builds in anticipation of the holiday period.
Our total cash and cash equivalents held by foreign subsidiaries were $561 million as of January 28, 2012. Under current tax laws and regulations, if cash and cash equivalents held outside the U.S. are repatriated to the U.S., in certain circumstances we may be subject to additional U.S. income taxes and foreign withholding taxes.

40

The following table provides our long-term debt balance as of January 28, 2012 and January 29, 2011:

January 28, 2012

January 29, 2011

(in millions)
Senior Unsecured Debt with Subsidiary Guarantee



$1 billion, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”)
1,000


—

$500 million, 8.50% Fixed Interest Rate Notes due June 2019, Less Unamortized Discount (“2019 Notes”)
488


486

$400 million, 7.00% Fixed Interest Rate Notes due May 2020 (“2020 Notes”)
400


400

Total Senior Unsecured Debt with Subsidiary Guarantee
1,888


886

Senior Unsecured Debt



$700 million, 6.90% Fixed Interest Rate Notes due July 2017, Less Unamortized Discount (“2017 Notes”) (a)
724


699

$350 million, 6.95% Fixed Interest Rate Debentures due March 2033, Less Unamortized Discount (“2033 Notes”)
350


350

$300 million, 7.60% Fixed Interest Rate Notes due July 2037, Less Unamortized Discount (“2037 Notes”)
299


299

5.25% Fixed Interest Rate Notes due November 2014, Less Unamortized Discount (“2014 Notes”) (b)
220


215

6.125% Fixed Interest Rate Notes due December 2012, Less Unamortized Discount (“2012 Notes”) (c)
57


58

Total Senior Unsecured Debt
1,650


1,621

Total
3,538


2,507

Current Portion of Long-term Debt (c)
(57
)

—

Total Long-term Debt, Net of Current Portion
3,481


2,507

________________
(a)
The balances include a fair value interest rate hedge adjustment which increased the debt balance by $25 million as of January 28, 2012 and $0 million as of January 29, 2011.
(b)
The principal balance outstanding was $213 million as of both January 28, 2012 and January 29, 2011. The balances include a fair value interest rate hedge adjustment which increased the debt balance by $7 million as of January 28, 2012 and $2 million as of January 29, 2011.
(c)
The principal balance outstanding was $57 million as of both January 28, 2012 and January 29, 2011. The balances include a fair value interest rate hedge adjustment which increased the debt balance by $0 million as of January 28, 2012 and $1 million as of January 29, 2011.

Issuance of Notes
In May 2010, we issued $400 million of 7.00% notes due in May 2020 utilizing an existing shelf registration under which up to $1 billion of debt securities, common and preferred stock and other securities can be issued. The 2020 Notes are jointly and severally guaranteed on a full and unconditional basis by the guarantors. The net proceeds from the issuance were $390 million, which included transaction costs of $10 million.
In March 2011, we issued $1 billion of 6.625% notes due in April 2021 utilizing an existing shelf registration under which debt securities, common and preferred stock and other securities can be issued. The 2021 Notes are jointly and severally guaranteed on a full and unconditional basis by the guarantors. The net proceeds from the issuance were $981 million, which included transaction costs of $19 million.
Subsequent to January 28, 2012, we issued $1 billion of 5.625% notes due in February 2022 (“2022 Notes”) utilizing an existing shelf registration under which debt securities, common and preferred stock and other securities could be issued. The 2022 Notes are jointly and severally guaranteed on a full and unconditional basis by the guarantors. The net proceeds from the issuance were $985 million, which included transaction costs of $15 million.
Repurchase of Notes
In May 2010, we used a portion of the proceeds from the 2020 Notes to repurchase $134 million of our 2012 Notes for $144 million. We used the remaining portion of the proceeds from the 2020 Notes to repurchase $266 million of the 2014 Notes for $277 million.

41

In August 2010, we repurchased $20 million and $1 million of 2014 Notes and 2012 Notes, respectively, through open-market transactions.
Revolving Facility
On July 15, 2011, we entered into an amendment and restatement (“Amendment”) of our secured revolving credit facility (“Revolving Facility”). The Amendment increased the aggregate amount of the commitments of the lenders under the Revolving Facility from $800 million to $1 billion and extended the termination date from August 1, 2014 to July 15, 2016. In addition, the Amendment reduced fees payable under the Revolving Facility which are based on our long-term credit ratings. The fees related to committed and unutilized amounts per year were reduced from 0.50% to 0.325% per annum and the fees related to outstanding letters of credit were reduced from 3.00% to 1.75% per annum. In addition, the interest rate on outstanding borrowings was reduced from the London Interbank Offered Rate (“LIBOR”) plus 3.00% to LIBOR plus 1.75%.
We incurred fees related to the Amendment of the Revolving Facility of $7 million, which were capitalized and are being amortized over the remaining term of the Revolving Facility.
The Revolving Facility contains fixed charge coverage and debt to EBITDA financial covenants. We are required to maintain a fixed charge coverage ratio of not less than 1.75 to 1.00 and a consolidated debt to consolidated EBITDA ratio not exceeding 4.00 to 1.00 for the most recent four-quarter period. In addition, the Revolving Facility provides that investments and restricted payments may be made, without limitation on amount, if (a) at the time of and after giving effect to such investment or restricted payment the ratio of consolidated debt to consolidated EBITDA for the most recent four-quarter period is less than 3.00 to 1.00 and (b) no default or event of default exists. As of January 28, 2012, we were in compliance with both of our financial covenants and the ratio of consolidated debt to consolidated EBITDA was less than 3.00 to 1.00.
As of January 28, 2012, there were no borrowings outstanding under the Revolving Facility.
Letters of Credit
The Revolving Facility supports our letter of credit program. We had $13 million of outstanding letters of credit as of January 28, 2012 that reduce our remaining availability under our amended credit agreements.
Fair Value Interest Rate Swap Arrangements
We have the following interest rate swap arrangements related to certain of our outstanding debt:
 
 
Notional Amount
 
 
January 28, 2012
 
January 29, 2011
 
 
(in millions)
2012 Notes
 
$
—

 
$
57

2014 Notes
 
—

 
213

2017 Notes
 
175

 
325

Total
 
$
175

 
$
595

The interest rate swap arrangements effectively convert the fixed interest rate on the related debt to a variable interest rate based on a LIBOR plus a fixed interest rate.
The swap arrangements are designated as fair value hedges. The changes in the fair value of the interest rate swaps have an equal and offsetting impact to the carrying value of the debt on the balance sheet. The differential to be paid or received on the interest rate swap arrangements is accrued and recognized as an adjustment to interest expense.
In July 2011, we terminated interest rate designated fair value hedges related to the 2012 Notes with a notional amount of $57 million. In settlement of these hedges, we received $1 million. In August 2011, we terminated interest rate designated fair value hedges related to the 2014 Notes with a notional amount of $213 million. In settlement of these hedges, we received $9 million. In September 2011, we terminated interest rate designated fair value hedges related to the 2017 Notes with a notional amount of $150 million. In settlement of these hedges, we received $12 million. The settlement amounts were equal to the fair value adjustment to the respective Notes and are amortized as a reduction to interest expense through the maturity date of the respective Notes.
For information related to our fair value interest rate swap arrangements, see Note 13 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

42

Working Capital and Capitalization
We believe that our available short-term and long-term capital resources are sufficient to fund foreseeable requirements.
The following table provides a summary of our working capital position and capitalization as of January 28, 2012, January 29, 2011 and January 30, 2010:
 
 
January 28, 2012

 
January 29, 2011

 
January 30, 2010

 
(in millions)
Cash Provided by Operating Activities
$
1,266

 
$
1,284

 
$
1,174

Capital Expenditures
426

 
274

 
202

Working Capital
842

 
1,088

 
1,928

Capitalization:
 
 
 
 
 
Long-term Debt
3,481

 
2,507

 
2,723

Shareholders’ Equity
137

 
1,476

 
2,183

Total Capitalization
3,618

 
3,983

 
4,906

Additional Amounts Under Credit Agreements (a)
1,000

 
800

 
1,000

Remaining Amounts Available Under Credit Agreements (a)
987

 
755

 
935

 ________________
(a)
As part of the February 19, 2009 amendment to the Revolving Facility, letters of credit issued subsequent to the amendment reduce our remaining availability under the Revolving Facility. We have outstanding letters of credit that reduce our remaining availability under the Revolving Facility of $13 million and $45 million as of January 28, 2012 and January 29, 2011, respectively.
The following table provides certain measures of liquidity and capital resources as of January 28, 2012, January 29, 2011 and January 30, 2010:
 
 
January 28, 2012

 
January 29, 2011

 
January 30, 2010

Debt-to-capitalization Ratio (a)
96
%
 
63
%
 
55
%
Cash Flow to Capital Investment (b)
297
%
 
468
%
 
581
%
________________
(a)
Long-term debt divided by total capitalization
(b)
Net cash provided by operating activities divided by capital expenditures
Credit Ratings
The following table provides our credit ratings as of January 28, 2012:
 
 
Moody’s
  
S&P (a)
  
Fitch
Corporate
Ba1
  
BB+
  
BB+
Senior Unsecured Debt with Subsidiary Guarantee
Ba1
  
BB+
  
BB+
Senior Unsecured Debt
Ba2
  
BB+
  
BB  
Outlook
Stable
  
Stable
  
Stable
________________
(a)
In February 2012, S&P downgraded our unsecured debt without subsidiary guarantees from BB+ to BB-.
Our borrowing costs under our Revolving Facility are linked to our credit ratings at S&P, Moody’s and Fitch. If we receive an up

43

grade or downgrade to our corporate credit ratings by S&P, Moody’s or Fitch, the borrowing costs could decrease or increase, respectively. The guarantees of our obligations under the Revolving Facility by certain of our 100% owned subsidiaries (such subsidiaries, the “Guarantors”) and the security interests granted in our and the Guarantors’ collateral securing such obligations are released if our credit ratings are higher than a certain level. Additionally, the restrictions imposed under the Revolving Facility on our ability to make investments and to make restricted payments cease to apply if our credit ratings are higher than certain levels. Credit rating downgrades by any of the agencies do not accelerate the repayment of any of our debt.

44

Common Stock Share Repurchases
Under the authority of our Board of Directors, we repurchased shares of our common stock under the following repurchase programs during the fiscal years 2011, 2010 and 2009:
 
 
 
 
 
Shares Repurchased
 
Amount Repurchased
 
Average Stock
Price of
Shares
Repurchased
within
Program
Repurchase Program
 
Amount  Authorized
 
2011
 
2010
 
2009
 
2011
 
2010
 
2009
 
 
 
(in millions)
 
(in thousands)
 
(in millions)
 
 
November 2011 (a)
 
$
250

 
2,116

 
NA

 
NA
 
$
85

 
NA

 
NA
 
$
40.50

May 2011
 
500

 
13,293

 
NA

 
NA
 
500

 
NA

 
NA
 
37.59

March 2011
 
500

 
13,695

 
NA

 
NA
 
500

 
NA

 
NA
 
36.49

November 2010 (b)
 
200

 
3,431

 
1,907

 
NA
 
109

 
$
60

 
NA
 
31.68

March 2010 (c)
 
200

 
NA

 
5,714

 
NA
 
NA

 
147

 
NA
 
25.69

Total
 
 
 
32,535

 
7,621

 

 
$
1,194

 
$
207

 

 
 
 ________________
(a)
The November 2011 repurchase program had $165 million remaining as of January 28, 2012.
(b)
The November 2010 repurchase program had $31 million remaining at the time it was cancelled in conjunction with the approval of the March 2011 repurchase program.
(c)
The March 2010 repurchase program had $53 million remaining at the time it was cancelled in conjunction with the approval of the November 2010 repurchase program.
NA
Not applicable
For the November 2011 repurchase program, $4 million of share repurchases were reflected in Accounts Payable on the 2011 Consolidated Balance Sheet and were settled in February 2012. There were no share repurchases reflected in Accounts Payable as of January 29, 2011.
Subsequent to January 28, 2012, we completed the November 2011 repurchase program by repurchasing an additional 4 million shares of common stock for $165 million under the program. In addition, our Board of Directors approved a new $500 million share repurchase program ("February 2012 repurchase program"). The timing and amount of any repurchase will be made in our discretion taking into account a number of factors, including market conditions.

45

Dividend Policy and Procedures
Under the authority and declaration of our Board of Directors, we paid the following dividends during the fiscal years 2011, 2010 and 2009:
 
 
Ordinary Dividends
 
Special Dividends
 
Total Dividends
 
Total Paid
 
 
(per share)
 
(in millions)
2011
 
 
 
 
 
 
 
 
Fourth Quarter
 
$
0.20

 
$
2.00

 
$
2.20

 
$
653

Third Quarter
 
0.20

 
—

 
0.20

 
60

Second Quarter
 
0.20

 
1.00

 
1.20

 
367

First Quarter
 
0.20

 
—

 
0.20

 
64

2011 Total
 
$
0.80

 
$
3.00

 
$
3.80

 
$
1,144

2010
 
 
 
 
 
 
 
 
Fourth Quarter
 
$
0.15

 
$
3.00

 
$
3.15

 
$
1,017

Third Quarter
 
0.15

 
—

 
0.15

 
49

Second Quarter
 
0.15

 
—

 
0.15

 
49

First Quarter
 
0.15

 
1.00

 
1.15

 
373

2010 Total
 
$
0.60

 
$
4.00

 
$
4.60

 
$
1,488

2009
 
 
 
 
 
 
 
 
Fourth Quarter
 
$
0.15

 
$
—

 
$
0.15

 
$
49

Third Quarter
 
0.15

 
—

 
0.15

 
48

Second Quarter
 
0.15

 
—

 
0.15

 
48

First Quarter
 
0.15

 
—

 
0.15

 
48

2009 Total
 
$
0.60

 
$
—

 
$
0.60

 
$
193

Subsequent to January 28, 2012, our Board of Directors declared our first quarter 2012 common stock dividend of $0.25 per share payable on March 9, 2012 to shareholders of record at the close of business on February 24, 2012. This is a $0.05 increase from our previous quarterly dividends.
Treasury Share Retirement
In January 2010, we retired 201 million shares of our treasury stock to reduce the related administrative expense. The retirement resulted in a reduction of $4.641 billion in Treasury Stock, $101 million in the par value of Common Stock, $1.545 billion in Paid-in Capital and $2.995 billion in Retained Earnings.
In December 2011, we retired 39 million shares of our treasury stock to reduce the related administrative expense. The retirement resulted in a reduction of $1.341 billion in Treasury Stock, $19 million in the par value of Common Stock, $286 million in Paid-in Capital and $1.036 billion in Retained Earnings.

46

Cash Flow
The following table provides a summary of our cash flow activity for the fiscal years ended January 28, 2012, January 29, 2011 and January 30, 2010:
 
 
2011
 
2010
 
2009
 
(in millions)
Cash and Cash Equivalents, Beginning of Year
$
1,130

 
$
1,804

 
$
1,173

Net Cash Flows Provided by Operating Activities
1,266

 
1,284

 
1,174

Net Cash Flows Used For Investing Activities
(226
)
 
(106
)
 
(162
)
Net Cash Flows Used For Financing Activities
(1,237
)
 
(1,857
)
 
(387
)
Effect of Exchange Rate Changes on Cash
2

 
5

 
6

Net Increase (Decrease) in Cash and Cash Equivalents
(195
)
 
(674
)
 
631

Cash and Cash Equivalents, End of Year
$
935

 
$
1,130

 
$
1,804


Operating Activities
Net cash provided by operating activities in 2011 was $1.266 billion. Net income of $850 million included depreciation and amortization of $391 million, impairment of goodwill and other intangible assets for our La Senza business of $232 million, expense associated with a contribution of our remaining shares of Express, Inc. to The Limited Brands Foundation of $163 million, a gain related to The Limited Brands Foundation contribution of $147 million, a gain related to the divestiture of our third-party apparel sourcing business of $111 million and a pre-tax gain on the sale of Express common stock of $86 million. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant items in working capital were the increases in accounts receivable and accounts payable related to the divestiture of our third-party apparel sourcing business.
Net cash provided by operating activities in 2010 was $1.284 billion. Net income of $805 million included $394 million of

47

depreciation and amortization. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant working capital change was a $112 million increase in operating cash flow associated with an increase in accounts payable and accrued expenses and other.
Net cash provided by operating activities in 2009 was $1.174 billion. Net income of $448 million included $393 million of depreciation and amortization. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant working capital change was a $156 million increase in operating cash flow associated with a reduction in inventories. Inventory levels decreased compared to 2008 due to a concerted effort to control and reduce inventory levels across the enterprise.
Investing Activities
Net cash used for investing activities in 2011 was $226 million consisting primarily of $426 million of capital expenditures partially offset by cash proceeds from the divestiture of our third-party apparel sourcing business and the sale of Express common stock of $124 million and $99 million, respectively. The capital expenditures included $281 million for opening new stores and remodeling and improving existing stores. Remaining capital expenditures were primarily related to spending on technology and infrastructure to support growth.
Net cash used for investing activities in 2010 was $106 million consisting primarily of $274 million of capital expenditures partially offset by $73 million of proceeds from the sale of Express common stock, $49 million of return of capital from Express and $32 million of proceeds from the divestiture of Limited Stores. The capital expenditures included $168 million for opening new stores and remodeling and improving existing stores. Remaining capital expenditures were primarily related to spending on technology and infrastructure to support growth.
Net cash used for investing activities in 2009 was $162 million consisting primarily of $202 million of capital expenditures partially offset by $32 million of proceeds related to the sale of an asset. The capital expenditures included $163 million for opening new stores and remodeling and improving existing stores. Remaining capital expenditures were primarily related to spending on technology and infrastructure to support growth.
We anticipate spending approximately $575 to $625 million for capital expenditures in 2012 with the majority relating to opening new stores and remodeling and improving existing stores. We expect to open approximately 50 new stores in 2012, primarily in Canada and the U.S.

