10-Q 1 a2059273z10-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended AUGUST 4, 2001 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ___________________ Commission file number 1-13814 INTIMATE BRANDS, INC. ---------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 31-1436998 --------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) THREE LIMITED PARKWAY, P.O. BOX 16000, COLUMBUS, OH 43216 --------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (614) 415-6900 -------------------------- 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 X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS A COMMON STOCK OUTSTANDING AT AUGUST 31, 2001 ---------------------- ---------------------------------- $.01 Par Value 80,646,359 Shares CLASS B COMMON STOCK OUTSTANDING AT AUGUST 31, 2001 ---------------------- ---------------------------------- $.01 Par Value 411,635,902 Shares INTIMATE BRANDS, INC. TABLE OF CONTENTS PAGE NO. Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Income Thirteen and Twenty-six Weeks Ended August 4, 2001 and July 29, 2000.............................. 4 Consolidated Balance Sheets August 4, 2001, February 3, 2001 and July 29, 2000............ 5 Consolidated Statements of Cash Flows Twenty-six Weeks Ended August 4, 2001 and July 29, 2000.............................. 6 Notes to Consolidated Financial Statements....................... 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition............... 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 18 Part II. Other Information Item 1. Legal Proceedings........................................... 19 Item 5. Other Information........................................... 20 Item 6. Exhibits and Reports on Form 8-K............................ 21 2 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q ("Report") or made by management of the Company involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company's control. Accordingly, the Company's 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" and similar expressions may identify forward-looking statements. The following factors, among others, in some cases have affected and in the future could affect the Company's financial performance and actual results and could cause actual results for 2001 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this Report or otherwise made by management: changes in consumer spending patterns, consumer preferences and overall economic conditions; the impact of competition and pricing; changes in weather patterns; political stability; postal rate increases and charges; paper and printing costs; risks associated with the seasonality of the retail industry; risks related to consumer acceptance of the Company's products and the ability to develop new merchandise; the ability to retain, hire and train key personnel; risks associated with the possible inability of the Company's manufacturers to deliver products in a timely manner; risks associated with relying on foreign sources of production and availability of suitable store locations on appropriate terms. See the Company's Annual Report on Form 10-K for a more detailed discussion of these matters and other risk factors. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. 3 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS INTIMATE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands except per share amounts) (Unaudited)

~~SECURITIES~~Thirteen ~~AND~~Weeks ~~EXCHANGE~~Ended ~~COMMISSION Washington~~Twenty-six Weeks Ended ----------------------------- ----------------------------- August 4, DJuly 29, August 4, July 29, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net sales $ 1,150,940 $ 1,190,888 $ 2,178,848 $ 2,235,630 Costs of goods sold, buying and occupancy (714,840) (724,657) (1,378,915) (1,368,826) ----------- ----------- ----------- ----------- Gross income 436,100 466,231 799,933 866,804 General, administrative and store operating expenses (318,529) (295,563) (621,548) (579,865) ----------- ----------- ----------- ----------- Operating income 117,571 170,668 178,385 286,939 Interest expense (2,361) (5,350) (4,422) (10,700) Other income (expense), net (884) 872 (1,343) 3,131 ----------- ----------- ----------- ----------- Income before income taxes 114,326 166,190 172,620 279,370 Provision for income taxes 45,400 66,400 68,600 111,700 ----------- ----------- ----------- ----------- Net income $ 68,926 $ 99,790 $ 104,020 $ 167,670 =========== =========== =========== =========== Net income per share: Basic $ 0.C14 $ 0.20 ~~20549~~ $ 0.21 $ 0.34 =========== =========== =========== =========== Diluted $ 0.14 $ 0.20 $ 0.21 $ 0.33 =========== =========== =========== =========== Dividends per share $ 0.07 $ 0.07 $ 0.14 $ 0.14 =========== =========== =========== ===========

The accompanying Notes are an integral part of these Consolidated Financial Statements. 4 INTIMATE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands)

~~FORM~~August 4, February 3, July 29, 2001 2001 2000 ----------- ----------- ----------- (Unaudited) (Unaudited) ASSETS Current assets: Cash and equivalents $ 15,650 $ 8,923 $ 18,043 Accounts receivable 10,805 13,974 16,271 Inventories 609,328 632,389 653,888 Stores supplies 45,465 46,220 41,971 Other 56,035 56,205 81,686 -Q ---------- ----------- ----------- Total current assets 737,283 757,711 811,859 Property and equipment, net 583,817 560,451 455,156 Other assets 138,319 139,186 124,134 ----------- ----------- ----------- Total assets $ 1,459,419 $ 1,457,348 $ 1,391,149 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 102,866 $ 113,080 $ 113,553 Current portion of long-term debt -- -- 150,000 Accrued expenses 229,967 288,985 205,829 Payable to The Limited, Inc. 216,932 113,063 275,765 Income taxes 41,834 120,825 36,773 ----------- ----------- ----------- Total current liabilities 591,599 635,953 781,920 Long-term debt 100,000 100,000 100,000 Deferred income taxes -- -- 128 Other long-term liabilities 55,806 56,067 57,412 Shareholders' equity: Common stock 5,318 5,318 5,318 Paid-in capital 1,208,623 1,215,278 1,209,926 Retained earnings (deficit) 216,365 181,100 (15,027) ----------- ----------- ----------- 1,430,306 1,401,696 1,200,217 Less: treasury stock, at average cost (718,292) (736,368) (748,528) ----------- ----------- ----------- Total shareholders' equity 712,014 665,328 451,689 ----------- ----------- ----------- Total liabilities and shareholders' equity $ 1,459,419 $ 1,457,348 $ 1,391,149 =========== =========== ===========

The accompanying Notes are an integral part of these Consolidated Financial Statements. 5 INTIMATE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands) (Unaudited)

~~[X]~~Twenty-six ~~QUARTERLY~~Weeks ~~REPORT~~Ended ~~PURSUANT~~--------------------------- TOAugust ~~SECTION~~4, 13July OR29, 152001 2000 --------- --------- Operating activities: Net income $ 104,020 $ 167,670 Adjustments to reconcile net income to net cash provided by (dused for) OFoperating ~~THE~~activities: ~~SECURITIES~~Depreciation ~~EXCHANGE~~and ~~ACT~~amortization OF66,782 ~~1934~~55,865 Changes in assets and liabilities: Inventories 23,061 (70,419) Accounts payable and accrued expenses (69,232) (23,199) Income taxes (78,991) (132,210) Other assets and liabilities 9,319 14,584 --------- --------- Net cash provided by operating activities 54,959 12,291 --------- --------- Investing activities: Capital expenditures (93,927) (61,933) --------- --------- Financing activities: Net increase in payable to The Limited, Inc. 103,879 252,024 Repurchase of common stock -- (197,878) Dividends paid (68,755) (69,630) Proceeds from exercise of stock options and other 10,571 6,796 --------- --------- Net cash provided by (used for) financing activities 45,695 (8,688) --------- --------- Net increase (decrease) in cash and equivalents 6,727 (58,330) Cash and equivalents, beginning of year 8,923 76,373 --------- --------- Cash and equivalents, end of period $ 15,650 $ 18,043 ========= =========

