EFTA00190141.pdf

Limited brands 2006 ANNUAL REPORT EFTA00190141 EFTA00190142 EFTA00190143  • • ..-• . ri . • _ • ' r • . - . . ... ............ . . 1._ " • -.a 1 , . -- . ........ .... . 4.- ."' ' " .4 ril L • ... - °dr . - - alc ; ' - -; • -.7 - . •• rr r-.. - -.1..r. ... • :, -a, ....• „ , „ -...a. - ..A.. .._ , . ... :,.. . _ _ :" . _ .: ' • e - •- . - - - ....; • . llw r - •. .r . -ar iir ill , . An •II, . • • * .• ••.- • a '''' . .r et ,•• • • • a .• • . .• .. ..., .. ''. ....."- • • • . • • to • '4." • • _ • • dllib. 4 • " , - ._. • . . ... • re .. . • •• •• 41/ • - • . . • • • .7 • ' •• P d; 1 . a .0 • • '. • 40 ' • . magi Nil a .0 .• ..'. - 4•'• • • . • •- NIP a I g0 a '1 41 .• •• • d. - . ' • 4 . j • di g' t 4• .I dr 0 ; . -'. .. s. - I- - . • a SIP •, g, aft .,gr • JD a • . • dIP 4 g EFTA00190144 TNER 2006 was a good year for Limited Brands. A very good year. Our financial results indicate real progress — sales increased by 10% and operating income increased by 19%. Clearly, this past year's performance reflects a combination of skills, including brand builders' and shopkeepers' skills, real tactical ability. and execution. We kept our eye on the near-term and the long-term, achieving day-to-day results while building a foundation for sustained growth. In our business, everything begins and ends with the customer. We have to keep giving them what they want. To do that, we must be exceptional shopkeepers and really know our customers. For 44 years we have grown and evolved. Yet, we remain shopkeepers. Regardless of scale, we run our brands with the insights of a single shopkeeper in a single store. Single-minded focus. Up close and personal. No substitute for it. I began as a shopkeeper. I am still a shopkeeper. I see the world that way. In one store. In four thousand. Doesn't matter. It's all about knowing the customer, not from data or research alone, but knowing her like a friend. Intimately. Traditional market information is important, but it only confirms what has already occurred. Significant, but not an insight to the future...not a substitute for knowing in real time. If specialty retail was about technology and systems, it would be easy. Whoever had the biggest, fastest computer would win. But it's not. Mediocre ideas, executed efficiently and quickly, are still mediocre ideas. EFTA00190145 4 No, the race will never be won by the technocrats. It will be won by great shopkeepers. As, indeed, it always has been. Walt Disney constantly walked his theme parks and would stop to talk to any child about their experience. Charles Revson would interrupt a board meeting to talk to a woman calling about her nail polish. Ray Kroc ate in McDonald's every chance he got. Great shopkeepers, keeping their priorities straight. Does anyone doubt Steve Jobs knows his customer? And what of Starbucks' Howard Schultz? He recently sent an open letter to top management saying they had to reestablish the small, intimate, critical details that make up the Starbucks' experience. He worried they were getting lost as the business continued to grow. He wanted them back. Howard didn't learn that in the office. He learned it in the shop. I said earlier that our business has evolved for over 40 years. We started with a single brand and an assortment "limited" to sportswear. Today, we are focused primarily on lingerie and beauty, and have distorted our time and resources to categories which are demonstrating significant market opportunity. Victoria's Secret is our largest brand. I'm pleased to report that the Victoria's Secret megabrand surpassed $5 billion in sales in 2006, with nearly $1 billion in operating income. We intend to grow this remarkably powerful brand to $10 billion in sales in five years. EFTA00190146 EFTA00190147 EFTA00190148 EFTA00190149 EFTA00190150 As sales have grown, it has become obvious that Victoria's Secret needs larger 9 stores. We have tested larger store formats for several years and the format is achieving very attractive returns. We are, therefore, resizing the average Victoria's Secret store by about 50%. In 2007, we will increase square footage by 8-10% through 125 to 140 store projects. The groundwork for this real estate initiative is laid on a foundation of proven sales growth, category expansion, new segments, the amazing success of PINK, Beauty growth, and growth in Intimissimi. The Victoria's Secret Direct channel (internet and catalogue) had a phenomenal year in 2006, with sales growth of 16%, and a significant increase in operating income. We are supporting the continued growth of the Direct business by investing in expanded distribution center capabilities and upgraded internet and catalogue support technology. The Direct channel is a great medium for the brand and an important part of the 360° access we provide to our customers. Our acquisition of La Senza adds Canada's number one lingerie brand to our intimate apparel group and gives us a greater international presence. La Senza has achieved very impressive growth in Canada and 34 other countries through its franchise operated stores. We have great confidence in La Senza's management team and look forward to working with them. EFTA00190151 10 Importantly, La Senza also provides us with real knowledge of the Canadian market and international experience as we begin to think about growth beyond the U.S. for our brands. Victoria's Secret Beauty and Bath & Body Works together represent the fifth largest personal care and beauty company in the United States. Remarkable progress. We are now focused on becoming the fourth largest, and then the third and, well, you get the idea. Bath & Body Works surpassed $2.S billion in sales in 2006, and has plenty of room to grow through the reinvigoration of base products and new product introductions. We can expand