48

Financing Activities
Net cash used for financing activities in 2011 was $1.237 billion consisting primarily of repurchases of common stock of $1.190 billion and quarterly and special dividends payments aggregating $3.80 per share, or $1.144 billion, partially offset by proceeds from the issuance of long-term debt of $981 million (net of issuance costs) and proceeds from the exercise of stock options of $75 million.
Net cash used for financing activities in 2010 was $1.857 billion consisting primarily of quarterly and special dividends payments aggregating $4.60 per share, or $1.488 billion, cash payments of $442 million to repurchase portions of our 2012 and 2014 Notes, cash payments of $207 million related to the repurchase of 8 million shares of common stock during the year at a weighted-average price of $27.21 under our 2010 share repurchase programs, prepayment of the remaining $200 million of our Term Loan in March 2010 and proceeds from the exercise of stock options of $88 million. These were partially offset by the net proceeds of $390 million from the issuance of $400 million of 2020 Notes.
Net cash used for financing activities in 2009 was $387 million consisting primarily of the prepayment of $550 million of our Term Loan, quarterly dividend payments of $0.15 per share, or $193 million, cash payments of $106 million to repurchase 2012 Notes and $19 million of costs related to the amendment of our Revolving Facility and Term Loan in February 2009. These were partially offset by the net proceeds of $473 million from the issuance of $500 million of 2019 Notes.
Contingent Liabilities and Contractual Obligations
The following table provides our contractual obligations, aggregated by type, including the maturity profile as of January 28, 2012:
 

49

 
Payments Due by Period
 
Total
 
Less
Than 1
Year
 
1-3
Years
 
4-5
Years
 
More
than 5
Years
 
Other
 
(in millions)
Long-term Debt (a)
$
6,114

 
$
304

 
$
700

 
$
465

 
$
4,645

 
$
—

Operating Leases Obligations (b)
3,120

 
493

 
897

 
710

 
1,020

 
—

Purchase Obligations (c)
1,193

 
1,130

 
53

 
5

 
5

 
—

Other Liabilities (d)
418

 
109

 
17

 
7

 
—

 
285

Total
$
10,845

 
$
2,036

 
$
1,667

 
$
1,187

 
$
5,670

 
$
285

________________
(a)
Long-term debt obligations relate to our principal and interest payments for outstanding notes and debentures. Interest payments have been estimated based on the coupon rate for fixed rate obligations. Interest obligations exclude amounts which have been accrued through January 28, 2012. Subsequent to January 28, 2012, we issued $1 billion of 5.625% notes due in February 2022. For additional information, see Note 12 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
(b)
Operating lease obligations primarily represent minimum payments due under store lease agreements. For additional information, see Note 16 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
(c)
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.
(d)
Other liabilities primarily includes future payments relating to our nonqualified supplemental retirement plan of $214 million which 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. In addition, Other Liabilities also includes future estimated payments associated with unrecognized tax benefits. The “Less Than 1 Year” category includes $96 million of these tax items because it is reasonably possible that the payments could change in the next twelve months due to audit settlements or resolution of uncertainties. The remaining portion totaling $71 million is included in the “Other” category as the timing and amount of these payments is not known until the matters are resolved with relevant tax authorities. For additional information, see Notes to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
In connection with the disposition of certain businesses, we have remaining guarantees of approximately $78 million related to lease payments of Express, Limited Stores, Abercrombie & Fitch, Dick’s Sporting Goods (formerly Galyan’s), and New York & Company under the current terms of noncancelable leases expiring at various dates through 2017. These guarantees

50

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, our guarantee may remain in effect if the term of a lease is extended.
The following table details the guaranteed lease payments during the next five fiscal years and the remaining years thereafter:
 
Fiscal Year (in millions)
 
 
2012
 
$
24

2013
 
22

2014
 
16

2015
 
9

2016
 
5

Thereafter
 
2

Total
 
$
78


Our guarantees related to Express, Limited Stores and New York & Company require fair value accounting in accordance with GAAP in effect at the time of these divestitures. The guaranteed lease payments related to Express, Limited Stores and New York & Company totaled $49 million as of January 28, 2012 and $65 million as of January 29, 2011. The estimated fair value of these guarantee obligations was $4 million as of January 28, 2012 and $6 million as of January 29, 2011, and is included in Other Long-term Liabilities on the Consolidated Balance Sheets. The decrease in the fair value from January 29, 2011 to January 28, 2012 reflects the decrease in the remaining obligation period.
Our guarantees related to Abercrombie & Fitch and Dick’s Sporting Goods (formerly Galyan’s) are not subject to fair value

51

accounting, but require that a loss be accrued when probable and reasonably estimable based on GAAP in effect at the time of these divestitures. We had no liability recorded with respect to any of the guarantee obligations as we concluded that payments under these guarantees were not probable as of January 28, 2012 and January 29, 2011.
These guarantees are not included within the Contingent Liabilities and Contractual Obligations table.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements as defined by Regulation 229.303 Item 303 (a) (4).
Recently Issued Accounting Pronouncements
Other Comprehensive Income
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) ASU 2011-05, Presentation of Comprehensive Income, which amends ASC 220, Comprehensive Income. This guidance eliminates the option to present the components of other comprehensive income as a part of the statement of shareholders’ equity and requires other comprehensive income to be presented as part of a single continuous statement of comprehensive income or in a statement of other comprehensive income immediately following the statement of income. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income. This guidance is required to be adopted in fiscal year 2012 and must be retrospectively applied to all reporting periods presented. The FASB has permitted early adoption. We adopted this guidance in the fourth quarter of 2011. ASU 2011-05 did not have an impact on our consolidated results of operations, financial position or cash flows.
In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, which defers the ASU 2011-05 requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income (AOCI) in both net income and other comprehensive income on the face of the financial statements. Companies are still required to present reclassifications out of AOCI on the face of the financial statements or disclose those amounts in the notes to the financial statements. This ASU also defers the requirement to report reclassification adjustments in interim periods. This guidance is required to be adopted in fiscal year 2012, however, early adoption is permitted. We adopted this guidance in the fourth quarter of 2011. ASU 2011-12 did not have an impact on our consolidated results of operations, financial position or cash flows.
Goodwill
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which gives companies testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step one

52

of the goodwill impairment test. If companies determine, based on qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. Otherwise, further testing would not be needed. This guidance will be effective beginning in fiscal year 2012, however, early adoption is permitted. ASU 2011-08 will not have an impact on our consolidated results of operations, financial position or cash flows. We are currently evaluating the provisions of this ASU.
Impact of Inflation
While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on the results of operations and financial condition have been minor.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to adopt accounting policies related to estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates its accounting policies, estimates and judgments, including those related to inventories, long-lived assets, claims and contingencies, income taxes and revenue recognition. Management bases our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Management has discussed the development and selection of our critical accounting policies and estimates with the Audit Committee of our Board of Directors and believes the following assumptions and estimates are most significant to reporting our results of operations and financial position.
Inventories
Inventories are principally valued at the lower of cost or market, on a weighted-average cost basis.
We record valuation adjustments to our inventories if the cost of inventory on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory. These estimates are based on management’s judgment regarding future demand and market conditions and analysis of historical experience. If actual demand or market conditions are different than those projected by management, future period merchandise margin rates may be unfavorably or favorably affected by adjustments to these estimates.
We also record inventory loss adjustments for estimated physical inventory losses that have occurred since the date of the last physical inventory. These estimates are based on management’s analysis of historical results and operating trends.
Management believes that the assumptions used in these estimates are reasonable and appropriate. A 10% increase or decrease in the inventory valuation adjustment would have impacted net income by approximately $2 million for 2011. A 10% increase or decrease in the estimated physical inventory loss adjustment would have impacted net income by approximately $2 million for 2011.
Valuation of Long-lived Assets

53

Property and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the estimated undiscounted future cash flows related to the asset are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the estimated fair value, usually determined by the estimated discounted future cash flows of the asset. When a decision has been made to dispose of property and equipment prior to the end of the previously estimated useful life, depreciation estimates are revised to reflect the use of the asset over the shortened estimated useful life.
Goodwill is reviewed for impairment each year in the fourth quarter and may be reviewed more frequently if certain events occur or circumstances change. The impairment review is performed by comparing each reporting unit’s carrying value to its estimated fair value, determined through either estimated discounted future cash flows or market-based methodologies. If the carrying value exceeds the estimated fair value, we determine the fair value of all assets and liabilities of the reporting unit, including the implied fair value of goodwill. If the carrying value of goodwill exceeds the implied fair value, we recognize an impairment charge equal to the difference.
Intangible assets with indefinite lives are reviewed for impairment each year in the fourth quarter and may be reviewed more frequently if certain events occur or circumstances change. The impairment review is performed by comparing the carrying value to the estimated fair value, usually determined by the estimated discounted future cash flows of the asset.

54

We estimate the fair value of property and equipment, goodwill and intangible assets in accordance with the provisions of ASC Topic 820, Fair Value Measurements and Disclosures. If future economic conditions are different than those projected by management, future impairment charges may be required.
La Senza Goodwill and Other Intangible Assets
In conjunction with the January 2007 acquisition of La Senza, we recorded $313 million in goodwill and $170 million in trade name and other intangible assets. As of January 28, 2012, the carrying value of goodwill and trade names for La Senza is $12 million and $75 million, respectively. These assets are included in the La Senza reporting unit which is part of the Other segment.
2008
In the latter half of 2008, La Senza was negatively impacted by the global economic downturn and the resulting impact on the Canadian retail environment. As a result, La Senza's operating results deteriorated significantly, particularly when compared to our expectations at the time of acquisition. In the fourth quarter of 2008, we concluded that the goodwill and certain trade name assets related to the La Senza acquisition were impaired and recorded impairment charges of $189 million and $26 million related to the goodwill and trade name assets, respectively.
2009
In the fourth quarter of 2009, we concluded that certain trade names would no longer be utilized within the La Senza business. As a result, we recorded an impairment charge of $3 million. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2009 Consolidated Statement of Income.
2010
No impairment charges were recorded related to La Senza goodwill and intangible assets.
2011
During 2011, La Senza's operating results failed to meet our expectations, as both comparable store sales and gross profit were below our beginning of year expectations especially in the critical fourth quarter holiday period. In the fourth quarter of 2011, we concluded that the goodwill and certain other intangible assets related to La Senza were impaired and recorded impairment charges of $119 million and $113 million related to the goodwill and other intangible assets, respectively. These impairment charges are included in Impairment of Goodwill and Other Intangible Assets on the 2011 Consolidated Statement of Income.
Impairment Testing—Goodwill
We evaluated La Senza’s goodwill by comparing the carrying value of the La Senza reporting unit to the estimated fair value of the reporting unit determined through estimated discounted future cash flows. We corroborated the estimated fair value of the La Senza reporting unit as determined by our discounted cash flow approach by referencing a market-based methodology.

55

2009 and 2010
Our 2009 and 2010 evaluations indicated that the estimated fair value of the La Senza reporting unit was in excess of the carrying value. As a result, we were not required to calculate the implied value of goodwill and no impairment was recognized.
2011
Based on our 2011 evaluation, the carrying value of the La Senza reporting unit exceeded the estimated fair value. As a result, we measured the goodwill impairment by comparing the carrying value of the reporting unit’s goodwill to the implied value of the goodwill based on the estimated fair value of the reporting unit, considering the estimated fair value of all assets and liabilities. As a result of this analysis, we recognized a goodwill impairment charge of $119 million.
Impairment Testing—Other Intangible Assets
We evaluated the La Senza trade name and other intangible assets by comparing the carrying values to the estimated fair values determined using a relief from royalty and other discounted cash flow methodologies.
2009
In the fourth quarter of 2009, we made the decision to exit the La Senza Girl business and recorded an impairment charge of $3 million related to the La Senza Girl trade name and other minor sub-brands. Our 2009 evaluation of the overall La Senza trade name indicated that the estimated fair value was in excess of the carrying value. As a result, no impairment was recognized with regards to this asset.

56

2010
Based on our 2010 evaluation, the estimated fair value of the La Senza trade name exceeded the carrying value. Reasonable changes in the significant estimates and assumptions used to determine the estimated fair value would not have resulted in a trade name impairment.
2011
Based on our 2011 evaluation, the carrying value of the La Senza trade name exceeded its' estimated fair value. As a result, we recognized an impairment charge of $112 million to reduce the trade name carrying value to estimated fair value. Additionally, we recognized an additional impairment charge of $1 million related to certain lease-related intangible assets.
Significant Estimates and Assumptions
Our determination of the estimated fair value of the La Senza reporting unit and other intangible assets requires significant judgments about economic factors, industry factors, our views regarding the future prospects of the La Senza reporting unit as well as numerous estimates and assumptions that are highly subjective. The estimates and assumptions critical to the overall fair value estimates include: (i) estimated future cash flow generated by La Senza; (ii) discount rates used to derive the present value factors used in determining the fair values; (iii) the terminal value assumption used in the discounted cash flow methodologies; and (iv) the royalty rate assumption used in the relief from royalty valuation methodology. These and other estimates and assumptions are impacted by economic conditions and expectations of management and may change in the future based on period-specific facts and circumstances. If La Senza’s future cash flows are different than those projected by management, additional future impairment charges may be required.
Sensitivity Analysis
The following provides sensitivities to our 2011 significant estimates and assumptions as noted above:
•
a 10% increase or decrease in estimated future cash flows would result in a $24 million change to the impairment charges.
•
a 1% increase or decrease in the discount rate would result in a $7 million change to the impairment charges.
•
a 10% increase or decrease in the terminal value assumption would result in an $18 million change to the impairment charges.
Other Impairment
In the fourth quarter of 2010, we concluded that a sub-brand trade name would no longer be utilized within the Victoria’s Secret business. We compared the estimated fair value of the trade name using a relief from royalty methodology to the carrying value and concluded that the trade name was fully impaired. As a result, we recognized an impairment charge of $6 million. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2010 Consolidated Statement of Income.

57

Claims and Contingencies
We are subject to various claims and contingencies related to lawsuits, insurance, regulatory and other matters arising out of the normal course of business. Our determination of the treatment of claims and contingencies in the Consolidated Financial Statements is based on management’s view of the expected outcome of the applicable claim or contingency. We consult with legal counsel on matters related to litigation and seek input from both internal and external experts within and outside our organization with respect to matters in the ordinary course of business. We accrue a liability if the likelihood of an adverse outcome is probable and the amount is reasonably estimable. If the likelihood of an adverse outcome is only reasonably possible (as opposed to probable), or if an estimate is not reasonably determinable, disclosure of a material claim or contingency is disclosed in the Notes to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
Income Taxes
We account for income taxes under the asset and liability method. Under this method, the amount of taxes currently payable or refundable are accrued and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is

58

recognized in our Consolidated Statement of Income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.
Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In determining our provision for income taxes, we use an annual effective income tax rate based on annual income, permanent differences between book and tax income and statutory income tax rates. We adjust the annual effective income tax rate as additional information on outcomes or events becomes available. Our effective income tax rate is affected by items including changes in tax law, the tax jurisdiction of new stores or business ventures and the level of earnings.
We follow the authoritative guidance included in ASC Topic 740, Income Taxes, which contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. Our policy is to include interest and penalties related to uncertain tax positions in income tax expense.
Our income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. We record an accrual for more likely than not exposures after evaluating the positions associated with our various income tax filings. A number of years may elapse before a particular matter for which we have established an accrual is audited and fully resolved or clarified. We adjust our tax contingencies accrual and income tax provision in the period in which matters are effectively settled with tax authorities at amounts different from our established accrual, when the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.
Although we believe that our estimates are reasonable, actual results could differ from these estimates resulting in a final tax outcome that may be materially different from that which is reflected in our Consolidated Financial Statements.
Revenue Recognition

Company-owned Stores and Direct Channels
While our recognition of revenue does not involve significant judgment, revenue recognition represents an important accounting policy for our organization. We recognize revenue upon customer receipt of the merchandise. We also provide a reserve for projected merchandise returns based on prior experience. For direct channel revenues, we estimate shipments that have not been received by the customer based on shipping terms and historical delivery times.
All of our brands sell gift cards with no expiration dates to customers in retail stores, through our direct channels and through third parties. We do not charge administrative fees on unused gift cards. We recognize income from gift cards when they are redeemed by the customer. In addition, we recognize income on unredeemed gift cards when we can determine that the

59

likelihood of the gift card being redeemed is remote and there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions (gift card breakage). We determine the gift card breakage rate based on historical redemption patterns. Gift card breakage is included in Net Sales in our Consolidated Statements of Income.

Franchise and Other
We also recognize revenues associated with franchise and wholesale arrangements. Revenue recognized under franchise arrangements generally consists of royalties earned upon sale of merchandise by franchisees to third-party customers. Revenue is generally recognized under wholesale arrangements at the time the title passes to the customer.
We recognize revenue associated with merchandise sourcing and production services provided to third parties. Revenue is recognized at the time the title passes to the customer.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk
The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in foreign currency exchange rates or interest rates. We use derivative financial instruments like the cross-currency swaps and interest rate swap arrangements to manage exposure to market risks. We do not use derivative financial instruments for trading purposes.

60

Foreign Exchange Rate Risk
To mitigate the translation risk to our earnings and the fair value of our investment in La Senza associated with fluctuations in the U.S. dollar-Canadian dollar exchange rate, we entered into a series of cross-currency swaps related to Canadian dollar denominated intercompany loans. These cross-currency swaps require the periodic exchange of fixed rate Canadian dollar interest payments for fixed rate U.S. dollar interest payments as well as exchange of Canadian dollar and U.S. dollar principal payments upon maturity. The swap arrangements mature between 2015 and 2018 at the same time as the related loans. As a result of the Canadian dollar denominated intercompany loans and the related cross-currency swaps, we do not believe there is any material translation risk to La Senza’s net earnings associated with fluctuations in the U.S. dollar-Canadian dollar exchange rate.
In addition, our Canadian dollar denominated earnings are subject to U.S. dollar-Canadian dollar exchange rate risk as substantially all of our merchandise sold in Canada is sourced through U.S. dollar transactions.
Interest Rate Risk
Our investment portfolio primarily consists of interest-bearing instruments that are classified as cash and cash equivalents based on their original maturities. Our investment portfolio is maintained in accordance with our investment policy, which specifies permitted types of investments, specifies credit quality standards and maturity profiles and limits credit exposure to any single issuer. The primary objective of our investment activities are the preservation of principal, the maintenance of liquidity and the maximization of interest income while minimizing risk. Currently, our investment portfolio is comprised of U.S. and Canadian government obligations, U.S. Treasury and AAA-rated money market funds, bank time deposits, and highly-rated commercial paper. Given the short-term nature and quality of investments in our portfolio, we do not believe there is any material risk to principal associated with increases or decreases in interest rates.
All of our long-term debt as of January 28, 2012 has fixed interest rates. We will from time to time adjust our exposure to interest rate risk by entering into interest rate swap arrangements. The effect of the interest rate swap arrangements is to convert the respective amount of debt from a fixed interest rate to a variable interest rate. The variable interest rate associated with these swap arrangements fluctuates based on changes in the three-month London Interbank Offered Rate ("LIBOR").
As of January 28, 2012, our designated fair value hedges have a notional amount of $175 million related to a portion of our 2017 Notes.
For the balance of our long-term debt that is not subject to the interest rate swap arrangements, our exposure to interest rate changes is limited to the fair value of the debt issued, which would not have a material impact on our earnings or cash flows.
Fair Value of Financial Instruments
As of January 28, 2012, management believes that the carrying values of cash and cash equivalents, receivables and payables

61

approximate fair value because of the short maturity of these financial instruments.
The following table provides a summary of the carrying value and fair value of long-term debt and swap arrangements as of January 28, 2012 and January 29, 2011:
 
 
January 28, 2012
 
January 29, 2011
 
(in millions)
Long-term Debt:
 
 
 
Carrying Value
$
3,538

 
$
2,507

Fair Value, Estimated (a) (b)
3,849

 
2,638

Cross-currency Swap Arrangements (c) (d)
60

 
57

Fixed-to-Floating Interest Rate Swap Arrangements (c) (e)
(14
)
 
(3
)
________________
(a)
The estimated fair value of our publicly traded debt is based on quoted market prices. The estimates presented are not necessarily indicative of the amounts that we could realize in a current market exchange.
(b)
The increase in the estimated fair value of our long-term debt reflects the March 2011 issuance of $1 billion notes due in April 2021 and increases in the estimated fair value of our remaining long-term debt.
(c)
Swap arrangements are in an (asset) liability position.
(d)
The change in fair value of the cross-currency swap arrangements from January 29, 2011 to January 28, 2012 is primarily due to the fluctuations in the U.S. dollar-Canadian dollar exchange rate.

62

(e)
The balance at January 29, 2011 represents multiple interest rate swap arrangements entered into during 2010 related to various outstanding notes to effectively convert the fixed interest rate on the related debt to a variable interest rate based on three-month London Interbank Offered Rate plus a fixed interest rate. The balance at January 28, 2012 only includes the interest rate swap arrangements related to our outstanding 2017 Notes as all others had been terminated in 2011.
Concentration of Credit Risk
We maintain cash and cash equivalents with various major financial institutions. Currently, our investment portfolio is comprised of U.S. and Canadian government obligations, U.S. Treasury and AAA-rated money market funds, bank time deposits, and highly-rated commercial paper.
We monitor the relative credit standing of financial institutions and other entities with whom we transact and limit the amount of credit exposure with any one entity. We also monitor the creditworthiness of entities to which we grant credit terms in the normal course of business and counterparties to derivative instruments.

63

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
LIMITED BRANDS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page No.
 
Our fiscal year ends on the Saturday closest to January 31. Fiscal years are designated in the Consolidated Financial Statements and Notes by the calendar year in which the fiscal year commences. The results for fiscal years 2011, 2010 and 2009 represent the 52 week period ending January 28, 2012, January 29, 2011 and January 30, 2010, respectively.

64

Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of January 28, 2012. In making this assessment, management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Based on our assessment and the COSO criteria, management believes that the Company maintained effective internal control over financial reporting as of January 28, 2012.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Company’s internal control over financial reporting. Ernst & Young LLP’s report appears on the following page and expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of January 28, 2012.

65

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

The Board of Directors and Shareholders of Limited Brands, Inc.:

We have audited Limited Brands, Inc. and subsidiaries' internal control over financial reporting as of January 28, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Limited Brands, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Limited Brands, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of January 28, 2012, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of Limited Brands, Inc. and subsidiaries as of January 28, 2012 and January 29, 2011, and the related Consolidated Statements of Income, Comprehensive Income, Total Equity, and Cash Flows for each of the three years in the period ended January 28, 2012 of Limited Brands, Inc. and subsidiaries, and our report dated March 23, 2012 expressed an unqualified opinion thereon.
                    

/s/ Ernst & Young LLP

Columbus, Ohio
March 23, 2012


66

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

The Board of Directors and Shareholders of Limited Brands, Inc.:

We have audited the accompanying Consolidated Balance Sheets of Limited Brands, Inc. and subsidiaries as of January 28, 2012 and January 29, 2011, and the related Consolidated Statements of Income, Comprehensive Income, Total Equity, and Cash Flows for each of the three years in the period ended January 28, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Limited Brands, Inc. and subsidiaries at January 28, 2012 and January 29, 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 28, 2012, in conformity with U.S. generally accepted accounting principles.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Limited Brands, Inc. and subsidiaries' internal control over financial reporting as of January 28, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 23, 2012 expressed an unqualified opinion thereon.