The accompanying Notes are an integral part of these Consolidated Financial Statements. 6 INTIMATE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation Intimate Brands, Inc. (the "Company") includes specialty retail stores and direct response (catalog and e-commerce) businesses, which offer women's intimate and other apparel, personal care products and accessories. The Company consists of Victoria's Secret Stores, Victoria's Secret Direct, and Bath & Body Works. The Limited, Inc. ("The Limited") owns approximately 84% of the outstanding common stock of the Company. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in unconsolidated entities over which the Company exercises significant influence but does not have control are accounted for using the equity method. The Company's share of the net income or loss of those unconsolidated entities is included in other income (expense). The consolidated financial statements as of and for the thirteen and twenty-six week periods ended August 4, 2001 and July 29, 2000 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's 2000 Annual Report on Form 10-K. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary for a fair statement of the results for the interim periods, but are not necessarily indicative of the results of operations for a full fiscal year. The consolidated financial statements as of and for the thirteen and twenty-six week periods ended August 4, 2001 and July 29, 2000 included herein have been reviewed by the independent public accounting firm of PricewaterhouseCoopers LLP and the report of such firm follows the Notes to Consolidated Financial Statements. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for its report on the consolidated financial statements because that report is not a "report" within the meaning of Sections 7 and 11 of that Act. Certain prior year amounts have been reclassified to conform to the current year presentation. 2. Earnings Per Share and Shareholders' Equity Earnings per basic share is computed based on the weighted average number of outstanding common shares. Earnings per diluted share includes the weighted average effect of dilutive options and restricted stock on the weighted average shares outstanding. 7 Weighted average common shares outstanding (thousands):

~~For~~Thirteen ~~the~~Weeks ~~quarterly~~Ended ~~period~~Twenty-six ~~ended~~Weeks ~~May 5~~Ended -------------------------- ------------------------- August 4, July 29, August 4, July 29, 2001 2000 2001 2000 ---------- ----------- ---------- ---------- Common shares issued 532,572 532,021 532,397 531,939 Treasury shares (40,912) (38,652) (41,105) (35,935) -------- -------- -------- -------- Basic shares 491,660 493,369 491,292 496,004 Dilutive effect of stock options and restricted shares 3,282 7,442 3,701 6,828 -------- -------- -------- -------- Diluted shares 494,942 500,811 494,993 502,832 ======== ======== ======== ========

The quarterly computation of earnings per diluted share excludes options to purchase 5.5 million and 0.5 million shares of common stock at August 4, 2001 and July 29, 2000, and the year-to-date computation of earnings per diluted share excludes options to purchase 5.6 million and 2.3 million shares, because the options' exercise prices were greater than the average market price of the common shares during the period. 3. Inventories The fiscal year of the Company and its subsidiaries is comprised of two principal selling seasons: spring (the first and second quarters) and fall (the third and fourth quarters). Inventories are principally valued at the lower of average cost or market, on a first-in, first-out basis, using the retail method. Inventory valuation at the end of the first and third quarters reflects adjustments for inventory markdowns for the total selling season. 4. Property and Equipment, Net Property and equipment, net, consisted of (thousands):

August OR 4, February 3, July 29, 2001 2001 2000 ----------- ----------- ----------- Property and equipment, at cost $ 1,199,508 $ 1,134,143 $ 990,495 Accumulated depreciation and amortization (615,691) (573,692) (535,339) ----------- ----------- ----------- Property and equipment, net $ 583,817 $ 560,451 $ 455,156 =========== =========== ===========

5. Income Taxes The provision for income taxes is based on the current estimate of the annual effective tax rate. Current income tax obligations are treated as having been settled through the intercompany accounts as if the Company was filing its income tax returns on a separate company basis. Such amounts were $147.3 million and $244.0 million for the twenty-six weeks ended August 4, 2001 and July 29, 2000. Other current assets included current deferred tax assets of $12.7 million at August 4, 2001, $12.2 million at February 3, 2001 and $39.4 million at July 29, 2000. Other assets included long-term deferred tax assets of $18.6 million at August 4, 2001 and February 3, 2001. 8 6. Long-term Debt Long-term debt consists of notes which represent the Company's proportionate share of certain long-term debt of The Limited. The interest rates and maturities of the notes parallel those of the corresponding debt of The Limited. The 7 1/2% debentures are subject to early redemption beginning in 2003 at specified declining premiums concurrent with any prepayment of the corresponding debt by The Limited. Long-term debt consisted of (thousands):

[August ]4, ~~TRANSITION~~February ~~REPORT~~3, ~~PURSUANT~~July TO29, ~~SECTION~~2001 132001 OR2000 ~~15(d)~~----------- OF------------- ~~THE~~---------- ~~SECURITIES~~7 ~~EXCHANGE~~1/2% ~~ACT~~Debentures OFdue ~~1934~~March 2023 $100,000 $100,000 $100,000 9 1/8% Notes due February 2001 -- -- 150,000 -------- -------- -------- 100,000 100,000 250,000 Less: current portion of long-term debt -- -- 150,000 -------- -------- -------- $100,000 $100,000 $100,000 ======== ======== ========

Interest paid during the twenty-six weeks ended August 4, 2001 and July 29, 2000, including interest on the intercompany cash management account (see Note 7), was $4.4 million and $10.7 million. 7. Intercompany Relationship with the Parent The Limited provides various services to the Company including, among other things, real estate management, store design and construction supervision, inbound and outbound transportation, merchandise sourcing, financial support (certain tax, treasury, accounting and audit), aircraft, legal, corporate development, risk management, human resources (certain management and benefit plan administration) and government affairs services. To the extent expenditures are specifically identifiable, they are charged to the Company. All other service-related costs not specifically attributable to an operating business have been allocated to the Company based upon various allocation methods, which the Company believes are reasonable. The Company and The Limited have entered into intercompany agreements which establish the provision of services in accordance with the terms described above. The Company participates in The Limited's centralized cash management system. Under this system, cash received from the Company's operations is transferred to The Limited's centralized cash accounts and cash disbursements are funded from the centralized cash accounts on a daily basis. The intercompany cash management account is an interest-earning asset or interest-bearing liability of the Company. Interest on the intercompany cash management account is calculated based on the Federal Reserve AA Composite 30-day rate. The Company's proprietary credit card processing is performed by Alliance Data Systems, which is approximately 20%-owned by The Limited. 9 The Company and The Limited are parties to a corporate agreement under which the Company granted to The Limited a continuing option to purchase, under certain circumstances, additional shares of Class B Common Stock or shares of nonvoting capital stock of the Company. The Corporate Agreement further provides that, upon request of The Limited, the Company will use its best efforts to effect the registration of any of the shares of Class B Common Stock and nonvoting capital stock held by The Limited for sale. 8. Segment Information The Company identifies operating segments based on a business's operating characteristics. Reportable segments were determined based on similar economic characteristics, the nature of products and services, and the method of distribution. The retail segment includes the store-based operations of Victoria's Secret Stores and Bath & Body Works. The VS Direct segment consists of the Victoria's Secret Direct catalog and e-commerce operations. Sales outside the United States were not significant. Segment information as of and for the thirteen and twenty-six weeks ended August 4, 2001 and July 29, 2000 follows (in millions):

