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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.¶
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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.¶
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WE ARE RESIZING THE¶
AVERAGE VICTORIA STORE SIZE BY ABO¶
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HE ‘S SECRE UT 50%¶
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As sales have grown, it has become obvious that Victoria’s Secret needs larger 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.¶
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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 $2.5 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 50 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 $25 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.¶
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This is a great time to be a member of the Limited Brands family:¶
· 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
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- 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¶
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FINANCIAL RESULTS¶