/s/ Ernst & Young LLP

Columbus, Ohio
March 23, 2012


67

LIMITED BRANDS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions except per share amounts)
 
 
2011
 
2010
 
2009
Net Sales
$
10,364

 
$
9,613

 
$
8,632

Costs of Goods Sold, Buying and Occupancy
(6,307
)
 
(5,982
)
 
(5,604
)
Gross Profit
4,057

 
3,631

 
3,028

General, Administrative and Store Operating Expenses
(2,698
)
 
(2,341
)
 
(2,166
)
Impairment of Goodwill and Other Intangible Assets
(232
)
 
(6
)
 
(3
)
Gain on Divestiture of Third-party Apparel Sourcing Business
111

 
—

 
—

Net Gain on Joint Venture
—

 
—

 
9

Operating Income
1,238

 
1,284

 
868

Interest Expense
(246
)
 
(208
)
 
(237
)
Other Income
235

 
175

 
19

Income Before Income Taxes
1,227

 
1,251

 
650

Provision for Income Taxes
377

 
446

 
202

Net Income
$
850

 
$
805

 
$
448

Net Income Per Basic Share
$
2.80

 
$
2.49

 
$
1.39

Net Income Per Diluted Share
$
2.70

 
$
2.42

 
$
1.37



LIMITED BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions except per share amounts)

 
2011
 
2010
 
2009
Net Income
$
850

 
$
805

 
$
448

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
   Reclassification of Cash Flow Hedges to Earnings
3

 
41

 
71

   Foreign Currency Translation
(1
)
 
(1
)
 
(2
)
   Unrealized Loss on Cash Flow Hedges
(3
)
 
(24
)
 
(56
)
Total Other Comprehensive Income (Loss), Net of Tax
(1
)
 
16

 
13

Total Comprehensive Income
$
849

 
$
821

 
$
461


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

68

LIMITED BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(in millions except per share amounts)
 
 
January 28,
2012
 
January 29,
2011
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
935

 
$
1,130

Accounts Receivable, Net
218

 
232

Inventories
997

 
1,032

Deferred Income Taxes
51

 
35

Other
167

 
163

Total Current Assets
2,368

 
2,592

Property and Equipment, Net
1,644

 
1,610

Goodwill
1,330

 
1,451

Trade Names and Other Intangible Assets, Net
495

 
592

Other Assets
271

 
206

Total Assets
$
6,108

 
$
6,451

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts Payable
$
540

 
$
545

Accrued Expenses and Other
770

 
765

Current Portion of Long-term Debt
57

 
—

Income Taxes
159

 
194

Total Current Liabilities
1,526

 
1,504

Deferred Income Taxes
183

 
202

Long-term Debt
3,481

 
2,507

Other Long-term Liabilities
780

 
761

Shareholders’ Equity:
 
 
 
Preferred Stock—$1.00 par value; 10 shares authorized; none issued
—

 
—

Common Stock—$0.50 par value; 1,000 shares authorized; 296 and 329 shares issued; 295 and 321 shares outstanding, respectively
148

 
164

Paid-in Capital
25

 
164

Accumulated Other Comprehensive Income
—

 
1

Retained Earnings
24

 
1,354

Less: Treasury Stock, at Average Cost; 1 and 8 shares, respectively
(60
)
 
(207
)
Total Limited Brands, Inc. Shareholders’ Equity
137

 
1,476

Noncontrolling Interest
1

 
1

Total Equity
138

 
1,477

Total Liabilities and Equity
$
6,108

 
$
6,451


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

69

LIMITED BRANDS, INC.
CONSOLIDATED STATEMENTS OF TOTAL EQUITY
(in millions except per share amounts)
 
 
Common Stock
 
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Treasury
Stock, at
Average
Cost
 
Noncontrolling Interest
 
 
Shares
Outstanding
 
Par
Value
 
 
Total
Equity
Balance, January 31, 2009
321

 
$
262

 
$
1,544

 
$
(28
)
 
$
4,777

 
$
(4,681
)
 
$
1

 
$
1,875

Net Income
—

 
—

 
—

 
—

 
448

 
—

 
—

 
448

Other Comprehensive Income
—

 
—

 
—

 
13

 
—

 
—

 
—

 
13

Total Comprehensive Income
—

 
—

 
—

 
13

 
448

 
—

 
—

 
461

Cash Dividends ($0.60 per share)
—

 
—

 
—

 
—

 
(193
)
 
—

 
—

 
(193
)
Treasury Share Retirement
—

 
(101
)
 
(1,545
)
 
—

 
(2,995
)
 
4,641

 
—

 
—

Exercise of Stock Options and Other
2

 
—

 
1

 
—

 
—

 
40

 
—

 
41

Balance, January 30, 2010
323

 
$
161

 
$
—

 
$
(15
)
 
$
2,037

 
$
—

 
$
1

 
$
2,184

Net Income
—

 
—

 
—

 
—

 
805

 
—

 
—

 
805

Other Comprehensive Income
—

 
—

 
—

 
16

 
—

 
—

 
—

 
16

Total Comprehensive Income
—

 
—

 
—

 
16

 
805

 
—

 
—

 
821

Cash Dividends ($4.60 per share)
—

 
—

 
—

 
—

 
(1,488
)
 
—

 
—

 
(1,488
)
Repurchase of Common Stock
(8
)
 
—

 
—

 
—

 
—

 
(207
)
 
—

 
(207
)
Exercise of Stock Options and Other
6

 
3

 
164

 
—

 
—

 
—

 
—

 
167

Balance, January 29, 2011
321

 
$
164

 
$
164

 
$
1

 
$
1,354

 
$
(207
)
 
$
1

 
$
1,477

Net Income
—

 
—

 
—

 
—

 
850

 
—

 
—

 
850

Other Comprehensive Income (Loss)
—

 
—

 
—

 
(1
)
 
—

 
—

 
—

 
(1
)
Total Comprehensive Income (Loss)
—

 
—

 
—

 
(1
)
 
850

 
—

 
—

 
849

Cash Dividends ($3.80 per share)
—

 
—

 
—

 
—

 
(1,144
)
 
—

 
—

 
(1,144
)
Repurchase of Common Stock
(32
)
 
—

 
—

 
—

 
—

 
(1,194
)
 
—

 
(1,194
)
Treasury Share Retirement
—

 
(19
)
 
(286
)
 
—

 
(1,036
)
 
1,341

 
—

 
—

Exercise of Stock Options and Other
6

 
3

 
147

 
—

 
—

 
—

 
—

 
150

Balance, January 28, 2012
295

 
$
148

 
$
25

 
$
—

 
$
24

 
$
(60
)
 
$
1

 
$
138


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

70


LIMITED BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
 
2011
 
2010
 
2009
Operating Activities
 
 
 
 
 
Net Income
$
850

 
$
805

 
$
448

Adjustments to Reconcile Net Income to Net Cash Provided by (Used for) Operating Activities:
 
 
 
 
 
Depreciation and Amortization of Long-lived Assets
391

 
394

 
393

Amortization of Landlord Allowances
(35
)
 
(35
)
 
(36
)
Goodwill and Intangible Asset Impairment Charges
232

 
6

 
3

Deferred Income Taxes
(37
)
 
(24
)
 
49

Share-based Compensation Expense
51

 
64

 
40

Excess Tax Benefits from Share-based Compensation
(48
)
 
(19
)
 
—

Expense related to Contribution of Express Common Stock to The Limited Brands Foundation
163

 
—

 
—

Gain on Contribution of Express Common Stock to The Limited Brands Foundation
(147
)
 
—

 
—

Gain on Divestiture of Third-party Apparel Sourcing Business
(111
)
 
—

 
—

Gain on Sale of Express Common Stock
(86
)
 
(45
)
 
—

Gain on Distribution from Express
—

 
(49
)
 
—

Gain on Express Initial Public Offering
—

 
(52
)
 
—

Gain on Divestiture of Limited Stores
—

 
(20
)
 
—

(Gain) Loss on Extinguishment of Debt
—

 
25

 
(2
)
        Net Gain on Joint Venture
—

 
—

 
(9
)
Changes in Assets and Liabilities, Net of Assets and Liabilities related to Divestitures:
 
 
 
 
 
Accounts Receivable
(152
)
 
(11
)
 
22

Inventories
(27
)
 
9

 
156

Accounts Payable, Accrued Expenses and Other
106

 
112

 
17

Income Taxes Payable
13

 
73

 
44

Other Assets and Liabilities
103

 
51

 
49

Net Cash Provided by Operating Activities
1,266

 
1,284

 
1,174

Investing Activities
 
 
 
 
 
Capital Expenditures
(426
)
 
(274
)
 
(202
)
Proceeds from Divestiture of Third-party Apparel Sourcing Business
124

 
—

 
—

Proceeds from Sale of Express Common Stock
99

 
73

 
—

Return of Capital from Express
—

 
49

 
—

Proceeds from Divestiture of Limited Stores
—

 
32

 
—

Return of Capital from Limited Stores
—

 
7

 
—

Proceeds from Sale of Assets
—

 
—

 
32

Net Proceeds from Divestiture of Joint Venture
—

 
—

 
9

Other Investing Activities
(23
)
 
7

 
(1
)
Net Cash Used for Investing Activities
(226
)
 
(106
)
 
(162
)
Financing Activities
 
 
 
 
 
Proceeds from Long-term Debt, Net of Issuance and Discount Costs
981

 
390

 
473

Payments of Long-term Debt
—

 
(645
)
 
(656
)
Financing Costs
(7
)
 
(14
)
 
(19
)
Repurchase of Common Stock
(1,190
)
 
(207
)
 
—

Dividends Paid
(1,144
)
 
(1,488
)
 
(193
)
Excess Tax Benefits from Share-based Compensation
48

 
19

 
—

Proceeds from Exercise of Stock Options and Other
75

 
88

 
8

Net Cash Used for Financing Activities
(1,237
)
 
(1,857
)
 
(387
)
Effects of Exchange Rate Changes on Cash
2

 
5

 
6

Net Increase (Decrease) in Cash and Cash Equivalents
(195
)
 
(674
)
 
631

Cash and Cash Equivalents, Beginning of Year
1,130

 
1,804

 
1,173

Cash and Cash Equivalents, End of Year
$
935

 
$
1,130

 
$
1,804


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

71

LIMITED BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Limited Brands, Inc. (“the Company”) operates in the highly competitive specialty retail business. The Company is a specialty retailer of women’s intimate and other apparel, beauty and personal care products and accessories. The Company sells its merchandise through company-owned specialty retail stores in the United States (“U.S.”) and Canada, which are primarily mall-based, and through its websites, catalogue and other channels. The Company's international operations outside of Canada are primarily through franchise, license and wholesale partners. The Company currently operates the following retail brands:
•
Victoria’s Secret
•
Victoria’s Secret Pink
•
Bath & Body Works
•
La Senza
•
Henri Bendel
Fiscal Year
The Company’s fiscal year ends on the Saturday nearest to January 31. As used herein, “2011”, “2010” and “2009” refer to the 52-week periods ending January 28, 2012, January 29, 2011 and January 30, 2010, respectively.
Basis of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company accounts for investments in unconsolidated entities where it exercises significant influence, but does not have control, using the equity method. Under the equity method of accounting, the Company recognizes its share of the investee net income or loss. Losses are only recognized to the extent the Company has positive carrying value related to the investee. Carrying values are only reduced below zero if the Company has an obligation to provide funding to the investee. The Company’s share of net income or loss of unconsolidated entities from which the Company purchases merchandise or merchandise components is included in Costs of Goods Sold, Buying and Occupancy on the Consolidated Statements of Income. The Company’s share of net income or loss of all other unconsolidated entities is included in Other Income on the Consolidated Statements of Income. The Company’s equity investments are required to be tested for impairment when it is determined there may be an other than temporary loss in value.
Third-party Apparel Sourcing Business
On October 31, 2011, the Company divested 51% of its ownership interest in its third-party apparel sourcing business to affiliates of Sycamore Partners. The Company is accounting for its continuing investment under the equity method of accounting. For additional information, see Note 9, “Equity Investments and Other.”
Express
Through May 12, 2010, the Company had a 25% ownership interest in Express and accounted for this investment under the equity method of accounting. On May 13, 2010, Express completed an initial public offering (“IPO”). Additionally, the Company sold a portion of its shares of common stock in Express in conjunction with the IPO. As a result, the Company’s ownership interest was diluted from 25% to 18%. The Company eliminated in consolidation 25% of merchandise sourcing sales to Express through May 12, 2010 and eliminated 18% from May 13, 2010 through the end of the second quarter of 2010.
Based on the Company’s reduced ownership in Express, the resulting loss of contractual rights and the resignation of the Company’s seats on Express’ Board of Directors in August 2010, the Company concluded that it was no longer appropriate to account for its investment in Express using the equity method of accounting. Thus, at the beginning of the third quarter of 2010, the Company commenced accounting for its investment in Express using the cost method of accounting. As a result of the accounting change, the Company ceased recording equity income (loss) from Express in Other Income on the Consolidated Statement of Income and the Company also began recognizing 100% of gross merchandise sourcing revenue from Express.


72

In April 2011, the Company sold a portion of its remaining shares of common stock in Express in an Express secondary offering, which reduced the Company’s ownership in Express to 8%. In April 2011, the Company also formally renounced its rights to its Express Board of Directors’ seat. As a result, the Company commenced accounting for its investment in Express using the available-for-sale method of accounting in the first quarter of 2011.

In July 2011, the Company contributed all of its remaining shares of common stock in Express to The Limited Brands Foundation. For additional information, see Note 9, “Equity Investments and Other.”
Limited Stores
Through June 9, 2010, the Company had a 25% ownership interest in Limited Stores. The Company accounted for this investment under the equity method of accounting and eliminated in consolidation 25% of gross merchandise sourcing revenue to Limited Stores equal to the Company’s ownership percentage. On June 10, 2010, the Company divested its remaining 25% ownership percentage in Limited Stores and resigned its seats on Limited Stores’ Board of Directors. Beginning June 10, 2010, the Company ceased recording equity income (loss) from Limited Stores and the Company also began recognizing 100% of gross merchandise sourcing revenue to Limited Stores. For additional information, see Note 9, “Equity Investments and Other.”
Cash and Cash Equivalents
Cash and Cash Equivalents include cash on hand, demand deposits with financial institutions and highly liquid investments with original maturities of less than 90 days. The Company’s outstanding checks, which amounted to $69 million as of January 28, 2012 and $74 million as of January 29, 2011, are included in Accounts Payable on the Consolidated Balance Sheets.
Concentration of Credit Risk
The Company maintains cash and cash equivalents with various major financial institutions. Currently, the Company’s investment portfolio is comprised of U.S. and Canadian government obligations, U.S. Treasury and AAA-rated money market funds, bank time deposits and highly-rated commercial paper.
The Company monitors the relative credit standing of financial institutions and other entities with whom the Company transacts and limits the amount of credit exposure with any one entity. The Company also monitors the creditworthiness of entities to which the Company grants credit terms in the normal course of business and counterparties to derivative instruments.
Inventories
Inventories are principally valued at the lower of cost or market, on a weighted-average cost basis.
The Company records valuation adjustments to its inventories if the cost of specific inventory items on hand exceeds the amount it expects to realize from the ultimate sale or disposal of the inventory. These estimates are based on management’s judgment regarding future demand and market conditions and analysis of historical experience.
The Company also records inventory loss adjustments for estimated physical inventory losses that have occurred since the date of the last physical inventory. These estimates are based on management’s analysis of historical results and operating trends.
Catalogue and Advertising Costs
The Company capitalizes the direct costs of producing and distributing its catalogues and amortizes the costs over the expected future revenue stream, which is generally over a three month period from the date the catalogues are mailed.
The Company’s capitalized direct response advertising costs amounted to $17 million and $20 million as of January 28, 2012 and January 29, 2011, respectively, and are included in Other Current Assets on the Consolidated Balance Sheets. All other advertising costs are expensed at the time the promotion first appears in media or in the store. Catalogue and advertising costs amounted to $474 million for 2011, $473 million for 2010 and $459 million for 2009.

73

Property and Equipment
The Company’s property and equipment are recorded at cost and depreciation/amortization is computed on a straight-line basis using the following depreciable life ranges:
 
Category of Property and Equipment
  
Depreciable Life Range
Software, including software developed for internal use
  
3 - 7 years
Store related assets
  
3 - 10 years
Leasehold improvements
  
Shorter of lease term or 10 years
Non-store related building and site improvements
  
10 - 15 years
Other property and equipment
  
20 years
Buildings
  
30 years

When a decision has been made to dispose of property and equipment prior to the end of the previously estimated useful life, depreciation estimates are revised to reflect the use of the asset over the shortened estimated useful life. The Company’s cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments that extend useful lives are capitalized.
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the estimated undiscounted future cash flows related to the asset are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying value and the estimated fair value, usually determined by the estimated discounted future cash flows of the asset.
Goodwill and Intangible Assets
The Company has certain intangible assets resulting from business combinations and acquisitions that are recorded at cost. Intangible assets with finite lives are amortized on a straight-line basis over their respective estimated useful lives ranging from 3 to 20 years.
Intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the estimated undiscounted future cash flows related to the asset are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying value and the estimated fair value, usually determined by the estimated discounted future cash flows of the asset.
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired. Goodwill is not subject to periodic amortization. Goodwill is reviewed for impairment each year in the fourth quarter and may be reviewed more frequently if certain events occur or circumstances change. The impairment review is performed by comparing each reporting unit’s carrying value to its estimated fair value, determined through either estimated discounted future cash flows or market-based methodologies. If the carrying value exceeds the estimated fair value, the Company determines the fair value of all assets and liabilities of the reporting unit, including the implied fair value of goodwill. If the carrying value of goodwill exceeds the implied fair value, the Company recognizes an impairment charge equal to the difference.
Intangible assets with indefinite lives are reviewed for impairment each year in the fourth quarter and may be reviewed more frequently if certain events occur or circumstances change. The impairment review is performed by comparing the carrying value to the estimated fair value, usually determined by the estimated discounted future cash flows of the asset.
If future economic conditions are different than those projected by management, future impairment charges may be required.
Leases and Leasehold Improvements
The Company has leases that contain predetermined fixed escalations of minimum rentals and/or rent abatements subsequent to taking possession of the leased property. The Company recognizes the related rent expense on a straight-line basis commencing upon the store possession date. The Company records the difference between the recognized rental expense and amounts payable under the leases as deferred lease credits. The Company’s liability for predetermined fixed escalations of minimum rentals and/or rent abatements amounted to $113 million as of January 28, 2012 and $105 million as of January 29, 2011. These liabilities are included in Other Long-term Liabilities on the Consolidated Balance Sheets.
The Company receives construction allowances from landlords related to its retail stores. These allowances are generally

74

comprised of cash amounts received by the Company from its landlords as part of the negotiated lease terms. The Company records a receivable and a landlord allowance at the lease commencement date (date of initial possession of the store). The landlord allowance is amortized on a straight-line basis as a reduction of rent expense over the term of the lease (including the pre-opening build-out period) and the receivable is reduced as amounts are received from the landlord. The Company’s unamortized portion of landlord allowances, which amounted to $181 million as of January 28, 2012 and $193 million as of January 29, 2011, is included in Other Long-term Liabilities on the Consolidated Balance Sheets.
The Company also has leasehold improvements which are amortized over the shorter of their estimated useful lives or the period from the date the assets are placed in service to the end of the initial lease term. Leasehold improvements made after the inception of the initial lease term are depreciated over the shorter of their estimated useful lives or the remaining lease term, including renewal periods, if reasonably assured.
Foreign Currency Translation
The functional currency of the Company’s foreign operations is generally the applicable local currency. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect as of the balance sheet date, while revenues and expenses are translated at the average exchange rates for the period. The Company’s resulting translation adjustments are recorded as a component of Comprehensive Income in the Consolidated Statements of Comprehensive Income and the Consolidated Statements of Total Equity.
Derivative Financial Instruments
The Company uses derivative instruments designated as cash flow hedges or fair value hedges and non-designated derivative instruments to manage exposure to foreign currency exchange rates and interest rates. The Company does not use derivative financial instruments for trading purposes. All derivative financial instruments are recorded on the Consolidated Balance Sheets at fair value.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
For derivative instruments that are designated and qualify as fair value hedges, the changes in the fair value of the derivative instrument have an equal and offsetting impact to the carrying value of the liability on the balance sheet.
For derivative instruments that are not designated as hedging instruments, the gain or loss on the derivative instrument is recognized in current earnings.
Fair Value
The authoritative guidance included in Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurements and Disclosure, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. This authoritative guidance further establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
•
Level 1—Quoted market prices in active markets for identical assets or liabilities.
•
Level 2—Observable inputs other than quoted market prices included in Level 1, such as quoted prices of similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The Company estimates the fair value of financial instruments, property and equipment and goodwill and intangible assets in accordance with the provisions of ASC Topic 820.