~~For~~2001 ~~the~~Retail ~~transition~~VS ~~period~~Direct ~~from to~~ Corporate Total ------------------- ------------ ------------- ------------- ----------- THIRTEEN WEEKS: Net sales $ 922 $ 229 $ -- $ 1,151 Operating income (loss) 135 17 (34) 118 TWENTY-SIX WEEKS: Net sales 1,724 455 -- 2,179 Operating income (loss) 217 26 (65) 178 Total assets 1,184 183 92 1,459

2000 ~~Commission~~Retail ~~file~~VS ~~number~~Direct Corporate Total ----------------------- ------------- -------------- ------------- ------------ THIRTEEN WEEKS: Net sales $ 908 $ 283 -- $ 1,191 Operating income (loss) 175 24 ($ 28) 171 TWENTY-~~13814~~ SIX WEEKS: Net sales 1,711 525 -- 2,236 Operating income (loss) 296 45 (54) 287 Total assets 1,115 166 110 1,391

In addition to its operating segments, management also focuses on Victoria's Secret as a brand. Sales of the Victoria's Secret brand decreased 5% to $792.1 million for the thirteen weeks ended August 4, 2001, and decreased 5% to $1.498 billion for the twenty-six weeks ended August 4, 2001. 11 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Intimate Brands, Inc. We have reviewed the accompanying consolidated balance sheets of Intimate Brands, Inc. and its subsidiaries (the "Company") as of August 4, 2001 and July 29, 2000, and the related consolidated statements of income for each of the thirteen and twenty-six week periods ended August 4, 2001 and July 29, 2000 and the consolidated statement of cash flows for the twenty-six week periods ended August 4, 2001 and July 29, 2000. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of February 3, 2001, and the related consolidated statements of income, of shareholders' equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 27, 2001 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of February 3, 2001 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/PricewaterhouseCoopers LLP Columbus, Ohio August 23, 2001 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Net sales for the second quarter of 2001 were $1.151 billion, a decrease of 3% from $1.191 billion for the second quarter of 2000. Gross income decreased 6% to $436.1 million from $466.2 million in 2000, and operating income decreased 31% to $117.6 million from $170.7 million in 2000. The operating income decline resulted primarily from a 3% sales decline and from increased store selling and occupancy expenses. Net income was $68.9 million, a decrease of 31% from $99.8 million in 2000. Earnings per share decreased to $0.14 per share from $0.20 per share in 2000. Net sales for the twenty-six weeks ended August 4, 2001 were $2.179 billion, a decrease of 3% from $2.236 billion in 2000. Gross income decreased 8% to $799.9 million from $866.8 million in 2000, and operating income decreased 38% to $178.4 million from $286.9 million in 2000. Net income was $104.0 million, a 38% decrease from $167.7 million in 2000. Earnings per share decreased 36% to $0.21 per share from $0.33 per share in 2000. FINANCIAL SUMMARY The following summarized financial and statistical data compares the reported results for the thirteen and twenty-six-week periods ended August 4, 2001 to the comparable periods for 2000:

INTIMATE BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware		31-1436998
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
Three Limited Parkway, P.O. Box 16000, Columbus, OH 43230
(Address of principal executive offices)(Zip Code)

N/M - Not meaningful 13

~~Registrant~~SECOND QUARTER YEAR-TO-DATE --------------------------------- ------------------------------- 2001 2000 Change 2001 2000 Change -------- -------- -------- -------- --------- ------- STORE DATA: Retail sales increase attributable to net new and remodeled stores: Victoria's ~~telephone~~Secret ~~number~~Stores 5% 3% 4% 3% Bath & Body Works 12% 14% 12% 13% Retail sales per average selling square foot: Victoria's Secret Stores $ 132 $ 138 (4%) $ 245 $ 263 (7%) Bath & Body Works $ 112 $ 132 (15%) $ 215 $ 250 (14%) Retail sales per average store (thousands): Victoria's Secret Stores $ 578 $ 615 (6%) $ 1,075 ~~including~~$ ~~area~~1,166 ~~code~~(8%) Bath & Body Works $ 238 $ 274 (~~614~~13%) ~~415~~ $ 457 $ 518 (12%) Average store size at end of quarter (selling square feet): Victoria's Secret Stores 4,391 4,443 (1%) Bath & Body Works 2,136 2,087 2% Selling square feet at end of quarter (thousands): Victoria's Secret Stores 4,312 4,008 8% Bath & Body Works 3,287 2,719 21% NUMBER OF STORES: Beginning of period 2,439 2,144 2,390 2,110 Opened 83 64 134 102 Closed (1) (3) (3) (7) -~~6900~~ ------ ------- ------- ------- End of period 2,521 2,205 2,521 2,205 ======= ======= ======= =======

~~Indicate~~NUMBER byOF ~~check~~STORES ~~mark~~SELLING ~~whether~~SQ. ~~the~~FT. ~~registrant~~ (1THOUSANDS) ~~has~~ ~~filed~~----------------------------- ~~all~~------------------------------ ~~reports~~AUGUST ~~required~~4, toJULY be29, ~~filed~~AUGUST by4, ~~Section 13~~JULY or29, 152001 ~~(d) of~~2000 ~~the~~2001 ~~Securities Exchange~~2000 ~~Act~~---------- of--------- ~~1934~~---------- ~~during~~---------- ~~the~~Victoria's ~~preceding~~Secret ~~12 months~~Stores ~~(or~~982 ~~for~~902 ~~such~~4,312 ~~shorter~~4,008 ~~period~~Bath ~~that~~& ~~the~~Body ~~registrant~~Works ~~was~~1,539 ~~required~~1,303 to3,287 ~~file~~2,719 ~~such~~----- ~~reports),~~----- ----- ----- Total stores and ~~(2) has~~selling ~~been~~square ~~subject~~feet to2,521 ~~such~~2,205 ~~filing requirements~~7,599 ~~for~~6,727 ~~the~~===== ~~past~~===== ~~90 days.~~===== =====