into underdeveloped categories of personal care like haircare and dermatological skincare, where we've had great initial success with Dr. Patricia Wexler skincare. We can grow through new stores — about SO in 2007, mostly in non-mall locations. And we can grow through new channels, internet and catalogue, giving us substantial upside as we leverage our skills across the enterprise. The apparel businesses, Express and The Limited, also made significant progress in 2006, turning a 2005 operating loss of about $100 million to income of over $2S million in 2006. We are clearly on the right track for continued progress, with a well-defined view of our customer and merchandise assortments that reflect her wants and needs. EFTA00190152 IMMINIall EFTA00190153  I EFTA00190154 EFTA00190155 EFTA00190156 This is a great time to be a member of the Limited Brands family: 15 We are an enterprise of shopkeepers We are building our brands, and incubating new ones We have focused on attracting and retaining best-in-class talent And we have invested in the infrastructure and technology necessary to support our growth The fact that we are growing is the most positive indicator that we are focusing on the right things. The customer, in the end, is the judge of our talent, our brand strategies and our infrastructure investments. They vote with their dollars, and they vote every hour. Much has changed. We will continue to change, adapt and grow. What will remain constant is who we are; our values, culture and thinking — an enterprise of shopkeepers, doing our best to know our customers, and always giving them what they want. Best regards, Leslie H. Wexner Chairman and Chief Executive Officer EFTA00190157 EFTA00190158 FINANCIAL RESULTS EFTA00190159  UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) ▪ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 3. 2007 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 (Evict name of registrant as specified in its charter) Delaware 31-1029810 (State or other jurisdiction (I.R.S. Emplo)er Identification No.) of incorporation or organization) Three Limited Parkway, P.O. Box 16000, 43216 Columbus, Ohio Code, (Address of principal executive offices) 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 Ad: None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes EI No O 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 O No E Indicate by check mark whether the registrant (I) 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 shorteiperiod that the registrant was required to file such reports). and (2) has been subject to such filing requirements for the past 90 days. Yes EI No O 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. 0 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 1 e accelerated filef in Rule 12b-2 of the Exchange Act. Large accelerated tiler E Accelerated filer O 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 O No 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: 48.506.244.312. Number of shares outstanding of the registrant's Common Stock as of March 23.2007: 399.639.580. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Registrant's 2007 Annual Meeting of Shareholders to be held on May 21, 2007, are incorporated by reference. EFTA00190160  Table of Contents Page No. Part I Item I. Business 1 Item IA. Risk Factors 4 Item IB. Unresolved Staff Comments 8 Item 2. Properties 9 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 11 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32 Item 8. Financial Statements and Supplementary Data 34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 63 Item 9A. Controls and Procedures 63 Item 9B. Other Information 63 Part III Item 10. Directors, Executive Officers and Corporate Governance 64 Item II. Executive Compensation 64 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 64 Item 13. Certain Relationships and Related Transactions, and Director Independence 64 Item 14. Principal Accounting Fees and Services 64 Part IV Item 15. Exhibits, Financial Statement Schedules 65 Signatures 69 EFTA00190161  PART I ITEM I. BUSINESS. FORWARD-LOOKING STATEMENTS. The Company cautions that any fonvard-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this report or made by the Company or management of the Company involve risks and uncertainties and are subject to change based on various important factors, many of which are beyond our control. Accordingly, the Company's future performance and financial results may differ materially from those expressed or implied in any such fonvard-looking statements. Words such as "estimate," "project." "plan," "believe," "expect." "anticipate," "intend," "planned," "potential" and similar expressions may identify forward-looking statements. A number of important factors could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading, "Risk Factors" in Part I. Item IA. GENERAL. Limited Brands, Inc. (the "Company" or "we") operates in the highly competitive specialty retail business. Our stores arc located primarily in the in the United States but we also have international operations. The Company sells women's intimate apparel, personal care and beauty products, women's and men's apparel and accessories. The Company sells merchandise at its retail stores, which are primarily mall-based, and through e-commerce and catalogue direct response channels. DESCRIPTION OF OPERATIONS. As of February 3, 2007, the Company conducted its business in three primary segments: Victoria's Secret, Bath & Body Works and Apparel. VICTORIA'S SECRET The Victoria's Secret segment sells women's intimate and other apparel, personal care and beauty products and accessories marketed under the Victoria's Secret and La Senza brand names. Victoria's Secret merchandise is sold through retail stores and direct response