75

Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, the amount of taxes currently payable or refundable are accrued and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in the Company’s Consolidated Statement of Income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.
In determining the Company’s provision for income taxes, it uses an annual effective income tax rate based on annual income, permanent differences between book and tax income and statutory income tax rates. The Company adjusts the annual effective income tax rate as additional information on outcomes or events becomes available. The Company’s effective income tax rate is affected by items including changes in tax law, the tax jurisdiction of new stores or business ventures and the level of earnings.
The Company follows a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes.
The Company’s income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. The Company records an accrual for more likely than not exposures after evaluating the positions associated with its various income tax filings. A number of years may elapse before a particular matter for which the Company has established an accrual is audited and fully resolved or clarified. The Company adjusts its tax contingencies accrual and income tax provision in the period in which matters are effectively settled with tax authorities at amounts different from its established accrual, when the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available. The Company includes its tax contingencies accrual, including accrued penalties and interest, in Other Long-term Liabilities on the Consolidated Balance Sheets unless the liability is expected to be paid within one year. Changes to the tax contingencies accrual, including accrued penalties and interest, are included in Provision for Income Taxes on the Consolidated Statements of Income.
Self Insurance
The Company is self-insured for medical, workers’ compensation, property, general liability and automobile liability up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred but not reported (“IBNR”) claims. IBNR claims are estimated using historical claim information and actuarial estimates.
Noncontrolling Interest
Noncontrolling interest represents the portion of equity interests of consolidated affiliates not owned by the Company.
Share-based Compensation
The Company recognizes all share-based payments to employees and directors as compensation cost over the service period based on their estimated fair value on the date of grant.
Compensation cost is recognized over the service period for the fair value of awards that actually vest. Compensation expense for awards without a performance condition is recognized, net of estimated forfeitures, using a single award approach (each award is valued as one grant, irrespective of the number of vesting tranches). Compensation expense for awards with a performance condition is recognized, net of estimated forfeitures, using a multiple award approach (each vesting tranche is valued as one grant).
During 2009, the Company followed a policy of issuing treasury shares to satisfy stock-based awards. Beginning in 2010, the Company adopted a policy of issuing new shares to satisfy stock-based awards.
Revenue Recognition

76

The Company recognizes sales upon customer receipt of the merchandise, which for direct response revenues reflects an estimate of shipments that have not yet been received by the customer based on shipping terms and estimated delivery times. The Company’s shipping and handling revenues are included in Net Sales with the related costs included in Costs of Goods Sold, Buying and Occupancy on the Consolidated Statements of Income. The Company also provides a reserve for projected merchandise returns based on prior experience. Net Sales exclude sales tax collected from customers.
The Company’s brands sell gift cards with no expiration dates to customers. The Company does not charge administrative fees on unused gift cards. The Company recognizes income from gift cards when they are redeemed by the customer. In addition, the Company recognizes income on unredeemed gift cards when it can determine that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions (gift card breakage). The Company determines the gift card breakage rate based on historical redemption patterns. Gift card breakage is included in Net Sales in the Consolidated Statements of Income.
The Company also recognizes revenues associated with franchise and wholesale arrangements. Revenue recognized under franchise arrangements generally consists of royalties earned upon sale of merchandise by franchisees to third-party customers. Revenue is generally recognized under wholesale arrangements at the time the title passes to the customer.
The Company recognizes revenue associated with merchandise sourcing and production services provided to third parties. Revenue is recognized at the time the title passes to the customer.
Costs of Goods Sold, Buying and Occupancy
The Company’s costs of goods sold include merchandise costs, net of discounts and allowances, freight and inventory shrinkage. The Company’s buying and occupancy expenses primarily include payroll, benefit costs and operating expenses for its buying departments and distribution network, rent, common area maintenance, real estate taxes, utilities, maintenance, fulfillment expenses, catalogue amortization and depreciation for the Company’s stores, warehouse facilities and equipment.
General, Administrative and Store Operating Expenses
The Company’s general, administrative and store operating expenses primarily include payroll and benefit costs for its store-selling and administrative departments (including corporate functions), marketing, advertising and other operating expenses not specifically categorized elsewhere in the Consolidated Statements of Income.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates and the Company revises its estimates and assumptions as new information becomes available.

2. New Accounting Pronouncements
Other Comprehensive Income
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) ASU 2011-05, Presentation of Comprehensive Income, which amends ASC 220, Comprehensive Income. This guidance eliminates the option to present the components of other comprehensive income as a part of the statement of shareholders’ equity and requires other comprehensive income to be presented as part of a single continuous statement of comprehensive income or in a statement of other comprehensive income immediately following the statement of income. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income. This guidance is required to be adopted in fiscal year 2012 and must be retrospectively applied to all reporting periods presented. The FASB has permitted early adoption. The Company adopted this guidance in the fourth quarter of 2011. ASU 2011-05 did not have an impact on the Company’s consolidated results of operations, financial position or cash flows.
In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, which defers the ASU 2011-05 requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income (AOCI) in both net income and other comprehensive income on the face of the financial statements. Companies are still required to present reclassifications out of AOCI on the face of the financial statements or disclose those amounts in the notes to the financial statements. This ASU also defers the requirement to report reclassification adjustments in interim periods. This guidance is required to be adopted in fiscal year 2012, however, early adoption is permitted. The Company

77

adopted this guidance in the fourth quarter of 2011. ASU 2011-12 did not have an impact on the Company’s consolidated results of operations, financial position or cash flows.
Goodwill
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which gives companies testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step one of the goodwill impairment test. If companies determine, based on qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. Otherwise, further testing would not be needed. This guidance will be effective beginning in fiscal year 2012, however, early adoption is permitted. ASU 2011-08 will not have an impact on the Company’s consolidated results of operations, financial position or cash flows. The Company is currently evaluating the provisions of this ASU.

3. Earnings Per Share
Earnings per basic share are computed based on the weighted-average number of outstanding common shares. Earnings per diluted share include the weighted-average effect of dilutive options and restricted stock on the weighted-average shares outstanding.
The following table provides shares utilized for the calculation of basic and diluted earnings per share for 2011, 2010 and 2009:
 
 
2011
 
2010
 
2009
 
(in millions)
Weighted-average Common Shares:
 
 
 
 
 
Issued Shares (a) (b)
323

 
326

 
524

Treasury Shares (a) (b)
(19
)
 
(3
)
 
(202
)
Basic Shares
304

 
323

 
322

Effect of Dilutive Options and Restricted Stock
10

 
10

 
5

Diluted Shares
314

 
333

 
327

Anti-dilutive Options and Awards (c)
1

 
2

 
12

 ________________
(a)
In December 2011, the Company retired 39 million shares of its Treasury Stock.
(b)
In January 2010, the Company retired 201 million shares of its Treasury Stock.
(c)
These options and awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

4. Divestitures
Third-party Apparel Sourcing Business
On October 31, 2011, the Company divested 51% of its ownership interest in its third-party apparel sourcing business to affiliates of Sycamore Partners for pre-tax cash proceeds of $124 million. The Company recorded a pre-tax gain on the divestiture of $111 million in the fourth quarter of 2011. For additional information, see Note 9, “Equity Investments and Other.”
Express
During the period between May 2010 through July 2011, the Company completed the divestiture of its remaining 25% ownership in Express through the following transactions:
•
In May 2010, Express completed an IPO and the Company sold 1.3 million shares of its common stock in Express for $20 million, reducing its ownership interest to 18%. As a result of these events, the Company recognized a pre-tax gain of $52 million.
•
In December 2010, the Company sold 3.6 million shares of its common stock in Express for $52 million, reducing its ownership interest to 14%. As a result, the Company recognized a pre-tax gain of $45 million.
•
In April 2011, the Company sold 5.5 million shares of its common stock in Express for $99 million, reducing its ownership interest to 8%. As a result, the Company recognized a pre-tax gain of $86 million.
•
In July 2011, the Company contributed its remaining 7.2 million shares of common stock to The Limited Brands

78

Foundation, reducing its ownership interest to 0%. At the time of the charitable contribution, the stock was worth $163 million. As a result of the contribution, the Company recognized a non-taxable gain of $147 million.
For additional information, see Note 9, “Equity Investments and Other.”
Limited Stores
In June 2010, the Company completed the divestiture of its remaining 25% ownership interest in Limited Stores and resigned its seats on Limited Stores’ Board of Directors. The Company received pre-tax net cash proceeds of $32 million from the divestiture which are included in Proceeds from Divestiture of Limited Stores within the Investing Activities section on the 2010 Consolidated Statement of Cash Flows. The Company recorded a pre-tax gain on the divestiture of $20 million. The pre-tax gain is included in Other Income on the 2010 Consolidated Statement of Income. For additional information, see Note 9, “Equity Investments and Other.”

5. Restructuring Activities
During the fourth quarter of 2011, the Company initiated a restructuring program designed to resize a portion of La Senza's store fleet and relocate its home office from Montreal, Canada to Columbus, Ohio. The Company recognized a pre-tax charge consisting of contract termination costs, severance and other costs of $24 million in the fourth quarter of 2011. The Company anticipates that the majority of costs incurred related to this restructuring program will be paid out in 2012. The restructuring charges of $17 million and $7 million are included in Cost of Goods Sold, Buying and Occupancy and General, Administrative and Store Operating Expenses, respectively, on the 2011 Consolidated Statement of Income.

6. Inventories
The following table provides inventories as of January 28, 2012 and January 29, 2011:
 
 
January 28,
2012
 
January 29,
2011
 
(in millions)
Finished Goods Merchandise
$
926

 
$
956

Raw Materials and Merchandise Components
71

 
76

Total Inventories
$
997

 
$
1,032


7. Property and Equipment, Net
The following table provides property and equipment, net as of January 28, 2012 and January 29, 2011:
 
 
January 28,
2012
 
January 29,
2011
 
(in millions)
Land
$
61

 
$
61

Buildings and Improvements
403

 
395

Furniture, Fixtures, Software and Equipment
2,528

 
2,466

Leaseholds Improvements
1,236

 
1,196

Construction in Progress
159

 
65

Total
4,387

 
4,183

Accumulated Depreciation and Amortization
(2,743
)
 
(2,573
)
Property and Equipment, Net
$
1,644

 
$
1,610


Depreciation expense was $387 million in 2011, 2010 and 2009.


79

8. Goodwill, Trade Names and Other Intangible Assets, Net
Goodwill
The following table provides the rollforward of goodwill for the fiscal years ended January 28, 2012 and January 29, 2011:
 
 
Victoria’s
Secret
 
Bath & Body
Works
 
Other
 
Total
 
(in millions)
Balance as of January 30, 2010
$
690

 
$
628

 
$
124

(a)
$
1,442

Foreign Currency Translation
—

 
—

 
9

 
9

Balance as of January 29, 2011
690

 
628

 
133

 
1,451

Impairment
—

 
—

 
(119
)
 
(119
)
Foreign Currency Translation
—

 
—

 
(2
)
 
(2
)
Balance as of January 28, 2012
$
690

 
$
628

 
$
12

 
$
1,330


(a) Balance is presented net of a $189 million La Senza impairment recognized in the fourth quarter of 2008.

Intangible Assets—Indefinite Lives
Intangible assets with indefinite lives represent the Victoria’s Secret, Bath & Body Works and La Senza trade names. These assets totaled $486 million as of January 28, 2012 and $576 million as of January 29, 2011 and are included in Trade Names and Other Intangible Assets, Net on the Consolidated Balance Sheets.
Intangible Assets—Finite Lives

Intangible assets with finite lives represent certain trademarks and customer relationships. These assets totaled $9 million and $16 million as of January 28, 2012 and January 29, 2011, respectively, and are included in Trade Names and Other Intangible Assets, Net on the Consolidated Balance Sheets. Amortization expense was $4 million for 2011, $7 million for 2010 and $6 million for 2009. Estimated future annual amortization expense will be approximately $3 million in 2012, $2 million in 2013, $2 million in 2014, and $2 million in 2015.
Impairment Charges
La Senza
In conjunction with the January 2007 acquisition of La Senza, the Company recorded $313 million in goodwill, $170 million in intangible assets with indefinite lives and $26 million in intangible assets with finite lives. These assets are included in the La Senza reporting unit which is included in the Other segment.
2008
In the fourth quarter of 2008, the Company completed its annual impairment testing. During the latter half of 2008, La Senza's operating results were negatively impacted by the global economic downturn and the resulting impact on the Canadian retail environment. As part of the annual impairment evaluation, the Company assessed the recoverability of goodwill using a discounted cash flow methodology. The Company concluded that the carrying value of the La Senza goodwill exceeded the implied fair value based on the estimated fair value of the La Senza reporting unit. Accordingly, the Company recorded a goodwill impairment charge of $189 million. Prior to completing the goodwill impairment evaluation, the Company performed its annual impairment analysis for indefinite-lived trade names. Based on its evaluation using a relief from royalty and other discounted cash flow methodologies, the Company concluded that certain La Senza trade name assets were impaired. Accordingly, the Company recorded an impairment charge of $25 million to reduce the carrying value of these assets to their estimated fair values. The Company also recognized a $1 million impairment charge related to a finite lived trade name asset.

2009
In the fourth quarter of 2009, the Company made the decision to exit the La Senza Girl business and recorded an impairment charge of $3 million to write-off the La Senza Girl trade name and other minor trade names. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2009 Consolidated Statement of Income.
2011
In the fourth quarter of 2011, the Company completed its annual impairment testing. During 2011, La Senza’s operating results failed to meet the Company's expectations, as both comparable store sales and gross profit were below our beginning of year

80

expectations especially in the critical fourth quarter holiday period. As part of the annual impairment evaluation, the Company assessed the recoverability of goodwill using a discounted cash flow methodology. The Company concluded that the carrying value of the La Senza goodwill exceeded the implied fair value based on the estimated fair value of the La Senza reporting unit. Accordingly, the Company recorded a goodwill impairment charge of $119 million. The goodwill impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2011 Consolidated Statement of Income.
Prior to completing the goodwill impairment evaluation, the Company performed its annual impairment analysis for its indefinite-lived trade name. Based on its evaluation using relief from royalty and other discounted cash flow methodologies, the Company concluded that the La Senza trade name asset was impaired. Accordingly, the Company recorded an impairment charge of $112 million to reduce the carrying value of the trade name asset to its estimated fair value. The Company also recognized a $1 million impairment charge related to a lease-related intangible asset. These impairment charges are included in Impairment of Goodwill and Other Intangible Assets on the 2011 Consolidated Statement of Income.
Other
In the fourth quarter of 2010, the Company concluded that a sub-brand trade name would no longer be utilized within the Victoria’s Secret business. The Company compared the estimated fair value of the trade name using a relief from royalty methodology to the carrying value and concluded that the trade name was fully impaired. As a result, the Company recognized an impairment charge of $6 million. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2010 Consolidated Statement of Income.

9. Equity Investments and Other
Third-party Apparel Sourcing Business
On October 31, 2011, the Company divested 51% of its ownership interest in its third-party apparel sourcing business to affiliates of Sycamore Partners for pre-tax cash proceeds of $124 million. The Company's remaining 49% ownership interest is accounted for under the equity method of accounting. The proceeds are included in Proceeds from Divestiture of Third-party Apparel Sourcing Business within the Investing Activities section on the 2011 Consolidated Statement of Cash Flows. The Company recorded a pre-tax gain on the divestiture of $111 million in the fourth quarter of 2011 which is included in Gain on Divestiture of Third-party Apparel Sourcing Business on the 2011 Consolidated Statement of Income.
In conjunction with the transaction, the Company entered into transition services agreements whereby the Company is providing support in various operational areas including logistics, technology and financial services. The terms of these transition services arrangements vary and range from two months to three years.
The Company is accounting for its remaining interest in the third-party apparel sourcing business using the equity method. The Company's carrying value for this investment was $72 million as of January 28, 2012.
Express
In July 2007, the Company completed the divestiture of 75% of its ownership interest in Express. In conjunction with the transaction, the Company and Express entered into transition services agreements whereby the Company provided support to Express in various operational areas including logistics, technology and merchandise sourcing. The terms of these transition services arrangements varied and ranged from three months to three years.
In October 2009, the Company entered into new agreements with Express whereby the Company will continue to provide logistics services and lease office space. The Company's third-party apparel sourcing business, which the Company divested in the fourth quarter of 2011, also continues to provide merchandise sourcing services to Express.
The Company recognized merchandise sourcing revenue from Express of $325 million in 2011, $384 million in 2010 and $344 million in 2009. These amounts are net of the elimination of merchandise sourcing revenue equal to the Company’s ownership percentage through the second quarter of 2010. The Company’s accounts receivable from Express for merchandise sourcing and other services totaled $74 million as of January 29, 2011.
In March 2010, Express completed a cash distribution to its owners and the Company received $57 million. The Company’s portion representing a return on capital was $8 million and is included in Other Assets and Liabilities within the Operating Activities section of the 2010 Consolidated Statement of Cash Flows. The remaining portion representing a return of capital is $49 million and is included in Return of Capital from Express within the Investing Activities section of the 2010 Consolidated Statement of Cash Flows. The proceeds received from the cash distribution were in excess of the Company’s carrying value of the investment in Express. As a result, the carrying value was reduced to zero as of the date of the cash distribution and a pre-tax gain of $49 million was recorded. The pre-tax gain is included in Other Income on the 2010 Consolidated Statement of Income.

81

On May 13, 2010, Express completed an IPO and the Company sold 1.3 million shares of its common stock in Express for $20 million. As a result, the Company’s ownership interest was diluted from 25% to 18% and the carrying value of the Company’s remaining investment was increased to reflect the proportional impact of the IPO. As a result of these events, the Company recognized a pre-tax gain of $52 million, which is included in Other Income on the 2010 Consolidated Statement of Income.
Based on the Company’s reduced ownership in Express, the resulting loss of contractual rights and the resignation of the Company’s seats on Express’ Board of Directors in August 2010, the Company concluded that it was no longer appropriate to account for its investment in Express using the equity method of accounting. At the beginning of the third quarter of 2010, the Company commenced accounting for its investment in Express using the cost method of accounting. As a result of the accounting change, the Company ceased recording equity income (loss) from Express in Other Income on the Consolidated Statement of Income and the Company also began recognizing 100% of merchandise sourcing sales to Express.
On December 15, 2010, Express completed a secondary offering and the Company sold an additional 3.6 million shares of its common stock in Express for $52 million. As a result, the Company’s ownership interest was diluted from 18% to 14% and the Company recognized a pre-tax gain of $45 million, which is included in Other Income on the 2010 Consolidated Statement of Income. Express also completed a cash dividend to its owners in December 2010 and the Company received $7 million. As a result of the dividend, the Company recognized a pre-tax gain of $7 million, which is also included in Other Income on the 2010 Consolidated Statement of Income.
On April 12, 2011, the Company sold 5.5 million shares of its common stock in Express for $99 million. As a result, the Company’s ownership interest was reduced from 14% to 8% and the Company recognized a pre-tax gain of $86 million, which is included in Other Income on the 2011 Consolidated Statement of Income. On April 21, 2011, the Company formally renounced its rights to its Express Board of Directors’ seat. As a result, the Company commenced accounting for its investment in Express using the available-for-sale method of accounting in the first quarter of 2011.
In July 2011, the Company contributed all of its remaining 7.2 million shares of Express, valued at $163 million, to The Limited Brands Foundation. As a result, the Company recognized contribution expense in 2011 of $163 million which is included in General, Administrative and Store Operating Expenses on the 2011 Consolidated Statement of Income. The Company also recognized a non-taxable gain of $147 million representing the difference between the market value of the Express shares on the date of the contribution and the Company’s net carrying value. The gain is included in Other Income on the 2011 Consolidated Statement of Income.
The Company’s investment carrying value under the cost method of accounting was $29 million as of January 29, 2011 and is included in Other Assets on the 2010 Consolidated Balance Sheet.
Limited Stores
In August 2007, the Company completed the divestiture of 75% of its ownership interest in Limited Stores. In conjunction with the transaction, the Company and Limited Stores entered into transition services agreements whereby the Company provided support to Limited Stores in various operational areas including logistics, technology and merchandise sourcing. The terms of these transition services arrangements varied and ranged from three months to three years.
In June 2010, the Company entered into a new agreement with Limited Stores whereby the Company will continue to provide logistics services. The Company's third-party apparel sourcing business, which the Company divested in the fourth quarter of 2011, continues to provide merchandise sourcing services to Limited Stores.
The Company recognized merchandise sourcing revenue from Limited Stores of $83 million in 2011, $62 million in 2010 and $58 million in 2009. The amounts are net of the elimination of merchandise sourcing revenue equal to the Company’s ownership percentage. The Company’s accounts receivable from Limited Stores for merchandise sourcing and other services totaled $9 million as of January 29, 2011.
In February 2010, Limited Stores completed a cash distribution to its owners and the Company received $7 million. The proceeds received from the cash dividend reduced the Company’s carrying value of the investment in Limited Stores. The distribution represented a return of capital and is included in Return of Capital from Limited Stores within the Investing Activities section on the 2010 Consolidated Statement of Cash Flows.
In June 2010, the Company completed the divestiture of its remaining 25% ownership interest in Limited Stores and resigned its seats on Limited Stores’ Board of Directors. The Company received pre-tax net cash proceeds of $32 million from the divestiture which are included in Proceeds from Divestiture of Limited Stores within the Investing Activities section on the 2010 Consolidated Statement of Cash Flows. The Company recorded a pre-tax gain on the divestiture of $20 million. The pre-tax gain is included in Other Income on the 2010 Consolidated Statement of Income. The Company ceased recording equity income (loss) from Limited Stores in Other Income on the Consolidated Statement of Income, and the Company began

82

recognizing 100% of merchandise sourcing sales to Limited Stores following the divestiture.
Easton Investment
The Company has land and other investments in Easton, a 1,300 acre planned community in Columbus, Ohio that integrates office, hotel, retail, residential and recreational space. These investments, at cost, totaled $70 million as of January 28, 2012 and $69 million as of January 29, 2011 and are recorded in Other Assets on the Consolidated Balance Sheets.
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 is accounted for using the equity method of accounting. The Company has a majority financial interest in ETC, but another unaffiliated member manages ETC. Certain significant decisions regarding ETC require the consent of unaffiliated members in addition to the Company.
Other
In April 2008, the Company recorded a pre-tax impairment charge of $19 million related to an unconsolidated joint venture accounted for under the equity method of accounting. The charge consisted of writing down the investment balance, reserving certain accounts and notes receivable and accruing a contractual liability. In July 2009, the Company recognized a pre-tax gain of $9 million associated with the reversal of the accrued contractual liability as a result of the divestiture of the joint venture. The pre-tax gain is included in Net Gain on Joint Venture on the 2009 Consolidated Statement of Income.