14 NET SALES Net sales for the second quarter of 2001 decreased 3% to $1.151 billion from $1.191 billion in 2000. The net sales decline was primarily due to a 5% decrease in comparable store sales and a 19% decrease in sales at Victoria's Secret Direct. These declines were partially offset by an increase from the net addition of 316 new stores (872,000 selling square feet). Retail sales of $921.8 million for the second quarter of 2001 increased 2% from $908.4 million in 2000. Victoria's Secret Stores' sales increased 2% to $563.0 million due to the net addition of 80 stores (304,000 selling square feet), partially offset by a 3% decrease in comparable store sales. Bath & Body Works' sales increased 3% to $358.9 million, due to the net addition of 236 new stores (568,000 selling square feet), partially offset by a 9% decrease in comparable store sales. Net sales at Victoria's Secret Direct decreased 19% to $229.1 million due to an acceleration of catalog mailings into the first quarter as compared to last year, as well as unfavorable results in the clothing, sleepwear, shoes and accessory categories, partially offset by an increase in e-commerce sales. Year-to-date net sales in 2001 decreased 3% to $2.179 billion from $2.236 billion in 2000. The decrease was primarily due to a 6% decrease in comparable store sales and a 13% decline in sales at Victoria's Secret Direct. These declines were partially offset by the net addition of 316 new stores (872,000 selling square feet). GROSS INCOME For the second quarter of 2001, the gross income rate (expressed as a percentage of net sales) decreased to 37.9% from 39.1% for the same period in 2000. The rate decrease was principally due to an increase in the buying and occupancy expense rate due to the inability to achieve leverage on store-related costs as comparable store sales decreased 5%. In addition, the buying and occupancy expense rate increase was due to the continuing expansion of Bath & Body Works' stores into non-mall locations, which, although profitable, typically have higher occupancy costs as a percentage of net sales. The year-to-date gross income rate decreased to 36.7% from 38.8% in 2000, primarily due to the factors discussed above. GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES The general, administrative and store operating expense rate (expressed as a percentage of net sales) increased to 27.7% in the second quarter of 2001 from 24.8% for the same period in 2000. General, administrative and store operating expenses increased 8% primarily due to higher store selling expenses resulting from the net addition of 316 new stores. At Victoria's Secret Stores, the general, administrative and store operating expense rate was relatively flat as lower marketing expenses offset the deleveraging impact of a comparable store sales decrease of 3%. At Bath & Body Works, the general, administrative and store operating expense rate increased significantly due to the inability to achieve leverage on a comparable store sales decrease of 9%. Bath & Body Works' general, administrative and store operating expenses increased due to higher store selling expenses resulting from a 21% increase in selling square feet. The year-to-date general, administrative and store operating expense rate increased to 28.5% from 25.9% in 2000, primarily due to the factors discussed above. 15 OPERATING INCOME The second quarter operating income rate (expressed as a percentage of net sales) decreased to 10.2% from 14.3% for the same period in 2000. The rate decrease was due to the 1.2% decrease in the gross income rate and the 2.9% increase in the general, administrative and store operating expense rate. The year-to-date operating income rate was 8.2% in 2001 and 12.8% in 2000. The rate decrease was due to the 2.1% decrease in the gross income rate and the 2.6% increase in the general, administrative and store operating expense rate. INTEREST EXPENSE AND OTHER INCOME (EXPENSE) Second quarter and year-to-date interest expense was $2.4 million and $4.4 million, respectively, in 2001 compared to $5.4 million and $10.7 million in 2000. Interest expense is primarily related to the Company's long-term debt. The decrease in interest expense was primarily due to the repayment of $150 million in debt in February 2001. The Company incurred other expense of $0.9 million and $1.3 million in the second quarter and year-to-date periods in 2001 compared to earnings of $0.9 million and $3.1 million for the same periods in 2000. The decrease in other income (expense) was primarily due to the use of previously invested cash to repay $150 million in debt. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities and borrowings from The Limited provide the resources to support current operations, projected growth, seasonal funding requirements and capital expenditures. A summary of the Company's working capital position and capitalization follows (millions): August 4, February 3, July 29, 2001 2001 2000 ---------- ------------ ------------ Working capital $ 146 $ 122 $ 30 ======== ======== ======== Capitalization: Long-term debt $ 100 $ 100 $ 100 Shareholders' equity 712 665 452 -------- -------- -------- Total capitalization $ 812 $ 765 $ 552 ======== ======== ======== Net cash provided by operating activities totaled $55 million for the twenty-six weeks ended August 4, 2001, compared to $12 million for the same period in 2000. The change in net cash provided by operating activities was primarily driven by lower net income, a reduction in inventory during the period compared to inventory growth during 2000, partially offset by a reduction in accounts payable and accrued expenses. 16 Investing activities represent capital expenditures, which were primarily for new and remodeled stores. Financing activities for the twenty-six weeks ended August 4, 2001 included cash dividend payments of $0.14 per share and a $104 million net increase in The Limited's intercompany cash management account payable (see Note 7 to the Consolidated Financial Statements). In 2000, financing activities included cash dividend payments of $0.14 per share, the repurchase of 1.4 million shares of the Company's common stock from its public shareholders for $31.4 million and the repurchase of 7.4 million shares from The Limited for $166.5 million. The cash dividend payment and stock repurchases were offset by a $252 million net increase in The Limited's intercompany cash management account payable (see Note 7 to the Consolidated Financial Statements). CAPITAL EXPENDITURES Capital expenditures, primarily for new and remodeled stores, totaled $94 million for the twenty-six weeks ended August 4, 2001, compared to $62 million for the comparable period of 2000. The increase is primarily related to the timing of capital expenditures associated with new and remodeled stores. The Company accelerated the timing of these projects to complete the stores prior to the key fall selling period. The Company anticipates spending approximately $250 million in 2001 for capital expenditures, of which approximately $200 million will be for new stores and for remodeling of and improvements to existing stores. The Company expects that capital expenditures will be funded principally by net cash provided by operating activities. The Company intends to add approximately 825,000 selling square feet in 2001, which will represent an 11% increase over year-end 2000. It is anticipated the increase will result from the addition of approximately 260 new stores and the expansion of 70 stores, partially offset by the closing of 12 stores. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS EITF Issue No. 00-14, "Accounting for Certain Sales Incentives," will be effective in the first quarter of 2002 and addresses the accounting for, and classification of, various sales incentives. The Company has determined that adopting the provisions of the EITF Issue will not have a material impact on its results of operations or its financial position. On June 29, 2001 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and also addresses the accounting for goodwill and other intangible assets. SFAS No. 142 addresses the accounting for goodwill and other intangible assets subsequent to their acquisition, and will be effective in the first quarter of 2002. The Company is currently evaluating the impact of adopting SFAS No. 141 and SFAS No. 142. IMPACT OF INFLATION The Company's results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, the Company believes the effects of inflation, if any, on the results of operations and financial condition have been minor. 17 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The market risk of the Company's financial instruments as of August 4, 2001 has not significantly changed since February 3, 2001. Information regarding the Company's financial instruments and market risk as of February 3, 2001 is disclosed in the Company's 2000 Annual Report on Form 10-K. 18 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is a defendant in a variety of lawsuits arising in the ordinary course of business. On January 13, 1999, two complaints were filed against the Company, as well as other defendants, including many national retailers. Both complaints relate to labor practices allegedly employed on the island of Saipan, Commonwealth of the Northern Mariana Islands, by apparel manufacturers unrelated to the Company (some of which have sold goods to the Company) and seek injunctions, unspecified monetary damages, and other relief. One complaint, on behalf of a class of unnamed garment workers, was filed in the United States District Court for the Central District of California, Western Division and subsequently transferred to the United States District Court for the Northern Mariana Islands. It alleged violations of federal statutes, the United States Constitution, and international law. On April 12, 1999, a motion to dismiss that complaint for failure to state a claim upon which relief can be granted was filed, and it remains pending. A first amended complaint was filed on April 28, 2000, which added additional defendants but did not otherwise substantively alter either the claims alleged or relief sought. The second complaint, filed by a national labor union and other organizations in the Superior Court of the State of California, San Francisco County, and which alleges unfair business practices under California law, remains pending. Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, the foregoing proceedings are not expected to have a material adverse effect on the Company's financial position or results of operations. 19 Item 5. OTHER INFORMATION The Company's Certificate of Incorporation includes provisions relating to potential conflicts of interest that may arise between the Company and The Limited. Such provisions were adopted in light of the fact that the Company and The Limited and its subsidiaries are engaged in retail businesses and may pursue similar opportunities in the ordinary course of business. Among other things, these provisions generally eliminate the liability of directors and officers of the Company with respect to certain matters involving The Limited and its subsidiaries, including matters that may constitute corporate opportunities of The Limited, its subsidiaries or the Company. Any person purchasing or acquiring an interest in shares of capital stock of the Company will be deemed to have consented to such provisions relating to conflicts of interest and corporate opportunities, and such consent may restrict such person's ability to challenge transactions carried out in compliance with such provisions. Investors should review the Company's Certificate of Incorporation before making any investment in shares of the Company's capital stock. 20 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 15. Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Incorporation of Report of Independent Accountants. (b) REPORTS ON FORM 8-K None. 21 SIGNATURE Pursuant to the requirements 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. INTIMATE BRANDS, INC. (Registrant) By /s/ TRACEY THOMAS TRAVIS -------------------------------------- Tracey Thomas Travis, Vice President, Finance and Chief Financial Officer of Intimate Brands, Inc.* Date: September 17, 2001 -------------------------------- *Ms. Travis is the principal financial officer and has been duly authorized to sign on behalf of the Registrant. 22