channels (e-commerce and catalogue). Through its e-commerce site, MOV.VictoriasSecretcom, and catalogue, certain of Victoria's Secret's merchandise may be purchased worldwide. In January 2007, the Company completed its acquisition of La Senza Corporation ("La Senza") for $600 million. La Senza is a Canadian specialty retailer offering lingerie and sleepwear as well as apparel for girls in the 7-14 year age group. In addition, independently owned La Senza stores operate in 34 other countries. The acquisition of La Senza supports our objective of enhancing our capabilities to pursue our strategic growth goals internationally. The results of La Senza are included in the Victoria's Secret segment. For additional information see Note 16 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data. The Victoria's Secret segment had net sales of $5.139 billion in 2006 and operated 1.003 stores in the United States and 323 stores in Canada. BATH & BODY WORKS The Bath & Body Works segment sells personal care, beauty and home fragrance products marketed under the Bath & Body Works, C.O. Bigelow and White Barn Candle Company brand names in addition to third-party EFTA00190162 brands. Bath & Body Works merchandise is sold at retail stores, through its e-commerce site, msw.bathandbodyworks.com, and catalogue. Bath & Body Works, which also operates C.O. Bigelow and the White Barn Candle Company stores, had net sales of $2.556 billion in 2006 and operated 1,546 stores nationwide. APPAREL BUSINESSES The Apparel segment sells women's and men's apparel through Express and Limited Stores. Express is a specialty retailer positioned as a young. sexy and sophisticated brand for both work and casual wear among fashion forward women and men. Express had net sales of $1.749 billion in 2006 and operated 658 stores nationwide. Limited Stores is a mall•based specialty store retailer. Limited Stores' strategy is to focus on sophisticated sportswear for modem American women. Limited Stores had net sales of $493 million in 2006 and operated 260 stores nationwide. OTHER Henri Bendel operates two specialty stores in New York, New York and Columbus, Ohio which feature fashion and personal care products for sophisticated women. The business had net sales of S42 million in 2006. The Company also operates six Diva London stores which sell accessories to a target market of women ages 18 to 34. Additional information about the Company's business, including its net sales and profits for the last three years and selling square footage. is set forth under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. For the financial results of the Company's reportable operating segments. see Note 16 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. The following chart reflects the retail businesses and the number of company operated stores in operation for each business at February 3. 2007 and January 28, 2006. Number of Stores February 3. January 28. 2007 2006 Victoria's Secret Victoria's Secret Stores 1,003 998 La Senza (a) 323 Total Victoria's Secret 1,326 998 Bath & Body Works 1,546 1,555 Apparel Businesses Express Women's 195 327 Express Men's 69 113 Express Dual Gender 394 303 Total Express 658 743 Limited Stores 260 292 Total Apparel businesses 918 1,035 Henri Bendel 2 2 Diva London 6 Total 3.798 3,590 2 EFTA00190163 (a) As of February 3, 2007. the Company also has global representation through 339 independently owned "La Senza" and "La Senza Girl" stores operating in 34 countries under 12 license agreements. The following table shows the changes in the number of retail stores operated by the Company for the past five fiscal years: Acquired/ Beginning Disposed End of Fiscal Year of Year Opened Closed Businesses Year 2002 4,614 108 (174) (512)(a) 4,036 2003 4,036 24 (149) — 3,911 2004 3,911 39 (171) — 3,779 2005 3,779 50 (239) 3,590 2006 3,590 52 (169) 325(b) 3,798 (a) Represents New York & Company (formerly Lemer New York) stores at November 27, 2002. the date of sale to a third-party. (b) Represents the stores acquired in the La Senza acquisition on January 12, 2007. The Company also owns Mast Industries, Inc. ("Mast"), an apparel importer which is a significant supplier of merchandise for Victoria's Secret, Express and Limited Stores. The Company also owns Beauty Avenues ("Beauty Avenues"), a personal care sourcing company serving both Victoria's Secret and Bath & Body Works. Mast and Beauty Avenues also have $650 million of sales to third-parties in 2006 and their operating results are included in Other in our segment reporting. For additional information, see Note 16 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data. During fiscal year 2006, the Company purchased merchandise from over 1,000 suppliers located throughout the world. In addition to purchases through Mast and Beauty Avenues, the Company purchases merchandise directly in foreign and domestic markets. Excluding Mast and Beauty Avenues, no supplier provided 10% or more of the Company's merchandise purchases. Most of the merchandise and related materials for the Company's stores are shipped to the Company's distribution centers in the Columbus, Ohio area. In connection with the distribution of merchandise, the Company uses 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. The Company's policy is to maintain sufficient quantities of inventory on hand in its retail stores and distribution centers so that it can offer customers an appropriate selection of current merchandise. The Company emphasizes rapid turnover and takes markdowns as required to keep merchandise fresh and current with fashion trends. The Company's 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 net sales in 2006, 2005 and 2004. Accordingly, cash requirements are highest in the third quarter as the Company's inventory