10. Accrued Expenses and Other
The following table provides additional information about the composition of accrued expenses and other as of January 28, 2012 and January 29, 2011:
 
 
January 28,
2012
 
January 29,
2011
 
(in millions)
Compensation, Payroll Taxes and Benefits
$
171

 
$
194

Deferred Revenue, Principally from Gift Card Sales
196

 
191

Taxes, Other Than Income
67

 
68

Insurance
36

 
34

Returns Reserve
30

 
30

Interest
50

 
29

Rent
21

 
22

Other
199

 
197

Total Accrued Expenses and Other
$
770

 
$
765


11. Income Taxes
The following table provides the components of the Company’s provision for income taxes for 2011, 2010 and 2009:
 
 
2011
 
2010
 
2009
 
(in millions)
Current:
 
 
 
 
 
U.S. Federal
$
357

 
$
406

 
$
138

U.S. State
46

 
54

 
1

Non-U.S.
11

 
10

 
14

Total
414

 
470

 
153

Deferred:
 
 
 
 
 
U.S. Federal
6

 
(20
)
 
47

U.S. State
1

 
(3
)
 
8

Non-U.S.
(44
)
 
(1
)
 
(6
)
Total
(37
)
 
(24
)
 
49

Provision for Income Taxes
$
377

 
$
446

 
$
202


83


The foreign component of pre-tax income, arising principally from overseas operations, was a loss of $37 million for 2011, and income of $42 million and $84 million for 2010 and 2009, respectively. The 2011 loss included the impact of the $232 million impairment of goodwill and other intangible assets at La Senza as well as the foreign portion of the gain on the divestiture of the third-party apparel sourcing business of $105 million.

The Non-U.S. deferred benefit of $44 million is primarily the result of the reversal of a deferred tax liability associated with the La Senza trade name established upon the acquisition of La Senza.
The following table provides the reconciliation between the statutory federal income tax rate and the effective tax rate for 2011, 2010 and 2009:
 
 
2011
 
2010
 
2009
Federal Income Tax Rate
35.0
 %
 
35.0
 %
 
35.0
 %
State Income Taxes, Net of Federal Income Tax Effect
4.0
 %
 
3.5
 %
 
3.7
 %
Express Charitable Contribution
(5.0
)%
 
—
 %
 
—
 %
Deductible Loss on Divestiture of Limited Stores
—
 %
 
(2.4
)%
 
—
 %
Non-deductible Impairment of Goodwill and Other Intangible Assets
4.3
 %
 
—
 %
 
0.3
 %
Foreign Portion of the Divestiture of Third-party Apparel Sourcing Business
(3.0
)%
 
—
 %
 
—
 %
Impact of Non-U.S. Operations
(2.2
)%
 
0.5
 %
 
(5.0
)%
Other Items, Net
(2.4
)%
 
(1.0
)%
 
(2.9
)%
Effective Tax Rate
30.7
 %
 
35.6
 %
 
31.1
 %

The Company’s effective tax rate has historically reflected a provision related to the undistributed earnings of foreign affiliates, but the related taxes are not paid until the earnings are deemed repatriated to the United States. The Company has historically recorded a deferred tax liability for those undistributed earnings. Currently, no deferred tax liability is recorded on foreign affiliated earnings as the tax basis is greater than the carrying value.

In the fourth quarter of 2009, the Company executed a re-organization of certain of its foreign subsidiaries which resulted in the recognition of a non-cash income tax benefit of $21 million associated with the reversal of deferred tax liabilities associated with undistributed earnings of a foreign subsidiary.
Deferred Taxes
The following table provides the effect of temporary differences that cause deferred income taxes as of January 28, 2012 and January 29, 2011. Deferred tax assets and liabilities represent the future effects on income taxes resulting from temporary differences and carryforwards at the end of the respective year.
 
 
January 28, 2012
 
January 29, 2011
 
Assets
 
Liabilities
 
Total
 
Assets
 
Liabilities
 
Total
 
(in millions)
Leases
$
45

 
$
—

 
$
45

 
$
39

 
$
—

 
$
39

Non-qualified Retirement Plan
82

 
—

 
82

 
73

 
—

 
73

Inventory
—

 
—

 
—

 
7

 
—

 
7

Property and Equipment
—

 
(190
)
 
(190
)
 
—

 
(154
)
 
(154
)
Goodwill
—

 
(15
)
 
(15
)
 
—

 
(15
)
 
(15
)
Trade Names and Other Intangibles
—

 
(139
)
 
(139
)
 
—

 
(183
)
 
(183
)
Charitable Contribution Carryforwards
23

 
—

 
23

 
—

 
—

 
—

State Net Operating Loss Carryforwards
26

 
—

 
26

 
31

 
—

 
31

Non-U.S. Operating Loss Carryforwards
40

 
—

 
40

 
38

 
—

 
38

Valuation Allowance
(59
)
 
—

 
(59
)
 
(50
)
 
—

 
(50
)
Other, Net
55

 
—

 
55

 
45

 
—

 
45

Total Deferred Income Taxes
$
212

 
$
(344
)
 
$
(132
)
 
$
183

 
$
(352
)
 
$
(169
)

84


As of January 28, 2012, the Company had available for state income tax purposes net operating loss carryforwards which expire, if unused, in the years 2012 through 2028. The Company has analyzed the realization of the state net operating loss carryforwards on an individual state basis. For those states where the Company has determined that it is more likely than not that the state net operating loss carryforwards will not be realized, a valuation allowance has been provided for the deferred tax asset.
As of January 28, 2012, the Company had available for non-U.S. tax purposes net operating loss carryforwards which expire, if unused, in the years 2027 through 2031. The Company has determined that it is more likely than not that all of the net operating loss carryforwards will not be realized and a valuation allowance has been provided for the net deferred tax assets, including the net operating loss carryforwards, of the related tax loss entity.
Income tax payments were $400 million for 2011, $376 million for 2010 and $118 million for 2009.
Uncertain Tax Positions
The following table summarizes the activity related to the Company’s unrecognized tax benefits for U.S. federal, state & non-U.S. tax jurisdictions for 2011, 2010 and 2009, without interest and penalties:
 
 
2011
 
2010
 
2009
 
(in millions)
Gross Unrecognized Tax Benefits, as of the Beginning of the Fiscal Year
$
147

 
$
115

 
$
116

Increases in Unrecognized Tax Benefits for Prior Years
4

 
17

 
18

Decreases in Unrecognized Tax Benefits for Prior Years
(33
)
 
(17
)
 
(31
)
Increases in Unrecognized Tax Benefits as a Result of Current Year Activity
45

 
40

 
26

Decreases to Unrecognized Tax Benefits Relating to Settlements with Taxing Authorities
(9
)
 
(2
)
 
(9
)
Decreases to Unrecognized Tax Benefits as a Result of a Lapse of the Applicable Statute of Limitations
(8
)
 
(6
)
 
(6
)
Foreign Currency Translation
—

 
—

 
1

Gross Unrecognized Tax Benefits, as of the End of the Fiscal Year
$
146

 
$
147

 
$
115


Of the $146 million, $147 million and $115 million of total unrecognized tax benefits at January 28, 2012, January 29, 2011, and January 30, 2010, respectively, approximately $131 million, $130 million and $100 million, respectively, represent the amount of unrecognized tax benefits that if recognized would favorably affect the effective income tax rate in future periods. These amounts are net of the offsetting tax effects from other tax jurisdictions.
Of the total unrecognized tax benefits, it is reasonably possible that $96 million could change in the next twelve months due to audit settlements, expiration of statute of limitations or other resolution of uncertainties. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in amounts which could be different from this estimate. In such case, the Company will record additional tax expense or tax benefit in the period in which such matters are effectively settled.
The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense. The Company recognized interest and penalties benefit of $7 million in 2011, expense of $2 million in 2010 and benefit of $7 million in 2009. The Company has accrued approximately $25 million and $32 million for the payment of interest and penalties as of January 28, 2012 and January 29, 2011, respectively. Accrued interest and penalties are included within Other Long-term Liabilities on the Consolidated Balance Sheets.
The Company files U.S. federal income tax returns as well as income tax returns in various states and in non-U.S. jurisdictions. At the end of 2011, the Company was subject to examination by the IRS for 2008 through 2010. The Company is also subject to various U.S. state and local income tax examinations for the years 2004 to 2010. Finally, the Company is subject to multiple non-U.S. tax jurisdiction examinations for the years 2001 to 2010. In some situations, the Company determines that it does not have a filing requirement in a particular tax jurisdiction. Where no return has been filed, no statute of limitations applies. Accordingly, if a tax jurisdiction reaches a conclusion that a filing requirement does exist, additional years may be reviewed by the tax authority. The Company believes it has appropriately accounted for uncertainties related to this issue.


85

12. Long-term Debt
The following table provides the Company’s long-term debt balance as of January 28, 2012 and January 29, 2011:
 

January 28,
2012

January 29,
2011

(in millions)
Senior Unsecured Debt with Subsidiary Guarantee



$1 billion, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”)
$
1,000


$
—

$500 million, 8.50% Fixed Interest Rate Notes due June 2019, Less Unamortized Discount (“2019 Notes”)
488


486

$400 million, 7.00% Fixed Interest Rate Notes due May 2020 (“2020 Notes”)
400


400

Total Senior Unsecured Debt with Subsidiary Guarantee
$
1,888


$
886

Senior Unsecured Debt



$700 million, 6.90% Fixed Interest Rate Notes due July 2017, Less Unamortized Discount (“2017 Notes”) (a)
$
724


$
699

$350 million, 6.95% Fixed Interest Rate Debentures due March 2033, Less Unamortized Discount (“2033 Notes”)
350


350

$300 million, 7.60% Fixed Interest Rate Notes due July 2037, Less Unamortized Discount (“2037 Notes”)
299


299

5.25% Fixed Interest Rate Notes due November 2014, Less Unamortized Discount (“2014 Notes”) (b)
220


215

6.125% Fixed Interest Rate Notes due December 2012, Less Unamortized Discount (“2012 Notes”) (c)
57


58

Total Senior Unsecured Debt
$
1,650


$
1,621

Total
$
3,538


$
2,507

Current Portion of Long-term Debt (c)
(57
)

—

Total Long-term Debt, Net of Current Portion
$
3,481


$
2,507

________________

(a)
The balances include a fair value interest rate hedge adjustment which increased the debt balance by $25 million as of January 28, 2012 and $0 million as of January 29, 2011.
(b)
The principal balance outstanding was $213 million as of both January 28, 2012 and January 29, 2011. The balances include a fair value interest rate hedge adjustment which increased the debt balance by $7 million as of January 28, 2012 and $2 million as of January 29, 2011.
(c)
The principal balance outstanding was $57 million as of both January 28, 2012 and January 29, 2011. The balances include a fair value interest rate hedge adjustment which increased the debt balance by $0 million as of January 28, 2012 and $1 million as of January 29, 2011.
The following table provides principal payments due on long-term debt in the next five fiscal years and the remaining years thereafter:
 
Fiscal Year (in millions)
 
2012
$
57

2013
—

2014
213

2015
—

2016
—

Thereafter
3,250


Cash paid for interest was $225 million in 2011, $209 million in 2010 and $250 million in 2009.


86

Issuance of Notes
In May 2010, the Company issued $400 million of 7.00% notes due in May 2020 utilizing an existing shelf registration under which debt securities, common and preferred stock and other securities can be issued. The 2020 Notes are jointly and severally guaranteed on a full and unconditional basis by the guarantors. The net proceeds from the issuance were $390 million, which included transaction costs of $10 million. These transaction costs are being amortized through the maturity date of May 2020 and are included within Other Assets on the Consolidated Balance Sheets.
In March 2011, the Company issued $1 billion of 6.625% notes due in April 2021 utilizing an existing shelf registration under which debt securities, common and preferred stock and other securities can be issued. The 2021 Notes are jointly and severally guaranteed on a full and unconditional basis by the guarantors. The net proceeds from the issuance were $981 million, which included transaction costs of $19 million. These transaction costs are being amortized through the maturity date of April 2021 and are included within Other Assets on the 2011 Consolidated Balance Sheet.
Subsequent to January 28, 2012, the Company issued $1 billion of 5.625% notes due in February 2022 (“2022 Notes”) utilizing an existing shelf registration under which debt securities, common and preferred stock and other securities can be issued. The 2022 Notes are jointly and severally guaranteed on a full and unconditional basis by the guarantors. The net proceeds from the issuance were $985 million, which included transaction costs of $15 million. These transaction costs will be amortized through the maturity date of February 2022.
Repurchase of Notes
In May 2010, the Company used a portion of the proceeds from the 2020 Notes to repurchase $134 million of the Company’s 2012 Notes for $144 million. The Company used the remaining portion of the proceeds from the 2020 Notes to repurchase $266 million of the 2014 Notes for $277 million. The loss on extinguishment of this debt was $25 million and is included in Other Income on the 2010 Consolidated Statement of Income.
In August 2010, the Company repurchased $20 million and $1 million of 2014 Notes and 2012 Notes, respectively, through open-market transactions.
Revolving Facility
On July 15, 2011, the Company entered into an amendment and restatement (“Amendment”) of its secured revolving credit facility (“Revolving Facility”). The Amendment increased the aggregate amount of the commitments of the lenders under the Revolving Facility from $800 million to $1 billion and extended the termination date from August 1, 2014 to July 15, 2016. In addition, the Amendment reduced fees payable under the Revolving Facility which are based on the Company’s long-term credit ratings. The fees related to committed and unutilized amounts per year were reduced from 0.50% to 0.325% per annum and the fees related to outstanding letters of credit were reduced from 3.00% to 1.75% per annum. In addition, the interest rate on outstanding borrowings was reduced from the London Interbank Offered Rate (“LIBOR”) plus 3.00% to LIBOR plus 1.75%.
The Company incurred fees related to the Amendment of the Revolving Facility of $7 million, which were capitalized and are being amortized over the remaining term of the Revolving Facility.
The Revolving Facility contains fixed charge coverage and debt to EBITDA financial covenants. The Company is required to maintain a fixed charge coverage ratio of not less than 1.75 to 1.00 and a consolidated debt to consolidated EBITDA ratio not exceeding 4.00 to 1.00 for the most recent four-quarter period. In addition, the Revolving Facility provides that investments and restricted payments may be made, without limitation on amount, if (a) at the time of and after giving effect to such investment or restricted payment the ratio of consolidated debt to consolidated EBITDA for the most recent four-quarter period is less than 3.00 to 1.00 and (b) no default or event of default exists. As of January 28, 2012, the Company was in compliance with both of its financial covenants and the ratio of consolidated debt to consolidated EBITDA was less than 3.00 to 1.00.
As of January 28, 2012, there were no borrowings outstanding under the Revolving Facility.
Letters of Credit
The Revolving Facility supports the Company’s letter of credit program. The Company had $13 million of outstanding letters of credit as of January 28, 2012 that reduce its remaining availability under its amended credit agreements.
Term Loan and Participating Interest Rate Swap Arrangements
In March 2010, the Company prepaid $200 million of a term loan. In conjunction with the term loan prepayment, the Company

87

terminated participating interest rate swap arrangements totaling $200 million. For additional information, see Note 13, “Derivative Instruments.”
Fair Value Interest Rate Swap Arrangements
For information related to the Company’s fair value interest rate swap arrangements, see Note 13, “Derivative Instruments.”

13. Derivative Instruments
Foreign Exchange Risk
In January 2007, the Company entered into a series of cross-currency swaps related to approximately $470 million of Canadian dollar denominated intercompany loans. These cross-currency swaps mitigate the exposure to fluctuations in the U.S. dollar-Canadian dollar exchange rate related to the Company’s La Senza operations. The cross-currency swaps require the periodic exchange of fixed rate Canadian dollar interest payments for fixed rate U.S. dollar interest payments as well as exchange of Canadian dollar and U.S. dollar principal payments upon maturity. The cross-currency swaps mature between 2015 and 2018 at the same time as the related loans and are designated as cash flow hedges of foreign currency exchange risk. Changes in the U.S. dollar-Canadian dollar exchange rate and the related swap settlements result in reclassification of amounts from accumulated other comprehensive income (loss) to earnings to completely offset foreign currency transaction gains and losses recognized on the intercompany loans.
The following table provides a summary of the fair value and balance sheet classification of the derivative financial instruments designated as foreign exchange cash flow hedges as of January 28, 2012 and January 29, 2011:
 
 
January 28,
2012
 
January 29,
2011
 
(in millions)
Other Long-term Liabilities
$
60

 
$
57


The following table provides a summary of the pre-tax financial statement effect of the gains and losses on the Company’s derivative instruments designated as foreign exchange cash flow hedges for 2011 and 2010:
 
 
Location
 
2011
 
2010
 
 
 
(in millions)
Gain (Loss) Recognized in Other Comprehensive Income (Loss)
Other Comprehensive Income (Loss)
 
$
(3
)
 
$
(23
)
(Gain) Loss Reclassified from Accumulated Other Comprehensive Income (Loss) into Other Income (Loss) (a)
Other Income (Loss)
 
—

 
31

________________
(a)
Represents reclassification of amounts from accumulated other comprehensive income (loss) to earnings to completely offset foreign currency transaction gains and losses recognized on the intercompany loans. No ineffectiveness was associated with these foreign exchange cash flow hedges.
Interest Rate Risk

Interest Rate Designated Cash Flow Hedges
In March 2010, the Company prepaid a $200 million term loan. In conjunction with the term loan pre-payment, the Company terminated participating interest rate swap arrangements totaling $200 million resulting in a realized loss of $10 million. This realized loss was expensed in Interest Expense on the 2010 Consolidated Statement of Income as there are no future cash flows associated with these terminated swap arrangements.

88

Interest Rate Designated Fair Value Hedges
The Company has the following interest rate swap arrangements related to certain outstanding debt:
 
 
Notional Amount
 
 
January 28, 2012
 
January 29, 2011
 
 
(in millions)
2012 Notes
 
$
—

 
$
57

2014 Notes
 
—

 
213

2017 Notes
 
175

 
325

Total
 
$
175

 
$
595

The interest rate swap arrangements effectively convert the fixed interest rate on the related debt to a variable interest rate based on a LIBOR plus a fixed interest rate.
The swap arrangements are designated as fair value hedges. The changes in the fair value of the interest rate swaps have an equal and offsetting impact to the carrying value of the debt on the balance sheet. The differential to be paid or received on the interest rate swap arrangements is accrued and recognized as an adjustment to interest expense.
In July 2011, the Company terminated interest rate designated fair value hedges related to the 2012 Notes with a notional amount of $57 million. In settlement of these hedges, the Company received $1 million. In August 2011, the Company terminated interest rate designated fair value hedges related to the 2014 Notes with a notional amount of $213 million. In settlement of these hedges, the Company received $9 million. In September 2011, the Company terminated interest rate designated fair value hedges related to the 2017 Notes with a notional amount of $150 million. In settlement of these hedges, the Company received $12 million. The settlement amounts were equal to the fair value adjustment to the respective Notes and are amortized as a reduction to interest expense through the maturity date of the respective Notes.
The following table provides a summary of the fair value and balance sheet classification of the derivative financial instruments designated as interest rate fair value hedges as of January 28, 2012 and January 29, 2011:
 
 
January 28,
2012
 
January 29,
2011
 
(in millions)
Other Assets
$
14

 
$
3


14. Fair Value Measurements
The following table provides a summary of the carrying value and fair value of long-term debt as of January 28, 2012 and January 29, 2011:
     
 
January 28,
2012
 
January 29,
2011
 
(in millions)
Carrying Value
$
3,538

 
$
2,507

Fair Value (a)
3,849

 
2,638

________________
(a)
The estimated fair value of the Company’s publicly traded debt is based on quoted market prices. The estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

89

The following table provides a summary of assets and liabilities measured in the consolidated financial statements at fair value on a recurring basis as of January 28, 2012 and January 29, 2011:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
As of January 28, 2012
 
Assets:
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
935

 
$
—

 
$
—

 
$
935

Interest Rate Designated Fair Value Hedges
—

 
14

 
—

 
14

Liabilities:
 
 
 
 
 
 
 
Cross-currency Cash Flow Hedges
—

 
60

 
—

 
60

Lease Guarantees
—

 
—

 
4

 
4

As of January 29, 2011
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
1,130

 
$
—

 
$
—

 
$
1,130

Interest Rate Designated Fair Value Hedges
—

 
3

 
—

 
3

Liabilities:


 


 


 


Cross-currency Cash Flow Hedges
—

 
57

 
—

 
57

Lease Guarantees
—

 
—

 
6

 
6


The Company’s Level 2 fair value measurements are measured using market approach valuation techniques. The primary inputs to these techniques include benchmark interest rates and foreign currency exchange rates, as applicable to the underlying instruments.
The Company’s Level 3 fair value measurements are measured using income approach valuation techniques. The primary inputs to these techniques include the guaranteed lease payments, discount rates, as well as the Company’s assessment of the risk of default on guaranteed leases.
Management believes that the carrying values of accounts receivable, accounts payable and accrued expenses approximate fair value because of their short maturity.
The following table provides a reconciliation of the Company’s lease guarantees measured at fair value on a recurring basis using unobservable inputs (Level 3) for 2011 and 2010:
 
2011
 
2010
 
(in millions)
Beginning Balance
$
6

 
$
9

Change in Estimated Fair Value Reported in Earnings
(2
)
 
(3
)
Ending Balance
$
4

 
$
6


The Company’s lease 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 certain businesses. The fair value of these lease guarantees is impacted by economic conditions, probability of rent obligation payments, period of obligation as well as the discount rate utilized. For additional information, see Note 17, “Commitments and Contingencies.”