Yes X No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class A Common Stock		Outstanding at May 25, 2001
$.01 Par Value		79,387,487 Shares
Class B Common Stock		Outstanding at May 25, 2001
$.01 Par Value		411,635,902 Shares

INTIMATE BRANDS, INC. TABLE OF CONTENTS

				Page No.
Part I. Financial Information
	Item 1. Financial Statements
		Consolidated Statements of Income
			Thirteen Weeks Ended May 5, 2001 and April 29, 2000	4
		Consolidated Balance Sheets
			May 5, 2001, February 3, 2001 and April 29, 2000	5
		Consolidated Statements of Cash Flows
			Thirteen Weeks Ended May 5, 2001 and April 29, 2000	6
		Notes to Consolidated Financial Statements		7
	Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition			12
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			16
Part II. Other Information
	Item 1. Legal Proceedings			17
	Item 4. Submission of Matters to a Vote of Security Holders			17
	Item 5. Other Information			18
	Item 6. Exhibits and Reports on Form 8-K			18

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q ("Report") or made by management of the Company involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company's control. Accordingly, the Company's 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" and similar expressions may identify forward-looking statements. The following factors, among others, in some cases have affected and in the future could affect the Company's financial performance and actual results and could cause actual results for 2001 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this Report or otherwise made by management: changes in consumer spending patterns, consumer preferences and overall economic conditions; the impact of competition and pricing; changes in weather patterns; political stability; postal rate increases and charges; paper and printing costs; risks associated with the seasonality of the retail industry; risks related to consumer acceptance of the Company's products and the ability to develop new merchandise; the ability to retain, hire and train key personnel; risks associated with the possible inability of the Company's manufacturers to deliver products in a timely manner; risks associated with relying on foreign sources of production and availability of suitable store locations on appropriate terms. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

INTIMATE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands except per share amounts) (Unaudited)

		Thirteen Weeks Ended
		May 5, 2001			April 29, 2000
Net sales		$	1,027,908		$	1,044,742
Costs of goods sold, buying and occupancy			(664,075	)		(644,169	)
Gross income			363,833			400,573
General, administrative and store operating expenses			(303,019	)		(284,302	)
Operating income			60,814			116,271
Interest expense			(2,061	)		(5,350	)
Other income (expense), net			(459	)		2,259
Income before income taxes			58,294			113,180
Provision for income taxes			23,200			45,300
Net income		$	35,094		$	67,880
Net income per share:
	Basic		$0.07			$0.14
	Diluted		$0.07			$0.13
Dividends per share			$0.07			$0.07

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

INTIMATE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands)

		May 5, 2001			February 3, 2001			April 29, 2000
		(Unaudited)						(Unaudited)
ASSETS
Current assets:
	Cash and equivalents	$	18,513		$	8,923		$	13,025
	Accounts receivable		13,149			13,974			17,098
	Inventories		639,432			632,389			644,412
	Stores supplies		47,035			46,220			43,568
	Other		54,191			56,205			92,515
Total current assets			772,320			757,711			810,618
Property and equipment, net			557,025			560,451			445,462
Other assets			136,748			139,186			122,967
Total assets		$	1,466,093		$	1,457,348		$	1,379,047
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
	Accounts payable	$	103,075		$	113,080		$	99,034
	Current portion of long-term debt		—			—			150,000
	Accrued expenses		236,484			288,985			194,522
	Payable to The Limited, Inc.		250,490			113,063			121,811
	Income taxes		51,843			120,825			75,921
Total current liabilities			641,892			635,953			641,288
Long-term debt			100,000			100,000			100,000
Deferred income taxes			—			—			816
Other long-term liabilities			57,121			56,067			55,734
Shareholders' equity:
	Common stock		5,318			5,318			5,305
	Paid-in capital		1,214,910			1,215,278			1,213,555
	Retained earnings (deficit)		181,860			181,100			(80,083	)
			1,402,088			1,401,696			1,138,777
	Less: treasury stock, at average cost		(735,008	)		(736,368	)		(557,568	)
Total shareholders' equity			667,080			665,328			581,209
Total liabilities and shareholders' equity		$	1,466,093		$	1,457,348		$	1,379,047

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

INTIMATE BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands) (Unaudited)

				Thirteen Weeks Ended
				May 5, 2001			April 29, 2000
Operating activities:
	Net income			$	35,094		$	67,880
	Adjustments to reconcile net income to net cash provided by (used for) operating activities:
		Depreciation and amortization			31,548			27,176
		Changes in assets and liabilities:
			Inventories		(7,043	)		(60,943	)
			Accounts payable and accrued expenses		(62,506	)		(49,382	)
			Income taxes		(68,982	)		(92,365	)
			Other assets and liabilities		9,040			(159	)
Net cash used for operating activities					(62,849	)		(107,793	)
Investing activities:
	Capital expenditures				(31,526	)		(22,223	)
Financing activities:
	Net increase in payable to The Limited, Inc.				137,427			98,070
	Dividends paid				(34,334	)		(34,896	)
	Proceeds from exercise of stock options and other				872			3,494
Net cash provided by financing activities					103,965			66,668
Net increase (decrease) in cash and equivalents					9,590			(63,348	)
Cash and equivalents, beginning of year					8,923			76,373
Cash and equivalents, end of period				$	18,513		$	13,025

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

INTIMATE BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

Intimate Brands, Inc. (the "Company") includes specialty retail stores and direct response (catalog and e-commerce) businesses, which offer women's intimate and other apparel, personal care products and accessories. The Company consists of Victoria's Secret Stores, Victoria's Secret Direct, and Bath & Body Works. The Limited, Inc. ("The Limited") owns approximately 84% of the outstanding common stock of the Company, which initiated public ownership on October 24, 1995.