builds in advance of the holiday season. The Company and its products are subject to regulation by various Federal, state, local and international regulatory authorities. The Company is subject to a variety of customs regulations and international trade arrangements. The Company's trademarks and patents, which constitute its 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. The Company believes that its 3 EFTA00190164 products and services are identified by its intellectual property and, thus, its 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. COMPETITION. The sale of intimate apparel, personal care and beauty products, women's and men's apparel and accessories through retail stores is a highly competitive business with numerous competitors, including individual and chain fashion specialty stores, department stores and discount retailers. Brand image. marketing, fashion design, price, service, fashion assortment and quality are the principal competitive factors in retail store sales. The Company's direct response businesses compete with numerous national and regional e-commerce and catalogue merchandisers. Image presentation, fulfillment and the factors affecting retail store sales discussed above are the principal competitive factors in e-commerce and catalogue sales. The Company is unable to estimate the number of competitors or its relative competitive position due to the large number of companies selling intimate apparel, personal care and beauty products. women's and men's apparel and accessories through retail stores, catalogues and e-commerce. ASSOCIATE RELATIONS. On February 3, 2007, the Company employed approximately 125,500 associates, 105.100 of whom were part- time. In addition, temporary associates are hired during peak periods, such as the holiday season. AVAILABLE INFORMATION. The Company's annual reports on Form 10-K. quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and code of conduct are available, free of charge, on the Company's website, www.LimitedBrands.com. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. ITEM IA. RISK FACTORS. The following discussion of risk factors contains "forward-looking statements," as discussed in Item 1. These risk factors may be important to understanding any statement in this Form 10-K, other filings or in any other discussions of the Company's business. The following information should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation and the consolidated financial statements and related notes included in this report. In addition to the other information set forth in this report, the reader should carefully consider the following factors which could materially affect the Company's business, financial condition or future results. The risks described below are not the only risks facing the Company. Additional risks and uncertainties not currently known or that are currently deemed to be immaterial may also adversely affect the business, financial condition and/or operating results of the Company in a material way. The Company's revenue and profit results are sensitive to, and may be adversely affected by, general economic conditions, consumer confidence and spending patterns. The Company's growth, sales and profitability may be adversely affected by negative local, regional, national or international political or economic trends or developments that reduce the consumers' ability or willingness to spend, including the effects of national and international security concerns such as war, terrorism or the threat thereof. Purchases of women's and men's apparel, women's intimate apparel, personal care and beauty products and accessories often decline during periods when economic or market conditions are unsettled or weak. In such circumstances, the Company may increase the number of promotional sales, which would further adversely affect its profitability. 4 EFTA00190165 The Company's net sales, operating income and inventory levels fluctuate on a seasonal basis. The Company experiences major seasonal fluctuations in its net sales and operating income, with a significant portion of its operating income typically realized during the fourth quarter holiday season. Any decrease in sales or margins during this period could have a disproportionate effect on the Company's financial condition and results of operations. Seasonal fluctuations also affect the Company's inventory levels, since it usually orders merchandise in advance of peak selling periods and sometimes before new fashion trends am confirmed by customer purchases. The Company must carry a significant amount of inventory, especially before the holiday season selling period. If the Company is not successful in selling inventory, it may have to sell the inventory at significantly reduced prices or it may not be able to sell the inventory at all, which in each case may further adversely affect profitability. The Company may be unable to compete favorably in its highly competitive segment of the retail industry. The sale of intimate and other apparel. personal care products and accessories is highly competitive. The Company competes for sales with a broad range of other retailers, including individual and chain fashion specialty stores, department stores and discount retailers. In addition to the traditional store-based retailers, the Company also competes with direct marketers that sell similar lines of merchandise and who target customers through e-commerce and catalogue. Direct marketers also include traditional store-based retailers like the Company who am competing in the e-commerce and catalogue distribution channels. The Company's direct response businesses compete with numerous national and regional e-commerce and catalogue merchandisers. Brand image. marketing, fashion