15. Comprehensive Income
Comprehensive Income consists of gains and losses on derivative instruments and foreign currency translation adjustments. The cumulative gains and losses on these items are included in Accumulated Other Comprehensive Income in the Consolidated Balance Sheets and Consolidated Statements of Shareholders' Equity.

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The following table provides the rollforward of additional detail regarding the composition of accumulated other comprehensive income as of January 28, 2012 and January 29, 2011:
 
Foreign Currency Translation
 
Cash Flow Hedges
 
Accumulated Other Comprehensive Income
 
(in millions)
Balance as of January 30, 2010
$
(6
)
 
$
(9
)
 
$
(15
)
Current-period Other Comprehensive Income
(1
)
 
17

 
16

Balance as of January 29, 2011
(7
)
 
8

 
1

Current-period Other Comprehensive Income
(1
)
 
—

 
(1
)
Balance as of January 28, 2012
$
(8
)
 
$
8

 
$
—


The components of accumulated other comprehensive income above are presented net of tax as applicable.

16. Leases
The Company is committed to noncancelable leases with remaining terms generally from one to ten years. A substantial portion of the Company’s leases consist of store leases generally with an initial term of ten years. Annual store rent consists of a fixed minimum amount and/or contingent rent based on a percentage of sales exceeding a stipulated amount. Store lease terms generally require additional payments covering certain operating costs such as common area maintenance, utilities, insurance and taxes. These additional payments are excluded from the table below.
The following table provides rent expense for 2011, 2010 and 2009:
 
 
2011
 
2010
 
2009
 
(in millions)
Store Rent:
 
 
 
 
 
Fixed Minimum
$
437

 
$
417

 
$
407

Contingent
50

 
44

 
40

Total Store Rent
487

 
461

 
447

Office, Equipment and Other
62

 
60

 
61

Gross Rent Expense
549

 
521

 
508

Sublease Rental Income
(3
)
 
(3
)
 
(2
)
Total Rent Expense
$
546

 
$
518

 
$
506


The following table provides the Company’s minimum rent commitments under noncancelable operating leases in the next five fiscal years and the remaining years thereafter:
 
Fiscal Year (in millions) (a)
 
2012
$
493

2013
463

2014
434

2015
381

2016
329

Thereafter
1,020

 ________________
(a)
Excludes additional payments covering taxes, common area costs and certain other expenses generally required by store lease terms.
The Company’s future sublease income under noncancelable subleases was $9 million as of January 28, 2012, which included $2 million of rent commitments related to disposed businesses under master lease arrangements.


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17. Commitments and Contingencies
The Company is subject to various claims and contingencies related to lawsuits, taxes, insurance, regulatory and other matters arising out of the normal course of business. Actions filed against the Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company’s results of operations, financial condition or cash flows.
Guarantees
In connection with the disposition of certain businesses, the Company has remaining guarantees of approximately $78 million related to lease payments of Express, Limited Stores, Abercrombie & Fitch, Dick’s Sporting Goods (formerly Galyan’s) and New York & Company under the current terms of noncancelable leases expiring at various dates through 2017. 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’s guarantees related to Express, Limited Stores and New York & Company require fair value accounting in accordance with GAAP in effect at the time of these divestitures. The guaranteed lease payments related to Express, Limited Stores and New York & Company totaled $49 million as of January 28, 2012 and $65 million as of January 29, 2011. The estimated fair value of these guarantee obligations was $4 million as of January 28, 2012 and $6 million as of January 29, 2011, and is included in Other Long-term Liabilities on the Consolidated Balance Sheets.
The Company’s guarantees related to Abercrombie & Fitch and Dick’s Sporting Goods (formerly Galyan’s) are not subject to fair value accounting, but require that a loss be accrued when probable and reasonably estimable based on GAAP in effect at the time of these divestitures. The Company had no liability recorded with respect to any of the guarantee obligations as it concluded that payments under these guarantees were not probable as of January 28, 2012 and January 29, 2011.

18. Retirement Benefits
The Company sponsors a tax-qualified defined contribution retirement plan and a non-qualified supplemental retirement plan for substantially all of its associates within the United States of America. Participation in the tax-qualified plan is available to associates who meet certain age and service requirements. Participation in the non-qualified plan is available to associates who meet certain age, service, job level and compensation requirements.
The qualified plan permits participating associates to elect contributions up to the maximum limits allowable under the Internal Revenue Code. The Company matches associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of the associates’ eligible annual compensation and years of service. Associate contributions and Company matching contributions vest immediately. Additional Company contributions and the related investment earnings are subject to vesting based on years of service. Total expense recognized related to the qualified plan was $51 million for 2011, $49 million for 2010 and $46 million for 2009.
The non-qualified plan is an unfunded plan which provides benefits beyond the Internal Revenue Code limits for qualified defined contribution plans. The plan permits participating associates to elect contributions up to a maximum percentage of eligible compensation. The Company matches associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of the associates’ eligible compensation and years of service. The plan also permits participating associates to defer additional compensation up to a maximum amount which the Company does not match. Associates’ accounts are credited with interest using a rate determined by the Company. Associate contributions and the related interest vest immediately. Company contributions, along with related interest, are subject to vesting based on years of service. Associates may elect in-service distributions for the unmatched additional deferred compensation component only. The remaining vested portion of associates’ accounts in the plan will be distributed upon termination of employment in either a lump sum or in annual installments over a specified period of up to 10 years.

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The following table provides the Company’s annual activity for this plan and year-end liability, included in Other Long-term Liabilities on the Consolidated Balance Sheets, as of January 28, 2012 and January 29, 2011:
 
January 28,
2012
 
January 29,
2011
 
(in millions)
Balance at Beginning of Year
$
193

 
$
168

Contributions:
 
 
 
Associate
12

 
12

Company
15

 
15

Interest
11

 
12

Distributions
(17
)
 
(14
)
Balance at End of Year
$
214

 
$
193


Total expense recognized related to the non-qualified plan was $26 million for 2011, $27 million for 2010 and $20 million for 2009.

19. Shareholders’ Equity
Common Stock Repurchases
Under the authority of the Company’s Board of Directors, the Company repurchased shares of its common stock under the following repurchase programs during the fiscal years 2011, 2010 and 2009:
 
 
 
 
 
Shares Repurchased
 
Amount Repurchased
 
Average Stock
Price of
Shares
Repurchased
within
Program
Repurchase Program
 
Amount  Authorized
 
2011
 
2010
 
2009
 
2011
 
2010
 
2009
 
 
 
(in millions)
 
(in thousands)
 
(in millions)
 
 
November 2011 (a)
 
$
250

 
2,116

 
NA

 
NA
 
$
85

 
NA

 
NA
 
$
40.50

May 2011
 
500

 
13,293

 
NA

 
NA
 
500

 
NA

 
NA
 
37.59

March 2011
 
500

 
13,695

 
NA

 
NA
 
500

 
NA

 
NA
 
36.49

November 2010 (b)
 
200

 
3,431

 
1,907

 
NA
 
109

 
$
60

 
NA
 
31.68

March 2010 (c)
 
200

 
NA

 
5,714

 
NA
 
NA

 
147

 
NA
 
25.69

Total
 
 
 
32,535

 
7,621

 

 
$
1,194

 
$
207

 

 
 
 ________________
(a)
The November 2011 repurchase program had $165 million remaining as of January 28, 2012.
(b)
The November 2010 repurchase program had $31 million remaining at the time it was cancelled in conjunction with the approval of the March 2011 repurchase program.
(c)
The March 2010 repurchase program had $53 million remaining at the time it was cancelled in conjunction with the approval of the November 2010 repurchase program.
NA
Not applicable
For the November 2011 repurchase program, $4 million of share repurchases were reflected in Accounts Payable on the 2011 Consolidated Balance Sheet and were settled in February 2012. There were no share repurchases reflected in Accounts Payable as of January 29, 2011.
Subsequent to January 28, 2012, the Company completed the November 2011 repurchase program by repurchasing an additional 4 million shares of common stock for $165 million under the program. In addition, the Company's Board of Directors approved a new $500 million share repurchase program in February 2012 ("February 2012 repurchase program").

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Dividends
Under the authority and declaration of the Board of Directors, the Company paid the following dividends during the fiscal years 2011, 2010 and 2009:
 
 
Ordinary Dividends
 
Special Dividends
 
Total Dividends
 
Total Paid
 
 
(per share)
 
(in millions)
2011
 
 
 
 
 
 
 
 
Fourth Quarter
 
$
0.20

 
$
2.00

 
$
2.20

 
$
653

Third Quarter
 
0.20

 
—

 
0.20

 
60

Second Quarter
 
0.20

 
1.00

 
1.20

 
367

First Quarter
 
0.20

 
—

 
0.20

 
64

2011 Total
 
$
0.80

 
$
3.00

 
$
3.80

 
$
1,144

2010
 
 
 
 
 
 
 
 
Fourth Quarter
 
$
0.15

 
$
3.00

 
$
3.15

 
$
1,017

Third Quarter
 
0.15

 
—

 
0.15

 
49

Second Quarter
 
0.15

 
—

 
0.15

 
49

First Quarter
 
0.15

 
1.00

 
1.15

 
373

2010 Total
 
$
0.60

 
$
4.00

 
$
4.60

 
$
1,488

2009
 
 
 
 
 
 
 
 
Fourth Quarter
 
$
0.15

 
$
—

 
$
0.15

 
$
49

Third Quarter
 
0.15

 
—

 
0.15

 
48

Second Quarter
 
0.15

 
—

 
0.15

 
48

First Quarter
 
0.15

 
—

 
0.15

 
48

2009 Total
 
$
0.60

 
$
—

 
$
0.60

 
$
193


Subsequent to January 28, 2012, the Board of Directors declared the first quarter 2012 common stock dividend of $0.25 per share payable on March 9, 2012 to shareholders of record at the close of business on February 24, 2012. This is a $0.05 increase from the 2011 quarterly dividends.
Treasury Stock Retirement
In January 2010, the Company retired 201 million shares of its treasury stock. The retirement resulted in a reduction of $4.641 billion in Treasury Stock, $101 million in the par value of Common Stock, $1.545 billion in Paid-in Capital and $2.995 billion in Retained Earnings.
In December 2011, the Company retired 39 million shares of its treasury stock. The retirement resulted in a reduction of $1.341 billion in Treasury Stock, $19 million in the par value of Common Stock, $286 million in Paid-in Capital and $1.036 billion in Retained Earnings.

20. Share-based Compensation
Plan Summary
In 2011, the Company's shareholders approved the 2011 Stock Option and Performance Incentive Plan ("2011 Plan"). The 2011 Plan replaces the 2009 Restatement of the 1993 Stock Option and Performance Incentive Plan. The plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, performance-based restricted stock, performance units and unrestricted shares. The Company grants stock options at a price equal to the fair market value of the stock on the date of grant. Stock options have a maximum term of ten years. Stock options generally vest ratably over 3 to 4 years. Restricted stock generally vests (the restrictions lapse) at the end of a three year period.
The Limited Brands, Inc. Stock Award and Deferred Compensation Plan for Non-Associate Directors provides for an annual stock retainer for non-associate directors. The stock issued in conjunction with this plan has no restrictions.
Under the Company’s plans, approximately 133 million options, restricted and unrestricted shares have been authorized to be granted to employees and directors. Approximately 19 million options and shares were available for grant as of January 28, 2012.

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In 2011, the Company’s Board of Directors declared special dividends of $3 per share. For additional information, see Note 19, "Shareholders' Equity." In accordance with the anti-dilutive provisions of the Stock Plan, the Company adjusted both the exercise price and the number of share-based awards outstanding as of the record date of the special dividends. The aggregate fair value, the aggregate intrinsic value and the ratio of the exercise price to the market price were approximately equal immediately before and after the adjustments. Therefore, no compensation expense was recognized.
Stock Options
The following table provides the Company’s stock option activity for the fiscal year ended January 28, 2012:
 
 
Number of
Shares
 
Weighted
Average
Option
Price Per
Share
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
(in thousands)
 
 
 
(in years)
 
(in thousands)
Outstanding as of January 29, 2011
12,450

 
$
16.01

 
 
 
 
Granted
1,597

 
31.71

 
 
 
 
Exercised
(4,999
)
 
15.13

 
 
 
 
Cancelled
(612
)
 
19.93

 
 
 
 
Adjustment for Special Dividends
947

 
 
 
 
 
 
Outstanding as of January 28, 2012
9,383

 
$
17.26

 
5.74

 
$
227,033

Vested and Expected to Vest as of January 28, 2012 (a)
9,119

 
16.97

 
5.65

 
223,369

Options Exercisable as of January 28, 2012
5,198

 
15.03

 
3.86

 
137,413

 ________________
(a)
The number of options expected to vest includes an estimate of expected forfeitures.
Intrinsic value for stock options is the difference between the current market value of the Company’s stock and the option strike price. The total intrinsic value of options exercised was $100 million for 2011, $57 million for 2010 and $3 million for 2009.
The total fair value at grant date of option awards vested was $8 million for 2011, $8 million for 2010 and $12 million for 2009.
The Company’s total unrecognized compensation cost, net of estimated forfeitures, related to nonvested options was $14 million as of January 28, 2012. This cost is expected to be recognized over a weighted-average period of 2.6 years.
The weighted-average estimated fair value of stock options granted was $9.35 per share for 2011, $7.51 per share for 2010 and $1.88 per share for 2009.
Cash received from stock options exercised was $75 million for 2011, $88 million for 2010 and $10 million for 2009. Tax benefits realized from tax deductions associated with stock options exercised were $34 million for 2011, $20 million for 2010 and $1 million for 2009.
The Company uses the Black-Scholes option-pricing model for valuation of options granted to employees and directors. The Company’s determination of the fair value of options is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and projected employee stock option exercise behaviors.
The following table contains the weighted-average assumptions used during 2011, 2010 and 2009:
 
 
2011
 
2010
 
2009
Expected Volatility
48
%
 
49
%
 
45
%
Risk-free Interest Rate
1.9
%
 
2.3
%
 
1.4
%
Dividend Yield
4.1
%
 
3.3
%
 
6.8
%
Expected Life (in years)
5.0

 
4.5

 
3.8


The majority of the Company’s stock-based compensation awards are granted on an annual basis in the first quarter of each year. The expected volatility assumption is based on the Company’s analysis of historical volatility. The risk-free interest rate

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assumption is based upon the average daily closing rates during the period for U.S. treasury notes that have a life which approximates the expected life of the option. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts in relation to the stock price at the grant date. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding.
Restricted Stock
The following table provides the Company’s restricted stock activity for the fiscal year ended January 28, 2012:
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
(in thousands)
 
 
Unvested as of January 29, 2011
10,442

 
$
11.86

Granted
2,508

 
29.34

Vested
(2,604
)
 
12.42

Cancelled
(718
)
 
17.33

Adjustment for Special Dividends
804

 
NA

Unvested as of January 28, 2012
10,432

 
14.68

 ________________
NA
Not applicable

The Company’s total intrinsic value of restricted stock vested was $83 million for 2011, $40 million for 2010 and $14 million for 2009.
The Company’s total fair value at grant date of awards vested was $32 million for 2011 and $29 million for both 2010 and 2009. Fair value of restricted stock awards is based on the market value of an unrestricted share on the grant date adjusted for anticipated dividend yields.
As of January 28, 2012, there was $61 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock. That cost is expected to be recognized over a weighted-average period of 2.3 years.
Tax benefits realized from tax deductions associated with restricted stock vested were $31 million for 2011, $15 million for 2010 and $4 million for 2009.
Income Statement Impact
The following table provides share-based compensation expense included in the Consolidated Statements of Income for 2011, 2010 and 2009:
 
2011
 
2010
 
2009
 
(in millions)
Costs of Goods Sold, Buying and Occupancy
$
14

 
$
17

 
$
12

General, Administrative and Store Operating Expenses
37

 
47

 
28

Total Share-based Compensation Expense
$
51

 
$
64

 
$
40


Share-based compensation expense is based on awards that are ultimately expected to vest. The Company estimates forfeitures at the time of grant and adjusts, if necessary, in subsequent periods based on historical experience and expected future termination rates.
The tax benefit associated with share-based compensation was $17 million for 2011, $21 million for 2010 and $13 million for 2009.

21. Segment Information

The Company has two reportable segments: Victoria’s Secret and Bath & Body Works. Prior to the fourth quarter of 2011, the Victoria’s Secret reportable segment consisted of the Victoria’s Secret and La Senza operating segments which were aggregated in accordance with the authoritative guidance included in ASC Topic 280, Segment Reporting. In the fourth quarter of 2011, the Company ceased aggregating La Senza with Victoria's Secret. While this reporting change did not impact the Company's

96

consolidated results, segment data for previous years has been recast to be consistent with the current year presentation throughout the financial statements and the accompanying notes.
The Victoria’s Secret segment sells women’s intimate and other apparel, personal care and beauty products under the Victoria’s Secret and Victoria’s Secret Pink brand names. Victoria’s Secret merchandise is sold through retail stores, its website, www.VictoriasSecret.com, and its catalogue.
The Bath & Body Works segment sells personal care, beauty and home fragrance products under the Bath & Body Works, C.O. Bigelow, White Barn Candle Company and other brand names. Bath & Body Works merchandise is sold at retail stores and through its website, www.BathandBodyWorks.com.
Other consists of the following:
•
Mast Global, a merchandise sourcing and production function serving our internal brands;
•
International retail, franchise and wholesale operations, which include the company-owned La Senza, Bath & Body Works and Victoria’s Secret stores in Canada;
•
Henri Bendel, operator of 19 specialty stores, which features accessories and personal care products; and
•
Corporate functions including non-core real estate, equity investments and other governance functions such as treasury and tax.
The following table provides the Company’s segment information as of and for the fiscal years ended January 28, 2012, January 29, 2011 and January 30, 2010. As discussed above, certain reclassifications have been made to amounts for prior periods to conform to the current year's presentation.
 
Victoria’s
Secret
 
Bath & Body
Works
 
Other
 
Total
 
(in millions)
January 28, 2012
 
 
 
 
 
 
 
Net Sales
$
6,121

 
$
2,674

 
$
1,569

 
$
10,364

Depreciation and Amortization
142

 
52

 
162

 
356

Operating Income (Loss) (a)
1,081

 
513

 
(356
)
 
1,238

Total Assets
2,346

 
1,273

 
2,489

 
6,108

Capital Expenditures
161

 
60

 
205

 
426

January 29, 2011
 
 
 
 
 
 
 
Net Sales
$
5,520

 
$
2,515

 
$
1,578

 
$
9,613

Depreciation and Amortization
135

 
55

 
169

 
359

Operating Income (Loss)
888

 
464

 
(68
)
 
1,284

Total Assets
2,357

 
1,330

 
2,764

 
6,451

Capital Expenditures
82

 
39

 
153

 
274

January 30, 2010
 
 
 
 
 
 
 
Net Sales
$
4,884

 
$
2,383

 
$
1,365

 
$
8,632

Depreciation and Amortization
130

 
58

 
169

 
357

Operating Income (Loss) (a)
578

 
358

 
(68
)
 
868

Total Assets
2,471

 
1,350

 
3,352

 
7,173

Capital Expenditures
105

 
24

 
73

 
202

________________
(a)
Operating Loss for the Other segment includes the effect of the following items:
(i)
In 2011, a $232 million impairment charge related to goodwill and other intangible assets for our La Senza business; a $111 million gain related to the divestiture of 51% of our third-party apparel sourcing business; $163 million of expense related to the charitable contribution of our remaining shares of Express, Inc. to The Limited Brands Foundation; and $24 million of restructuring expenses at La Senza.
(ii)
In 2009, a $9 million pre-tax gain, $14 million net of related tax benefits, associated with the reversal of an accrued contractual liability as a result of the divestiture of a joint venture.