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Investments in unconsolidated entities over which the Company exercises significant influence but does not have control are accounted for using the equity method. The Company's share of the net income or loss of those unconsolidated entities is included in other income (expense).

The consolidated financial statements as of and for the thirteen week periods ended May 5, 2001 and April 29, 2000 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's 2000 Annual Report on Form 10-K. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary for a fair statement of the results for the interim periods, but are not necessarily indicative of the results of operations for a full fiscal year.

The consolidated financial statements as of and for the thirteen week periods ended May 5, 2001 and April 29, 2000 included herein have been reviewed by the independent public accounting firm of PricewaterhouseCoopers LLP and the report of such firm follows the Notes to Consolidated Financial Statements. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for its report on the consolidated financial statements because that report is not a "report" within the meaning of Sections 7 and 11 of that Act.

Certain prior year amounts have been reclassified to conform to the current year presentation.

2. Earnings Per Share and Shareholders' Equity

Earnings per basic share is computed based on the weighted average number of outstanding common shares. Earnings per diluted share includes the weighted average effect of dilutive options and restricted stock on the weighted average shares outstanding.

Weighted average common shares outstanding (thousands):

	Thirteen Weeks Ended
	May 5, 2001		April 29, 2000
Common shares issued	532,222		531,857
Treasury shares	(41,299	)	(33,217	)
Basic shares	490,923		498,640
Dilutive effect of stock options and restricted stock	4,121		6,212
Diluted shares	495,044		504,852

The computation of earnings per diluted share excludes options to purchase 5.6 million and 4.0 million shares of common stock at quarter-end 2001 and 2000, because the options' exercise price was greater than the average market price of the common shares during the period.

On May 2, 2000, the Company declared a two-for-one stock split ("stock split") in the form of a stock dividend distributed on May 30, 2000 to shareholders of record on May 12, 2000. Shareholders' equity reflects the reclassification of an amount equal to the par value of the increase in issued common shares ($2.7 million) from paid-in capital to common stock. All share and per share data throughout this report has been restated to reflect the stock split.

3. Inventories

The fiscal year of the Company and its subsidiaries is comprised of two principal selling seasons: spring (the first and second quarters) and fall (the third and fourth quarters). Inventories are principally valued at the lower of average cost or market, on a first-in, first-out basis, using the retail method. Inventory valuation at the end of the first and third quarters reflects adjustments for inventory markdowns and shrinkage estimates for the total selling season.

4. Property and Equipment, Net

Property and equipment, net, consisted of (thousands):

	May 5, 2001			February 3, 2001			April 29, 2000
Property and equipment, at cost	$	1,153,713		$	1,134,143		$	955,335
Accumulated depreciation and amortization		(596,688	)		(573,692	)		(509,873	)
Property and equipment, net	$	557,025		$	560,451		$	445,462

5. Income Taxes

The provision for income taxes is based on the current estimate of the annual effective tax rate. Current income tax obligations are treated as having been settled through the intercompany accounts as if the Company was filing its income tax returns on a separate company basis. Such amounts were $92.1 million and $137.7 million for the thirteen weeks ended May 5, 2001 and April 29, 2000. Other assets included long-term deferred tax assets of $18.6 million at May 5, 2001 and February 3, 2001. Other current assets included current deferred tax assets of $12.2 million at May 5, 2001 and February 3, 2001 and $39.4 million at April 29, 2000.

6. Long-term Debt

Long-term debt consists of notes which represent the Company's proportionate share of certain long-term debt of The Limited. The interest rates and maturities of the notes parallel those of the corresponding debt of The Limited. The 71/2% debentures are subject to early redemption beginning in 2003 at specified declining premiums concurrent with any prepayment of the corresponding debt by The Limited.

Long-term debt consisted of (thousands):

		May 5, 2001		February 3, 2001		April 29, 2000
71/2% Debentures due March 2023		$	100,000	$	100,000	$	100,000
91/8% Notes due February 2001			—		—		150,000
			100,000		100,000		250,000
	Less: current portion of long-term debt		—		—		150,000
		$	100,000	$	100,000	$	100,000

Interest paid during the thirteen weeks ended May 5, 2001 and April 29, 2000, including interest on the intercompany cash management account (see Note 7), was $3.9 million and $10.7 million.

7. Intercompany Relationship with the Parent

The Limited provides various services to the Company including, among other things, merchandise sourcing, real estate management, store design and construction supervision, inbound and outbound transportation, financial support (certain tax, treasury, accounting and audit), aircraft, legal, corporate development, risk management, human resources (certain management and benefit plan administration) and government affairs services. To the extent expenditures are specifically identifiable they are charged to the Company. All other service-related costs not specifically attributable to an operating business have been allocated to the Company based upon various allocation methods, which the Company believes are reasonable. The Company and The Limited have entered into intercompany agreements which establish the provision of services in accordance with the terms described above.

The Company participates in The Limited's centralized cash management system. Under this system, cash received from the Company's operations is transferred to The Limited's centralized cash accounts and cash disbursements are funded from the centralized cash accounts on a daily basis. The intercompany cash management account is an interest-earning asset or interest-bearing liability of the Company. Interest on the intercompany cash management account is calculated based on the Federal Reserve AA Composite 30-day rate.

The Company's proprietary credit card processing is performed by Alliance Data Systems, which is approximately 31%-owned by The Limited.

The Company and The Limited are parties to a corporate agreement under which the Company granted to The Limited a continuing option to purchase, under certain circumstances, additional shares of Class B Common Stock or shares of nonvoting capital stock of the Company. The Corporate Agreement further provides that, upon request of The Limited, the Company will use its best efforts to effect the registration of any of the shares of Class B Common Stock and nonvoting capital stock held by The Limited for sale.

8. Segment Information

The Company identifies operating segments based on a business's operating characteristics. Reportable segments were determined based on similar economic characteristics, the nature of products and services, and the method of distribution. The retail segment includes the store-based operations of Victoria's Secret Stores and Bath & Body Works. The VS Direct segment consists of the Victoria's Secret Direct catalog and e-commerce operations. Sales outside the United States were not significant.