design, price, service, quality, image presentation and fulfillment are all competitive factors in both the store-based and direct response channels. Some of the Company's competitors may have greater financial, marketing and other resources available to them. In many cases, the Company's competitors sell their products in department stores that are located in the same shopping malls as the Company's stores. In addition to competing for sales, the Company competes for favorable site locations and lease terms in shopping malls. Increased competition could result in price reductions, increased marketing expenditures and loss of market share, any of which could have a material adverse effect on the Company's financial condition and results of operations. The Company may not be able to keep up with fashion trends and may not be able to launch new product lines successfully. The Company's success depends in part on management's ability to effectively anticipate and respond to changing fashion tastes and consumer demands and to translate market trends into appropriate. saleable product offerings far in advance of the actual time of sale to the customer. Customer tastes and fashion trends change rapidly. If the Company is unable to successfully anticipate, identify or react to changing styles or trends and misjudges the market for its products or any new product lines, the Company's sales will be lower potentially resulting in significant amounts of unsold finished goods inventory. In response. the Company may be forced to increase its marketing promotions or price markdowns, which could have a material adverse effect on its business. The Company's brand image may also suffer if customers believe merchandise misjudgments indicate that the Company is no longer able to identify and offer the latest fashions. The Company may lose key personnel. The Company believes that it has benefited substantially from the leadership and experience of its senior executives, including Leslie H. Wexner (its Chairman of the Board of Directors and Chief Executive Officer). The loss of the services of any of these individuals could have a material adverse effect on the business and prospects of the Company. Competition for key personnel in the retail industry is intense and the Company's future success will also depend on its ability to recruit, train and retain other qualified personnel. 5 EFTA00190166 The Company's manufacturers may be unable to manufacture and deliver products in a timely manner or meet quality standards. The Company purchases products through contract manufacturers and importers and directly from third-party manufacturers. Similar to most other specialty retailers, the Company has narrow sales window periods for much of its inventory. Factors outside the Company's control, such as manufacturing or shipping delays or quality problems, could disrupt merchandise deliveries and result in lost sales, cancellation charges or excessive markdowns which could have a material adverse effect on the Company's financial condition and results of operations. The Company relies significantly on foreign sources of production and maintains operations in foreign countries. The Company purchases apparel merchandise directly in foreign markets and in the domestic market, some of which is manufactured overseas. The Company does not have any material long-term merchandise supply contracts and many of its imports are subject to a variety of customs regulations and international trade arrangements, including existing or potential duties, tariffs or quotas. The Company competes with other companies for production facilities and import quota capacity. The Company also faces a variety of other risks generally associated with doing business in foreign markets and importing merchandise from abroad, such as: • political instability; • imposition of new legislation or rules relating to imports that may limit the quantity of goods which may be imported into the United States from countries in a particular region; • imposition of duties, taxes and other charges on imports; • currency and exchange risks; • local business practice and political issues, including issues relating to compliance with domestic or international labor standards which may result in adverse publicity; • potential delays or disruptions in shipping and related pricing impacts; and • disruption of imports by labor disputes. New initiatives may be proposed that may have an impact on the trading status of certain countries and may include retaliatory duties or other trade sanctions which, if enacted, would limit or reduce the products purchased from suppliers in such countries. In addition, significant health hazards or environmental or natural disasters may occur which could have a negative effect on the economies, financial markets and business activity. The Company's purchases of merchandise from these manufacturing operations may be affected by this risk. The future performance of the Company will depend upon these and the other factors listed above which are beyond its control. These factors may have a material adverse effect on the business of the Company. The Company depends on a high volume of mall traffic and the availability of suitable lease space. Many of the Company's stores are located in shopping malls. Sales at these stores are derived, in part, from the high volume of traffic in those malls. The Company's stores benefit from the ability of the mall's "anchor" tenants, generally large department stores, and other area attractions to generate consumer traffic in the vicinity of its stores and the continuing popularity of malls as shopping destinations. Sales volume and mall traffic may be adversely affected by economic downturns in a particular area, competition from non-mall retailers and other 