The Company’s international sales, consisting of La Senza, Victoria's Secret Canada and Bath & Body Works Canada retail sales; non-U.S. franchise, license and wholesale operations; and direct sales shipped internationally, totaled $943 million in 2011, $762 million in 2010 and $638 million in 2009. The Company’s internationally based long-lived assets were $277 million as of January 28, 2012 and $471 million as of January 29, 2011.

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22. Quarterly Financial Data (Unaudited)
The following table provides summarized quarterly financial data for 2011:
 
Fiscal Quarter Ended
 
April 30,
2011 (b)
 
July 30,
2011 (c)
 
October 29,
2011 (d)
 
January 28,
2012 (e)
 
(in millions except per share data)
Net Sales
$
2,217

 
$
2,458

 
$
2,174

 
$
3,515

Gross Profit
842

 
902

 
785

 
1,528

Operating Income
217

 
194

 
186

 
641

Income Before Income Taxes
249

 
276

 
122

 
580

Net Income
165

 
231

 
94

 
360

Net Income Per Basic Share (a)
$
0.52

 
$
0.76

 
$
0.32

 
$
1.21

Net Income Per Diluted Share (a)
$
0.50

 
$
0.73

 
$
0.31

 
$
1.17

 ________________
(a)
Due to changes in stock prices during the year and timing of issuances and repurchases of shares, the cumulative total of quarterly net income per share amounts may not equal the net income per share for the year.
(b)
Includes the effect of the following items:
(i)
A pre-tax gain of $86 million related to the sale of shares of Express, Inc. common stock;
(ii)
A pre-tax expense of $50 million related to a pledge to The Limited Brands Foundation; and
(iii)
A tax benefit of $11 million related to the favorable resolution of certain discrete income tax matters.
(c)
Includes the effect of a non-taxable gain of $147 million and pre-tax expense of $113 million associated with the charitable contribution of Express, Inc. common stock to The Limited Brands Foundation.
(d)
Includes the effect of a tax benefit of $17 million related to the favorable resolution of certain discrete income tax matters.
(e)
Includes the effect of the following items:
(i)
A pre-tax charge of $232 million related to the impairment of La Senza goodwill and other intangible assets;
(ii)
A pre-tax gain of $111 million related to the sale of 51% of the third-party apparel sourcing business;
(iii)
A pre-tax expense of $24 million relating to restructuring expenses at La Senza; and
(iv)
A tax benefit of $28 million related to certain discrete income tax matters.
The following table provides summarized quarterly financial data for 2010:
 
Fiscal Quarter Ended
 
May 1,
2010 (b)
 
July 31,
2010 (c)
 
October 30,
2010
 
January 29,
2011 (d)
 
(in millions except per share data)
Net Sales
$
1,932

 
$
2,242

 
$
1,983

 
$
3,456

Gross Profit
694

 
778

 
714

 
1,445

Operating Income
185

 
236

 
149

 
714

Income Before Income Taxes
187

 
244

 
101

 
719

Net Income
113

 
178

 
61

 
453

Net Income Per Basic Share (a)
$
0.35

 
$
0.55

 
$
0.19

 
$
1.41

Net Income Per Diluted Share (a)
$
0.34

 
$
0.54

 
$
0.18

 
$
1.36

________________
(a)
Due to changes in stock prices during the year and timing of issuances and repurchases of shares, the cumulative total of quarterly net income per share amounts may not equal the net income per share for the year.
(b)
Includes the effect of a pre-tax gain of $49 million related to a $57 million cash distribution from Express.
(c)
Includes the effect of the following items:
(i)
A pre-tax gain of $52 million related to the initial public offering of Express, Inc. including the sale of a portion of the company’s shares;
(ii)
A pre-tax loss of $25 million associated with the early retirement of portions of the 2012 and 2014 notes; and
(iii)
A pre-tax gain of $20 million associated with the sale of the remaining 25% ownership interest in Limited Stores.
(d)
Includes the effect of the following items:
(i)
A pre-tax gain of $45 million related to the sale of Express, Inc. common stock; and
(ii)
A pre-tax gain of $7 million related to a dividend payment from Express, Inc.

98

23. Subsequent Events
In February 2012, the Company issued $1 billion of notes due in February 2022 utilizing an existing shelf registration. For additional information, see Note 12, "Long-term Debt."
In February 2012, the Company completed the November 2011 repurchase program and the Company's Board of Directors approved a new $500 million share repurchase program. For additional information, see Note 19, "Shareholders' Equity."

24. Supplemental Guarantor Financial Information
The Company’s 2019 Notes, 2020 Notes, 2021 Notes and 2022 Notes (issued subsequent to January 28, 2012), are jointly and severally guaranteed on a full and unconditional basis by certain of the Company’s 100% owned subsidiaries. The Company is a holding company and its most significant assets are the stock of its subsidiaries. The guarantors represent: (a) substantially all of the sales of the Company’s domestic subsidiaries, (b) more than 90% of the assets owned by the Company’s domestic subsidiaries, other than real property, certain other assets and intercompany investments and balances, and (c) more than 95% of the accounts receivable and inventory directly owned by the Company’s domestic subsidiaries.
The following supplemental financial information sets forth for the Company and its guarantor and non-guarantor subsidiaries: the Condensed Consolidating Balance Sheets as of January 28, 2012 and January 29, 2011 and the Condensed Consolidating Statements of Income and Cash Flows for the years ended January 28, 2012, January 29, 2011 and January 30, 2010.



99

LIMITED BRANDS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)
 
 
January 28, 2012
 
Limited
Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Limited
Brands, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
—

 
$
371

 
$
564

 
$
—

 
$
935

Accounts Receivable, Net
—

 
142

 
76

 
—

 
218

Inventories
—

 
822

 
175

 
—

 
997

Deferred Income Taxes
—

 
33

 
18

 
—

 
51

Other
—

 
109

 
58

 
—

 
167

Total Current Assets
—

 
1,477

 
891

 
—

 
2,368

Property and Equipment, Net
—

 
911

 
733

 
—

 
1,644

Goodwill
—

 
1,318

 
12

 
—

 
1,330

Trade Names and Other Intangible Assets, Net
—

 
410

 
85

 
—

 
495

Net Investments in and Advances to/from Consolidated Affiliates
3,531

 
13,928

 
518

 
(17,977
)
 
—

Other Assets
199

 
43

 
677

 
(648
)
 
271

Total Assets
$
3,730

 
$
18,087

 
$
2,916

 
$
(18,625
)
 
$
6,108

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts Payable
$
4

 
$
312

 
$
224

 
$
—

 
$
540

Accrued Expenses and Other
51

 
412

 
307

 
—

 
770

Current Portion of Long-term Debt
57

 
—

 
—

 
—

 
57

Income Taxes
1

 
150

 
8

 
—

 
159

Total Current Liabilities
113

 
874

 
539

 
—

 
1,526

Deferred Income Taxes
(6
)
 
10

 
179

 
—

 
183

Long-term Debt
3,481

 
597

 
36

 
(633
)
 
3,481

Other Long-term Liabilities
6

 
582

 
207

 
(15
)
 
780

Total Equity
136

 
16,024

 
1,955

 
(17,977
)
 
138

Total Liabilities and Equity
$
3,730

 
$
18,087

 
$
2,916

 
$
(18,625
)
 
$
6,108


100

LIMITED BRANDS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)
 
 
January 29, 2011
 
Limited
Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Limited
Brands, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
—

 
$
701

 
$
429

 
$
—

 
$
1,130

Accounts Receivable, Net
1

 
189

 
42

 
—

 
232

Inventories
—

 
830

 
202

 
—

 
1,032

Deferred Income Taxes
—

 
30

 
5

 
—

 
35

Other
—

 
117

 
47

 
(1
)
 
163

Total Current Assets
1

 
1,867

 
725

 
(1
)
 
2,592

Property and Equipment, Net
—

 
936

 
674

 
—

 
1,610

Goodwill
—

 
1,318

 
133

 
—

 
1,451

Trade Names and Other Intangible Assets, Net
—

 
411

 
181

 
—

 
592

Net Investments in and Advances to/from Consolidated Affiliates
11,835

 
28,045

 
14,486

 
(54,366
)
 
—

Other Assets
176

 
55

 
645

 
(670
)
 
206

Total Assets
$
12,012

 
$
32,632

 
$
16,844

 
$
(55,037
)
 
$
6,451

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts Payable
$
—

 
$
312

 
$
233

 
$
—

 
$
545

Accrued Expenses and Other
29

 
420

 
316

 
—

 
765

Income Taxes
(3
)
 
167

 
30

 
—

 
194

Total Current Liabilities
26

 
899

 
579

 
—

 
1,504

Deferred Income Taxes
(6
)
 
28

 
180

 
—

 
202

Long-term Debt
2,507

 
608

 
47

 
(655
)
 
2,507

Other Long-term Liabilities
12

 
576

 
188

 
(15
)
 
761

Total Equity
9,473

 
30,521

 
15,850

 
(54,367
)
 
1,477

Total Liabilities and Equity
$
12,012

 
$
32,632

 
$
16,844

 
$
(55,037
)
 
$
6,451


101

LIMITED BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(in millions)
 
 
2011
 
Limited
Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Limited
Brands, Inc.
Net Sales
$
—

 
$
9,570

 
$
3,334

 
$
(2,540
)
 
$
10,364

Costs of Goods Sold, Buying and Occupancy
—

 
(5,943
)
 
(2,782
)
 
2,418

 
(6,307
)
Gross Profit
—

 
3,627

 
552

 
(122
)
 
4,057

General, Administrative and Store Operating Expenses
(5
)
 
(2,297
)
 
(517
)
 
121

 
(2,698
)
Impairment of Goodwill and Other Intangible Assets
—

 
—

 
(232
)
 
—

 
(232
)
Gain on Divestiture of Third-party Apparel Sourcing Business
—

 
6

 
105

 
—

 
111

Operating Income (Loss)
(5
)
 
1,336

 
(92
)
 
(1
)
 
1,238

Interest Expense
(245
)
 
(25
)
 
(12
)
 
36

 
(246
)
Other Income (Loss)
251

 
(247
)
 
244

 
(13
)
 
235

Income (Loss) Before Income Taxes
1

 
1,064

 
140

 
22

 
1,227

Provision (Benefit) for Income Taxes
2

 
324

 
51

 
—

 
377

Equity in Earnings, Net of Tax
851

 
356

 
207

 
(1,414
)
 
—

Net Income (Loss)
$
850

 
$
1,096

 
$
296

 
$
(1,392
)
 
$
850



LIMITED BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
(in millions)
 
 
2011
 
Limited
Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Limited
Brands, Inc.
Net Income (Loss)
$
850

 
$
1,096

 
$
296

 
$
(1,392
)
 
$
850

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
 
 
   Reclassification of Cash Flow Hedges to Earnings
3

 
—

 
—

 
—

 
3

   Foreign Currency Translation
—

 
—

 
(1
)
 
—

 
(1
)
   Unrealized Loss on Cash Flow Hedges
—

 
—

 
(3
)
 
—

 
(3
)
Total Other Comprehensive Income (Loss), Net of Tax
3

 
—

 
(4
)
 
—

 
(1
)
Total Comprehensive Income
$
853

 
$
1,096

 
$
292

 
$
(1,392
)
 
$
849



102

LIMITED BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(in millions)
 
 
2010
 
Limited
Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Limited
Brands, Inc.
Net Sales
$
—

 
$
9,005

 
$
2,587

 
$
(1,979
)
 
$
9,613

Costs of Goods Sold, Buying and Occupancy
—

 
(5,655
)
 
(2,161
)
 
1,834

 
(5,982
)
Gross Profit
—

 
3,350

 
426

 
(145
)
 
3,631

General, Administrative and Store Operating Expenses
(4
)
 
(2,212
)
 
(286
)
 
161

 
(2,341
)
Impairment of Goodwill and Other Intangible Assets
—

 
(6
)
 
—

 
—

 
(6
)
Operating Income (Loss)
(4
)
 
1,132

 
140

 
16

 
1,284

Interest Expense
(207
)
 
—

 
(13
)
 
12

 
(208
)
Other Income (Loss)
(26
)
 
15

 
196

 
(10
)
 
175

Income (Loss) Before Income Taxes
(237
)
 
1,147

 
323

 
18

 
1,251

Provision (Benefit) for Income Taxes
1

 
338

 
107

 
—

 
446

Equity in Earnings, Net of Tax
1,043

 
862

 
313

 
(2,218
)
 
—

Net Income (Loss)
$
805

 
$
1,671

 
$
529

 
$
(2,200
)
 
$
805



LIMITED BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
(in millions)
 
 
2010
 
Limited
Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Limited
Brands, Inc.
Net Income (Loss)
$
805

 
$
1,671

 
$
529

 
$
(2,200
)
 
$
805

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
 
 
   Reclassification of Cash Flow Hedges to Earnings
10

 
—

 
31

 
—

 
41

   Foreign Currency Translation
—

 
—

 
(1
)
 
—

 
(1
)
   Unrealized Loss on Cash Flow Hedges
(1
)
 
—

 
(23
)
 
—

 
(24
)
Total Other Comprehensive Income (Loss), Net of Tax
9

 
—

 
7

 
—

 
16

Total Comprehensive Income
$
814

 
$
1,671

 
$
536

 
$
(2,200
)
 
$
821



103

LIMITED BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(in millions)
 
 
2009
 
Limited
Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Limited
Brands, Inc.
Net Sales
$
—

 
$
8,205

 
$
2,314

 
$
(1,887
)
 
$
8,632

Costs of Goods Sold, Buying and Occupancy
—

 
(5,445
)
 
(1,907
)
 
1,748

 
(5,604
)
Gross Profit
—

 
2,760

 
407

 
(139
)
 
3,028

General, Administrative and Store Operating Expenses
(2
)
 
(2,043
)
 
(262
)
 
141

 
(2,166
)
Impairment of Goodwill and Other Intangible Assets
—

 
—

 
(3
)
 
—

 
(3
)
Net Gain on Joint Venture
9

 
—

 
—

 
—

 
9

Operating Income (Loss)
7

 
717

 
142

 
2

 
868

Interest Expense
(234
)
 
—

 
(13
)
 
10

 
(237
)
Other Income (Loss)
—

 
12

 
16

 
(9
)
 
19

Income (Loss) Before Income Taxes
(227
)
 
729

 
145

 
3

 
650

Provision (Benefit) for Income Taxes
—

 
221

 
(19
)
 
—

 
202

Equity in Earnings, Net of Tax
675

 
612

 
221

 
(1,508
)
 
—

Net Income (Loss)
$
448

 
$
1,120

 
$
385

 
$
(1,505
)
 
$
448



LIMITED BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
(in millions)
 
 
2009
 
Limited
Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Limited
Brands, Inc.
Net Income (Loss)
$
448

 
$
1,120

 
$
385

 
$
(1,505
)
 
$
448

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
 
 
   Reclassification of Cash Flow Hedges to Earnings
14

 
—

 
57

 
—

 
71

   Foreign Currency Translation
—

 
—

 
(2
)
 
—

 
(2
)
   Unrealized (Loss) / Gain on Cash Flow Hedges
4

 
—

 
(60
)
 
—

 
(56
)
Total Other Comprehensive Income (Loss), Net of Tax
18

 
—

 
(5
)
 
—

 
13

Total Comprehensive Income
$
466

 
$
1,120

 
$
380

 
$
(1,505
)
 
$
461



104

LIMITED BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in millions)
 
 
2011
 
Limited
Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Limited
Brands, Inc.
Net Cash Provided by (Used for) Operating Activities
$
73

 
$
978

 
$
215

 
$
—

 
$
1,266

Investing Activities:
 
 
 
 
 
 
 
 
 
Capital Expenditures
—

 
(219
)
 
(207
)
 
—

 
(426
)
Proceeds from Divestiture of Third-party Apparel Sourcing Business
—

 
78

 
46

 
—

 
124

Proceeds from Sale of Express Common Stock
—

 
—

 
99

 
—

 
99

Net Investments in Consolidated Affiliates
—

 
(36
)
 
—

 
36

 
—

Other Investing Activities
—

 
—

 
(23
)
 
—

 
(23
)
Net Cash Provided by (Used for) Investing Activities
—

 
(177
)
 
(85
)
 
36

 
(226
)
Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from Long-term Debt, Net of Issuance and Discount Costs
981

 
—

 
—

 
—

 
981

Financing Costs
(7
)
 
—

 
—

 
—

 
(7
)
Repurchase of Common Stock
(1,190
)
 
—

 
—

 
—

 
(1,190
)
Dividends Paid
(1,144
)
 
—

 
—

 
—

 
(1,144
)
Excess Tax Benefits from Share-based Compensation
—

 
39

 
9

 
—

 
48

Net Financing Activities and Advances to/from Consolidated Affiliates
1,212

 
(1,170
)
 
(6
)
 
(36
)
 
—

Proceeds From Exercise of Stock Options and Other
75

 
—

 
—

 
—

 
75

Net Cash Provided by (Used for) Financing Activities
(73
)
 
(1,131
)
 
3

 
(36
)
 
(1,237
)
Effects of Exchange Rate Changes on Cash
—

 
—

 
2

 
—

 
2

Net Increase (Decrease) in Cash and Cash Equivalents
—

 
(330
)
 
135

 
—

 
(195
)
Cash and Cash Equivalents, Beginning of Year
—

 
701

 
429

 
—

 
1,130

Cash and Cash Equivalents, End of Year
$
—

 
$
371

 
$
564

 
$
—

 
$
935


105

LIMITED BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in millions)
 
 
2010
 
Limited
Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Limited
Brands, Inc.
Net Cash Provided by (Used for) Operating Activities
$
(355
)
 
$
1,206

 
$
433

 
$
—

 
$
1,284

Investing Activities:
 
 
 
 
 
 
 
 
 
Capital Expenditures
—

 
(129
)
 
(145
)
 
—

 
(274
)
Proceeds from Sale of Express Common Stock
—

 
—

 
73

 
—

 
73

Return of Capital from Express
—

 
—

 
49

 
—

 
49

Proceeds from Divestiture of Limited Stores
—

 
—

 
32

 
—

 
32

Return of Capital from Limited Stores
—

 
—

 
7

 
—

 
7

Net Investments in Consolidated Affiliates
—

 
—

 
29

 
(29
)
 
—

Other Investing Activities
—

 
—

 
7

 
—

 
7

Net Cash Provided by (Used for) Investing Activities
—

 
(129
)
 
52

 
(29
)
 
(106
)
Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from Long-term Debt, Net of Issuance and Discount Costs
390

 
—

 
—

 
—

 
390

Payments of Long-term Debt
(645
)
 
—

 
—

 
—

 
(645
)
Financing Costs
(14
)
 
—

 
—

 
—

 
(14
)
Repurchase of Common Stock
(207
)
 
—

 
—

 
—

 
(207
)
Dividends Paid
(1,488
)
 
—

 
—

 
—

 
(1,488
)
Excess Tax Benefits from Share-based Compensation
—

 
15

 
4

 
—

 
19

Net Financing Activities and Advances to/from Consolidated Affiliates
2,231

 
(1,832
)
 
(428
)
 
29

 
—

Proceeds From Exercise of Stock Options and Other
88

 
—

 
—

 
—

 
88

Net Cash Provided by (Used for) Financing Activities
355

 
(1,817
)
 
(424
)
 
29

 
(1,857
)
Effects of Exchange Rate Changes on Cash
—

 
—

 
5

 
—

 
5

Net Increase (Decrease) in Cash and Cash Equivalents
—

 
(740
)
 
66

 
—

 
(674
)
Cash and Cash Equivalents, Beginning of Year
—

 
1,441

 
363

 
—

 
1,804

Cash and Cash Equivalents, End of Year
$
—

 
$
701

 
$
429

 
$
—

 
$
1,130


106

LIMITED BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in millions)
 
 
2009
 
Limited
Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Limited
Brands, Inc.
Net Cash Provided by (Used for) Operating Activities
$
(279
)
 
$
1,004

 
$
449

 
$
—

 
$
1,174

Investing Activities:
 
 
 
 
 
 
 
 
 
Capital Expenditures
—

 
(120
)
 
(82
)
 
—

 
(202
)
Proceeds from Sale of Assets
—

 
—

 
32

 
—

 
32

Net Proceeds from the Divestiture of Joint Venture
—

 
—

 
9

 
—

 
9

Net Investments in Consolidated Affiliates
—

 
—

 
(29
)
 
29

 
—

Other Investing Activities
(3
)
 
—

 
2

 
—

 
(1
)
Net Cash Provided by (Used for) Investing Activities
(3
)
 
(120
)
 
(68
)
 
29

 
(162
)
Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from Long-term Debt, Net of Issuance and Discount Costs
473

 
—

 
—

 
—

 
473

Payments of Long-term Debt
(656
)
 
—

 
—

 
—

 
(656
)
Financing Costs
(19
)
 
—

 
—

 
—

 
(19
)
Dividends Paid
(193
)
 
—

 
—

 
—

 
(193
)
Net Financing Activities and Advances to/from Consolidated Affiliates
669

 
(381
)
 
(259
)
 
(29
)
 
—

Proceeds From Exercise of Stock Options and Other
8

 
—

 
—

 
—

 
8

Net Cash Provided by (Used for) Financing Activities
282

 
(381
)
 
(259
)
 
(29
)
 
(387
)
Effects of Exchange Rate Changes on Cash
—

 
—

 
6

 
—

 
6

Net Increase (Decrease) in Cash and Cash Equivalents
—

 
503

 
128

 
—

 
631

Cash and Cash Equivalents, Beginning of Year
—

 
938

 
235

 
—

 
1,173

Cash and Cash Equivalents, End of Year
$
—

 
$
1,441

 
$
363

 
$
—

 
$
1,804



107

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Information regarding changes in accountants is set forth under the caption “INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS” in our proxy statement to be filed on or about April 12, 2012 for the Annual Meeting of Stockholders to be held May 24, 2012 (the “Proxy Statement”) and is incorporated herein by reference.
There were no disagreements with accountants on accounting and financial disclosure.

ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were adequate and effective and designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting. Management’s Report on Internal Control Over Financial Reporting as of January 28, 2012 is set forth in Item 8. Financial Statements and Supplementary Data.
Attestation Report of the Registered Public Accounting Firm. The Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting as of January 28, 2012 is set forth in Item 8. Financial Statements and Supplementary Data.
Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred in the fourth quarter 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.
After the Annual Meeting of Stockholders held on May 26, 2011, the Board determined to hold the advisory "say on pay" vote every year.


108

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information regarding our directors is set forth under the captions “ELECTION OF DIRECTORS—Nominees and Directors”, “—Director Independence”, “—Board Leadership Structure ”; “—Risk Oversight: Certain Compensation Matters”, “—Information Concerning the Board of Directors”, “—Committees of the Board of Directors”, “—Meetings of the Company's Non-Management Directors”, “—Communications with the Board”, “—Attendance at Annual Meetings”, —“Code of Conduct and Related Person Transaction Policy”, “—Copies of the Company’s Code of Conduct, Corporate Governance Principles and Related Person Transaction Policy and Committee Charters”, and “SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT” in the Proxy Statement and is incorporated herein by reference. Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is set forth under the caption “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in the Proxy Statement and is incorporated herein by reference. Information regarding executive officers is set forth herein under the caption “EXECUTIVE OFFICERS OF THE REGISTRANT” in Part I.

ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is set forth under the caption “COMPENSATION-RELATED MATTERS” in the Proxy Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information regarding the security ownership of certain beneficial owners and management is set forth under the captions “SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT” in the Proxy Statement and “SHARE OWNERSHIP OF PRINCIPAL STOCKHOLDERS” in the Proxy Statement and is incorporated herein by reference.
The following table summarizes share and exercise price information about Limited Brands’ equity compensation plans as of January 28, 2012.
 
Plan category
 
(a) Number of
securities to be issued
upon exercise of
outstanding options,
warrants and rights
 
(b) Weighted-average
exercise price of
outstanding options,
warrants and rights
 
(c) Number of securities
remaining available for
future issuance under
equity compensation
plan (excluding
securities reflected in
column (a) )
Equity compensation plans approved by security holders (1)
 
20,482,054

 
$
17.26

(2)
18,919,191

Equity compensation plans not approved by security holders
 
—

 
—

  
—

Total
 
20,482,054

 
$
17.26

  
18,919,191

 ________________
(1)
Includes the following plans: Limited Brands, Inc. 2011 Stock Option and Performance Incentive Plan, Limited Brands, Inc. 1993 Stock Option and Performance Incentive Plan (2009 restatement), Limited Brands, Inc. 1996 Stock Plan for Non-Associate Directors and 2003 Stock Award and Deferred Compensation Plan for Non-Associate Directors.
(2)
Does not include outstanding rights to receive Common Stock upon the vesting of restricted shares awards.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Information regarding certain relationships and related transactions is set forth under the caption “ELECTION OF DIRECTORS—Nominees and Directors” and “—Director Independence” in the Proxy Statement and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information regarding principal accountant fees and services is set forth under the captions “INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS—Audit fees”, “—Audit related fees”, “—Tax fees”, “—All other fees” and “—Pre-approval policies and procedures” in the Proxy Statement and is incorporated herein by reference.

109

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
(a)
 
(1
)
 
Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
The following consolidated financial statements of Limited Brands, Inc. and subsidiaries are filed
as part of this report under Item 8. Financial Statements and Supplementary Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
Management’s Report on Internal Control Over Financial Reporting
 
 
 
 
 
 
 
 
 
 
 
 
 
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
 
 
 
 
 
 
 
 
 
 
 
 
 
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Income for the Years Ended January 28, 2012, January 29, 2011 and January 30, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income for the Years Ended January 28, 2012, January 29, 2011 and January 30, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of January 28, 2012 and January 29, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Total Equity for the Years Ended January 28, 2012, January 29, 2011 and January 30, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the Years Ended January 28, 2012, January 29, 2011 and January 30, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
(a)
 
(2
)
 
Financial Statement Schedules
 
 
 
 
 
 
 
 
 
 
 
Schedules have been omitted because they are not required or are not applicable or because the
information required to be set forth therein either is not material or is included in the financial
statements or notes thereto.
 
 
 
 
 
 
 
(a)
 
(3
)
 
List of Exhibits
 
 
 
 
 
 
 
 
 
 
 
3.
 
Articles of Incorporation and Bylaws.
 
 
 
 
 
 
 
 
 
 
 
3.1
 
Certificate of Incorporation of the Company, dated March 8, 1982 incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2001.
 
 
 
 
 
 
 
 
 
 
 
3.2
 
Certificate of Amendment of Certificate of Incorporation, dated May 19, 1986 incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2001.
 
 
 
 
 
 
 
 
 
 
 
3.3
 
Certificate of Amendment of Certificate of Incorporation, dated May 19, 1987 incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2001.
 
 
 
 
 
 
 
 
 
 
 
3.4
 
Certificate of Amendment of Certificate of Incorporation dated May 31, 2001 incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 5, 2001.
 
 
 
 
 
 
 
 
 
 
 
3.5
 
Amended and Restated Bylaws of the Company incorporated by reference to Exhibit 3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 3, 2003.
 
 
 
 
 
 
 
 
 
 
 
4.
 
Instruments Defining the Rights of Security Holders.
 
 
 
 
 
 
 
 
 
 
 
4.1
 
Conformed copy of the Indenture dated as of March 15, 1988 between the Company and The Bank of New York, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3 (File no. 333-105484) dated May 22, 2003.
 
 
 
 
 
 
 
 
 
 
 
4.2
 
Proposed form of Debt Warrant Agreement for Warrants attached to Debt Securities, with proposed form of Debt Warrant Certificate incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 (File no. 33-53366) originally filed with the Securities and Exchange Commission (the “Commission”) on October 16, 1992, as amended by Amendment No. 1 thereto, filed with the Commission on February 23, 1993 (the “1993 Form S-3”).
 
 
 
 
 
 
 
 
 
 
 
4.3
 
Proposed form of Debt Warrant Agreement for Warrants not attached to Debt Securities, with proposed form of Debt Warrant Certificate incorporated by reference to Exhibit 4.3 to the 1993 Form S-3.
 
 
 
 
 
 
 

110

 
 
 
 
4.4
 
Indenture, dated as of February 19, 2003 between the Company and The Bank of New York, incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-4 (File no. 333-104633) dated April 18, 2003.
 
 
 
 
 
 
 
 
 
 
 
4.5
 
First Supplemental Indenture dated as of May 31, 2005 among the Registrant, The Bank of New York and The Bank of New York Trust Company, N.A. incorporated by reference to Exhibit 4.1.2 to the Company’s Registration Statement on Form S-3 (Reg. No. 333-125561) filed June 6, 2005.
 
 
 
 
 
 
 
 
 
 
 
4.6
 
Second Supplemental Indenture dated as of July 17, 2007 between the Registrant and The Bank of New York Trust Company, N.A. incorporated by reference to Exhibit 4.1.4 to the Company’s Registration Statement on Form S-3 (Reg. No. 333-146420) filed October 1, 2007.
 
 
 
 
 
 
 
 
 
 
 
4.7
 
Third Supplemental Indenture dated as of May 4, 2010 between the Registrant and The Bank of New York Mellon Trust Company, N.A. incorporated by reference to Exhibit 4.1.4 to the Company’s Registration Statement on Form S-3 (Reg. No. 333-170406) filed on November 5, 2010.
 
 
 
 
 
 
 
 
 
 
 
4.8
 
Amendment and Restatement Agreement, dated as of July 15, 2011, among Limited Brands, Inc., the Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, under the Amended and Restated Five-Year Revolving Credit Agreement dated as of October 6, 2004, as amended and restated as of November 5, 2004, March 22, 2006, August 3, 2007, February 19, 2009 and March 8, 2010, incorporated by reference to Exhibit 4.1 to the Company’s Form 10-Q dated August 31, 2011.
 
 
 
 
 
 
 
 
 
 
 
4.9
 
Indenture, dated as of June 19, 2009, among Limited Brands, Inc, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K dated June 24, 2009.
 
 
 
 
 
 
 
 
 
 
 
4.10
 
Registration Rights Agreement, dated as of June 19, 2009, among Limited Brands, Inc., the guarantors named therein and J.P. Morgan Securities Inc., as representative of the initial purchasers, incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K dated June 24, 2009.
 
 
 
 
 
 
 
 
 
 
 
4.11
 
Fourth Supplemental Indenture dated as of January 29, 2011 between the Registrant and The Bank of New York Mellon Trust Company, N.A. incorporated by reference to Exhibit 4.1.5 to the post-effective amendment to the Company’s Registration Statement on Form S-3 (Reg. No. 333-170406) filed on November 5, 2010.
 
 
 
 
 
 
 
 
 
 
 
4.12
 
Form of Fifth Supplemental Indenture between the Registrant and The Bank of New York Mellon Trust Company, N.A. incorporated by reference to Exhibit 4.1.6 to the post-effective amendment to the Company’s Registration Statement on Form S-3 (Reg. No. 333-170406) filed on November 5, 2010.
 
 
 
 
 
 
 
 
 
 
 
10.
 
Material Contracts.
 
 
 
 
 
 
 
 
 
 
 
10.1
 
Officers’ Benefits Plan incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 1989 (the “1988 Form 10-K”).**
 
 
 
 
 
 
 
 
 
 
 
10.2
 
The Limited Supplemental Retirement and Deferred Compensation Plan incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2001.**
 
 
 
 
 
 
 
 
 
 
 
10.3
 
Form of Indemnification Agreement between the Company and the directors and executive officers of the Company incorporated by reference to Exhibit 10.4 to the 1998 Form 10-K.**
 
 
 
 
 
 
 
 
 
 
 
10.4
 
Supplemental schedule of directors and executive officers who are parties to an Indemnification Agreement incorporated by reference to Exhibit 10.5 to the 1998 Form 10-K.**
 
 
 
 
 
 
 
 
 
 
 
10.5
 
The 1993 Stock Option and Performance Incentive Plan of the Company, incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 (File No. 33-49871).**
 
 
 
 
 
 
 
 
 
 
 
10.6
 
Limited Brands, Inc. (formerly The Limited, Inc.) 1996 Stock Plan for Non-Associate Directors incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended November 2, 1996.**
 
 
 
 
 
 
 
 
 
 
 
10.7
 
Limited Brands, Inc. (formerly The Limited, Inc.) Incentive Compensation Performance Plan incorporated by reference to Exhibit A to the Company’s Proxy Statement dated April 14, 1997.**
 
 
 
 
 
 
 
 
 
 
 
10.8
 
Agreement dated as of May 3, 1999 among Limited Brands, Inc. (formerly The Limited, Inc.), Leslie H. Wexner and the Wexner Children’s Trust, incorporated by reference to Exhibit 99 (c) 1 to the Company’s Schedule 13E-4 dated May 4, 1999.
 
 
 
 
 
 
 

111

 
 
 
 
10.9
 
The 1998 Restatement of Limited Brands, Inc. (formerly The Limited, Inc.) 1993 Stock Option and Performance Incentive Plan incorporated by reference to Exhibit A to the Company’s Proxy Statement dated April 20, 1998.**
 
 
 
 
 
 
 
 
 
 
 
10.10
 
The 2002 Restatement of Limited Brands, Inc. (formerly The Limited, Inc.) 1993 Stock Option and Performance Incentive Plan, incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003.**
 
 
 
 
 
 
 
 
 
 
 
10.11
 
Limited Brands, Inc. Stock Award and Deferred Compensation Plan for Non-Associate Directors incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (File no. 333-110465) dated November 13, 2003.**
 
 
 
 
 
 
 
 
 
 
 
10.12
 
Limited Brands, Inc. 1993 Stock Option and Performance Incentive Plan (2003 Restatement) incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 (File no. 333-110465) dated November 13, 2003.**
 
 
 
 
 
 
 
 
 
 
 
10.13
 
Limited Brands, Inc. 1993 Stock Option and Performance Incentive Plan (2004 Restatement) incorporated by reference to Appendix A to the Company’s Proxy Statement dated April 14, 2004.**
 
 
 
 
 
 
 
 
 
 
 
10.14
 
Form of Aircraft Time Sharing Agreement between Limited Service Corporation and participating officers and directors incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q dated December 8, 2004.**
 
 
 
 
 
 
 
 
 
 
 
10.15
 
Employment Agreement dated as of January 17, 2005 among Limited Brands, Inc., The Limited Service Corporation and Martyn Redgrave incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated January 19, 2005.**
 
 
 
 
 
 
 
 
 
 
 
10.16
 
Limited Brands, Inc. Stock Option Award Agreement incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.**
 
 
 
 
 
 
 
 
 
 
 
10.17
 
Form of Amended and Restated Aircraft Time Sharing Agreement between Limited Service Corporation and participating officers and directors incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.**
 
 
 
 
 
 
 
 
 
 
 
10.18
 
Form of Stock Ownership Guideline incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.**
 
 
 
 
 
 
 
 
 
 
 
10.19
 
Employment Agreement dated as of November 24, 2006 among Limited Brands, Inc., Victoria’s Secret Direct, LLC, and Sharen Jester Turney incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2007.**
 
 
 
 
 
 
 
 
 
 
 
10.20
 
Employment Agreement effective as of April 9, 2007 among Limited Brands, Inc. and Stuart Burgdoerfer incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K dated April 11, 2007.**
 
 
 
 
 
 
 
 
 
 
 
10.21
 
Amendment to Employment Agreement dated as of March 28, 2008 among Limited Brands, Inc., and Sharen Jester Turney incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2008.**
 
 
 
 
 
 
 
 
 
 
 
10.22
 
Limited Brands, Inc. 1993 Stock Option and Performance Incentive Plan (2009 Restatement) incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 (File no. 333-110465) dated September 10, 2009.**
 
 
 
 
 
 
 
 
 
 
 
10.23
 
Employment Agreement dated as of July 5, 2011 among Bath & Body Works Brand Management, Inc. and Nicholas P. M. Coe filed hereto at Exhibit 10.23.
 
 
 
 
 
 
 
 
 
 
 
10.24
 
Employment Agreement dated as of December 31, 2007 among Limited Brands, Inc., Beauty Avenues, LLC, and Charles C. McGuigan, as amended by Amendment to Agreement dated December 1, 2008 and Form of Employment Agreement Amendment effective as of March 15, 2012 filed hereto at Exhibit 10.24 as a result of Mr. McGuigan becoming a named executive officer pursuant to item 402 of Regulation S-K.
 
 
 
 
 
 
 
 
 
 
 
10.25
 
The Limited Brands Inc. 2011 Stock Option and Performance Incentive Plan originally incorporated by reference to Appendix A to the Company's Proxy Statement dated April 11, 2011 and Amended and Restated dated July 21, 2011 filed hereto at Exhibit 10.25.
 
 
 
 
 
 
 
 
 
 
 
12.
 
Computation of Ratio of Earnings to Fixed Charges.
 
 
 
 
 
 
 
 
 
 
 
14.
 
Code of Ethics—incorporated by reference to the definitive Proxy Statement to be filed on or about April 12, 2012.
 
 
 
 
 
 
 
 
 
 
 
21.
 
Subsidiaries of the Registrant.
 
 
 
 
 
 
 

112

 
 
 
 
23.1
 
Consent of Ernst & Young LLP.
 
 
 
 
 
 
 
 
 
 
 
24.
 
Powers of Attorney.
 
 
 
 
 
 
 
 
 
 
 
31.1
 
Section 302 Certification of CEO.
 
 
 
 
 
 
 
 
 
 
 
31.2
 
Section 302 Certification of CFO.
 
 
 
 
 
 
 
 
 
 
 
32.
 
Section 906 Certification (by CEO and CFO).
________________
**
Identifies management contracts or compensatory plans or arrangements.
(b)
Exhibits.
The exhibits to this report are listed in section (a)(3) of Item 15 above.
(c)
Not applicable.


113

SIGNATURES
Pursuant to the requirements of Section 13 or l5(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 23, 2012
 
LIMITED BRANDS, INC. (registrant)
 
 
 
 
By:
/s/ STUART B. BURGDOERFER

 
 
Stuart B. Burgdoerfer,
Executive Vice President,
Chief Financial Officer *
 
*
Mr. Burgdoerfer is the principal financial officer and the principal accounting officer and has been duly authorized to sign on behalf of the Registrant.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on January 28, 2012:
 
Signature
  
Title
 
 
 
/s/    LESLIE H. WEXNER** 
  
Chairman of the Board of Directors and
Leslie H. Wexner
 
Chief Executive Officer
 
 
 
/s/    DENNIS S. HERSCH**        
  
Director
Dennis S. Hersch
 
 
 
 
 
/s/    JAMES L. HESKETT**        
  
Director
James L. Heskett
 
 
 
 
 
/s/    DONNA A. JAMES**
  
Director
Donna A. James
 
 
 
 
 
/s/    DAVID T. KOLLAT**        
  
Director
David T. Kollat
 
 
 
 
 
/s/    WILLIAM R. LOOMIS, JR.**        
  
Director
William R. Loomis, Jr.
 
 
 
 
 
/s/    JEFFREY H. MIRO**        
  
Director
Jeffrey H. Miro
 
 
 
 
 
/s/    ALLAN R. TESSLER**        
  
Director
Allan R. Tessler
 
 
 
 
 
/s/    ABIGAIL S. WEXNER**        
  
Director
Abigail S. Wexner
 
 
 
 
 
/s/    RAYMOND ZIMMERMAN**        
  
Director
Raymond Zimmerman
 
 
 
**
The undersigned, by signing his name hereto, does hereby sign this report on behalf of each of the above-indicated directors of the registrant pursuant to powers of attorney executed by such directors.
By
/s/ STUART B. BURGDOERFER

 
Stuart B. Burgdoerfer
Attorney-in-fact

114

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-K
 
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
 
LIMITED BRANDS, INC.
(exact name of Registrant as specified in its charter)
 
 
EXHIBITS

115

EXHIBIT INDEX
 
Exhibit No.
 
Document
 
 
 
10.23
 
Employment Agreement dated as of July 5, 2011 among Bath & Body Works Brand Management, Inc. and Nicholas P. M. Coe.
 
 
 
10.24
 
Employment Agreement dated as of December 31, 2007 among Limited Brands, Inc., Beauty Avenues, LLC, and Charles C. McGuigan, Amendment to Agreement dated December 1, 2008 and Form of Employment Agreement Amendment effective as of March 15, 2012.
 
 
 
10.25
 
Limited Brands Inc. 2011 Stock Option and Performance Incentive Plan Amended and Restated dated July 21, 2011.
 
 
 
12
 
Computation of Ratio of Earnings to Fixed Charges.
 
 
 
21
 
Subsidiaries of the Registrant.
 
 
 
23.1
 
Consent of Ernst & Young LLP.
 
 
 
24
 
Powers of Attorney.
 
 
 
31.1
 
Section 302 Certification of CEO.
 
 
 
31.2
 
Section 302 Certification of CFO.
 
 
 
32
 
Section 906 Certification (by CEO and CFO).
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

116