Segment information as of and for the thirteen weeks ended May 5, 2001 and April 29, 2000 follows (in thousands):

2001	Retail		VS Direct		Corporate			Total
Net sales	$	801,806	$	226,102		—		$	1,027,908
Operating income (loss)		82,903		9,573	$	(31,662	)		60,814
Total assets		1,182,263		186,564		97,266			1,466,093

2000	Retail		VS Direct		Corporate			Total
Net sales	$	802,086	$	242,656		—		$	1,044,742
Operating income (loss)		121,730		20,713	$	(26,172	)		116,271
Total assets		1,079,061		193,969		106,017			1,379,047

In addition to its operating segments, management also focuses on Victoria's Secret as a brand. Sales of the Victoria's Secret brand for the first quarter of 2001 decreased 4% to $705.8 million from $738.3 million in 2000.

Report of Independent Accountants

To the Board of Directors and Shareholders of Intimate Brands, Inc.:

We have reviewed the accompanying consolidated balance sheets of Intimate Brands, Inc. and its subsidiaries (the "Company") as of May 5, 2001 and April 29, 2000, and the related consolidated statements of income and of cash flows for each of the thirteen-week periods ended May 5, 2001 and April 29, 2000. These financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of February 3, 2001, and the related consolidated statements of income, of shareholders' equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 27, 2001 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of February 3, 2001 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

Columbus, Ohio May 21, 2001

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS

Net sales for the first quarter of 2001 were $1.028 billion, a decrease of 2% from $1.045 billion for the first quarter of 2000. Gross income decreased 9% to $363.8 million from $400.6 million in 2000, and operating income decreased 48% to $60.8 million from $116.3 million in 2000. The operating income decline resulted primarily from a sales decline of 2% and from increased store selling and occupancy expenses. Net income was $35.1 million, a decrease of 48% from $67.9 million in 2000. Earnings per share decreased to $0.07 per share from $0.13 per share in 2000.

On its May 21, 2001 earnings call, the Company stated that it expected negative sales trends to continue and that store selling and occupancy expenses would be higher in the second quarter of 2001 versus last year. As a result, the Company stated that it expected second quarter earnings would be down significantly from last year.

Financial Summary

The following summarized financial and statistical data compares the thirteen week period ended May 5, 2001 to the comparable 2000 period:

		2001			2000			Change
Net Sales (millions):
Victoria's Secret Stores		$	480		$	496		(3	)%
Bath & Body Works			320			301		6	%
Other			2			5		N/M
	Total retail sales		802			802		0	%
Victoria's Secret Direct			226			243		(7	)%
	Total net sales	$	1,028		$	1,045		(2	)%
Comparable Store Sales:
Victoria's Secret Stores			(7	)%		14	%
Bath & Body Works			(8	)%		6	%
Total comparable store sales increase (decrease)			(7	)%		11	%

N/M Not meaningful

		2001			2000			Change
Store Data:
Retail sales increase attributable to net new and remodeled stores:
	Victoria's Secret Stores		4	%		4	%
	Bath & Body Works		14	%		12	%
Retail sales per average selling square foot:
	Victoria's Secret Stores	$	114		$	125		(9	)%
	Bath & Body Works	$	104		$	119		(13	)%
Retail sales per average store (thousands):
	Victoria's Secret Stores	$	499		$	554		(10	)%
	Bath & Body Works	$	220		$	244		(10	)%
Average store size at end of quarter (selling square feet):
	Victoria's Secret Stores		4,391			4,443		(1	)%
	Bath & Body Works		2,132			2,066		3	%
Selling square feet at end of quarter (thousands):
	Victoria's Secret Stores		4,242			3,972		7	%
	Bath & Body Works		3,140			2,582		22	%
Number of Stores:
Beginning of year			2,390			2,110
	Opened		51			38
	Closed		(2	)		(4	)
End of period			2,439			2,144

	Number of Stores		Selling Sq. Ft. (Thousands)
	May 5, 2001	April 29, 2000	May 5, 2001	April 29, 2000
Victoria's Secret Stores	966	894	4,242	3,972
Bath & Body Works	1,473	1,250	3,140	2,582
Total stores and selling square feet	2,439	2,144	7,382	6,554

Net Sales

Net sales for the first quarter of 2001 decreased 2% to $1.028 billion from $1.045 billion in 2000. The net sales decline was primarily due to a 7% decrease in comparable store sales and a 7% decrease in sales at Victoria's Secret Direct, partially offset by an increase from the net addition of 295 new stores (828,000 selling square feet).

Retail sales of $801.8 million for the first quarter of 2001 were relatively flat to sales of $802.1 million in 2000. Victoria's Secret Stores' sales decrease of 3% to $479.7 million was primarily due to a 7% decrease in comparable store sales, resulting from a decrease in both the number of transactions and average sales price per unit and poor performance in certain merchandise categories, particularly sleepwear. The decline was partially offset by the net addition of 72 stores (270,000 selling square feet). Bath & Body Works' sales increase of 6% to $319.8 million was primarily attributable to the net addition of 223 new stores (558,000 selling square feet), partially offset by an 8% decrease in comparable store sales as new product launches were not as successful as planned. Net sales at Victoria's Secret Direct decreased 7% to $226.1 million as improved performance in bras and swimwear was more than offset by unfavorable results in other merchandise categories.

Gross Income

For the first quarter of 2001, the gross income rate (expressed as a percentage of net sales) decreased to 35.4% from 38.3% for the same period in 2000. The rate decrease was principally due to an increase in the buying and occupancy expense rate due to the inability to achieve leverage on store-related costs as comparable store sales decreased 7%. In addition, the buying and occupancy expense rate increase was due to the continuing expansion of Bath & Body Works' stores into non-mall locations, which, although highly profitable, typically have higher occupancy costs as a percentage of net sales.

General, Administrative and Store Operating Expenses

The general, administrative and store operating expense rate (expressed as a percentage of net sales) increased to 29.5% in the first quarter of 2001 from 27.2% for the same period in 2000. General, administrative and store operating expenses increased 7% due to higher store selling expenses resulting from the net addition of 295 new stores and higher labor costs. At Victoria's Secret Stores, higher average wage rates more than offset a reduction in payroll hours. Bath & Body Works experienced an increase in average wage rates and an increase in payroll hours due to new store additions.

Operating Income

The first quarter operating income rate (expressed as a percentage of net sales) decreased to 5.9% from 11.1% for the same period in 2000. The rate decrease was due to the 2.9% decrease in the gross income rate and the 2.3% increase in the general, administrative and store operating expense rate.

Interest Expense and Other Income (Expense)

First quarter interest expense was $2.1 million in 2001 compared to $5.4 million in 2000. The interest expense is primarily for the Company's long-term debt. The decrease in interest expense was primarily due to the repayment of $150 million in debt in February 2001.

The Company incurred $0.5 million in other expense in 2001 compared to earnings of $2.3 million for the same period in 2000. The decrease in other income (expense) was primarily due to the use of cash that was previously invested to repay $150 million in debt.