6 EFTA00190167 malls where the Company does not have stores and the closing of anchor department stores. In addition, a decline in the desirability of the shopping environment in a particular mall, or a decline in the popularity of mall shopping among the Company's target consumers, would adversely affect its business. Part of the Company's future growth is significantly dependent on its ability to operate stores in desirable locations with capital investment and lease costs that allow the Company to earn a reasonable return. The Company cannot be sure as to when or whether such desirable locations will become available at reasonable costs. The Company may face labor shortages or increased labor costs which could adversely affect its growth and operating results. Labor is a significant component in the cost of operating the Company's stores. If the Company faces labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, increases in the federal minimum wage or increases in other employee benefits costs, its operating expenses could increase and its growth could be adversely affected. The Company's success depends in part upon its ability to attract, motivate and retain a sufficient number of qualified employees. Increases in costs of mailing, paper and printing may affect the Company's business. Postal rate increases and paper and printing costs will affect the cost of the Company's order fulfillment and catalogue and promotional mailings. The Company relies on discounts from the basic postal rate structure, such as discounts for bulk mailings and sorting. Future paper and postal rate increases could adversely impact the Company's earnings if it was unable to pass such increases directly onto its customers or by implementing more efficient printing, mailing, delivery and order fulfillment systems. The Company's stock price may be volatile. The Company's stock price may fluctuate substantially as a result of quarter to quarter variations in the actual or anticipated financial results of the Company or other companies in the retail industry or markets served by the Company. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks and that have often been unrelated or disproportionate to the operating performance of these companies. The Company may be unable to service its debt. The Company may be unable to service the debt drawn under its credit facilities and/or any other debt it incurs. Additionally, the agreements related to such debt require the Company to maintain certain financial ratios which limit the total amount the Company may borrow, and also prohibit certain types of liens on property or assets. The Company is implementing certain changes to its IT systems that may disrupt operations. The Company is currently implementing modifications and upgrades to the information technology systems for merchandise, distribution, e-commerce and support systems, including finance. Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. The Company is aware of inherent risks associated with replacing these systems, including accurately capturing data and system disruptions. The launch of these successor systems will take place in a phased approach over an approximate five year period that began in 2005. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on the Company's operations. 7 EFTA00190168 The Company relies significantly on its information technology systems. The Company's success depends, in part, on the secure and uninterrupted performance of its information technology systems. The Company's computer systems as well as those of its 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 the Company's servers and those of its service providers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautions the Company has taken, unanticipated problems may nevertheless cause failures in the Company's information technology systems. Sustained or repeated system failures that interrupt the Company's ability to process orders and deliver products to the stores in a timely manner could have a material adverse effect on the Company's operations, controls and reporting. The Company's results can be adversely affected by market disruptions. Market disruptions due to severe weather conditions, natural disasters, health hazards, terrorist activities or the prospect of these events can affect consumer spending and confidence levels and adversely affect the Company's results or prospects in affected markets. The receipt of proceeds under any insurance the Company maintains for these purposes may be delayed or the proceeds may be insufficient to fully offset its losses. The Company's results may be adversely affected by fluctuations in the price of oil. Prices of oil have fluctuated dramatically in the past. These fluctuations may result in an increase in the Company's transportation costs for distribution, utility costs for its retail stores and costs to purchase product from its manufacturers. A continual rise in oil prices could adversely affect consumer spending and demand for the Company's products and increase its operating costs, both of which could have a material adverse effect on the Company's financial condition and results of operations. The Company's licensees could take actions that could harm our business or brands. The Company has global representation through independently owned La Senza stores operating under license agreements. Although we have criteria to evaluate and screen prospective licensees, we are limited in the amount of control we can exercise over our licensees and the quality of licensed operations may be diminished by any number of factors beyond our control. Licensees 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 licensees do not operate successfully. ITEM 1B. UNRESOLVED STAFF COMMENTS. Not applicable.