FINANCIAL CONDITION

Liquidity and Capital Resources

Cash provided from operating activities and borrowings from The Limited provide the resources to support current operations, projected growth, seasonal funding requirements and capital expenditures. A summary of the Company's working capital position and capitalization follows (millions):

		May 5, 2001		February 3, 2001		April 29, 2000
Working capital		$	130	$	122	$	169
Capitalization:
	Long-term debt	$	100	$	100	$	100
	Shareholders' equity		667		665		581
Total capitalization		$	767	$	765	$	681

Net cash used for operating activities totaled $63 million for the thirteen weeks ended May 5, 2001 versus net cash used for operating activities of $108 million for the same period in 2000. The change in net cash used for operating activities was primarily driven by less inventory growth compared to 2000.

Investing activities were for capital expenditures, which were primarily for new and remodeled stores.

Financing activities in the first quarter of 2001 included cash dividend payments of $0.07 per share and a $137 million net increase in The Limited's intercompany cash management account payable (see Note 7 to the Consolidated Financial Statements).

Capital Expenditures

Capital expenditures, primarily for new and remodeled stores, totaled $32 million for the thirteen weeks ended May 5, 2001, compared to $22 million for the comparable period of 2000. The increase is a combination of accelerated store openings, timing of certain expenditures and an overall increase in planned capital expenditures versus the prior year. The Company anticipates spending $280 to $310 million in 2001 for capital expenditures, of which $250 to $275 million will be for new stores and for remodeling of and improvements to existing stores. The Company expects that capital expenditures will be funded principally by net cash provided by operating activities.

The Company intends to add approximately 900,000 selling square feet in 2001, which will represent a 13% increase over year-end 2000. It is anticipated the increase will result from the addition of approximately 280 new stores and the expansion of 59 stores, partially offset by the closing of 15 stores.

Recently Issued Accounting Pronouncements

Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," amended and clarified by SFAS No. 138, was adopted by the Company in the first quarter of 2001. SFAS No. 133 requires that derivative instruments be recorded at fair value and that changes in their fair value be recognized in current earnings unless specific hedging criteria are met. Because the Company's use of derivatives is limited, the adoption of SFAS No. 133 did not have a material impact on the Company's results of operations or financial position.

EITF Issue No. 00-14, "Accounting for Certain Sales Incentives," will be effective in the first quarter of 2002 and addresses the accounting for, and classification of, various sales incentives. The

Company has determined that adopting the provisions of the EITF Issue will not have a material impact on its results of operations or its financial position.

Impact of Inflation

The Company's results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, the Company believes the effects of inflation, if any, on the results of operations and financial condition have been minor.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk of the Company's financial instruments as of May 5, 2001 has not significantly changed since February 3, 2001. Information regarding the Company's financial instruments and market risk as of February 3, 2001 is disclosed in the Company's 2000 Annual Report on Form 10-K.

PART II—OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The Company is a defendant in a variety of lawsuits arising in the ordinary course of business.

On January 13, 1999, two complaints were filed against the Company's parent, The Limited, and one of its subsidiaries, as well as other defendants, including many national retailers. Both complaints relate to labor practices allegedly employed on the island of Saipan, Commonwealth of the Northern Mariana Islands, by apparel manufacturers unrelated to The Limited (some of which have sold goods to The Limited) and seek injunctions, unspecified monetary damages, and other relief. One complaint, on behalf of a class of unnamed garment workers, filed in the United States District Court for the Central District of California, Western Division, alleges violations of federal statutes, the United States Constitution, and international law. On April 12, 1999, a motion to dismiss that complaint for failure to state a claim upon which relief can be granted was filed, and it remains pending. On September 29, 1999, the United States District Court for the Central District of California, Western Division, transferred the case to the United States District Court for the District of Hawaii. A first amended complaint was filed on April 28, 2000, which adds additional defendants but does not otherwise substantively alter the claims alleged or relief sought. On June 23, 2000, the United States District Court for the District of Hawaii transferred the case to the United States District Court for the District of the Northern Mariana Islands, and on July 7, 2000 denied plaintiffs' motion for reconsideration of the transfer order. Plaintiffs filed a Petition for a Writ of Mandamus challenging the transfer order and Motion for Emergency Stay which was denied by a panel of the U.S. 9th Circuit Court of Appeals on March 22, 2001. The second complaint, filed by a national labor union and other organizations in the Superior Court of the State of California, San Francisco County, and which alleges unfair business practices under California law, remains pending.

Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, the foregoing proceedings are not expected to have a material adverse effect on the Company's financial position or results of operations.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its Annual Meeting of Stockholders on May 21, 2001. The matters voted upon and the results of the voting were as follows:

a) William E. Kirwan, Beth M. Pritchard, and Leslie H. Wexner were elected to the Board of Directors for a term of three years. Of the 1,303,798,649 shares present in person or represented by proxy at the meeting, the number of shares voted for and the number of shares as to which voting authority was withheld in the election were as follows, with respect to each of the nominees:

Name	Shares Voted For Election	Shares as to Which Voting Authority Withheld
William E. Kirwan	1,302,300,879	1,497,770
Beth M. Pritchard	1,297,444,231	6,354,418
Leslie H. Wexner	1,297,186,474	6,612,175

In addition, directors whose term of office continued after the Annual Meeting were: Roger D. Blackwell, Grace A. Nichols, Donald B. Shackelford, E. Gordon Gee, and Donna A. James.

b) The Company's Amended and Restated Certificate of Incorporation previously authorized the issuance of 1,155,000,000 shares of Capital Stock, of which 1,100,000,000 shares were Common Stock and 55,000,000 shares were Preferred Stock. The shareholders were asked to consider and vote upon a

proposal to amend the Company's Amended and Restated Certificate of Incorporation to increase the number of shares of Common Stock that the Company is authorized to issue from 1,100,000,000 to 2,200,000,000. Of the 1,303,798,649 shares present in person or represented by proxy at the meeting, 1,280,413,293 shares were voted for the proposal, 23,286,501 shares were voted against the proposal, and 98,855 shares abstained from voting with respect to the proposal.

Item 5. OTHER INFORMATION

The Company's Certificate of Incorporation includes provisions relating to potential conflicts of interest that may arise between the Company and The Limited. Such provisions were adopted in light of the fact that the Company and The Limited and its subsidiaries are engaged in retail businesses and may pursue similar opportunities in the ordinary course of business. Among other things, these provisions generally eliminate the liability of directors and officers of the Company with respect to certain matters involving The Limited and its subsidiaries, including matters that may constitute corporate opportunities of The Limited, its subsidiaries or the Company. Any person purchasing or acquiring an interest in shares of capital stock of the Company will be deemed to have consented to such provisions relating to conflicts of interest and corporate opportunities, and such consent may restrict such person's ability to challenge transactions carried out in compliance with such provisions. Investors should review the Company's Certificate of Incorporation before making any investment in shares of the Company's capital stock.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

None.

SIGNATURE

Pursuant to the requirements 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.

INTIMATE BRANDS, INC. (Registrant) By /s/ TRACEY THOMAS TRAVIS Tracey Thomas Travis, Vice President, Finance and Chief Financial Officer of Intimate Brands, Inc.

Date: June 18, 2001

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