Victoria's Secret Annual Report

VICTORIA’S S E C R E T Annual Report 2007

VICTORIA’S S E C R E T

Table Of Contents Introduction........................................................................1 Financial Highlights...........................................................2 Letter to Our Shareholders.................................................7 Board of Directors and Executive Officers........................13 Form 10-K...................................................................Insert Description of Business and Business Segments............. 14 Management’s Discussion and Analysis.......................... 15 Financial Statements and Supplimentary Data................. 15 Consolidated Balance Sheets........................................... 16 Consolidated Statements of Operations........................... 17 Consolidated Statements of Cash Flows.......................... 18 Consolidated Statements of Shareholders’ Equity............. 19 Notes to Consolidated Financial Statements.................... 20

Introduction Welcome to the Victoria’s Secret 2007 Annual Report. We are a leading lingerie, clothing, and swimwear retailor whose mission is to deliver the best quality clothing to our customers across the world. Our majority shareholder, Limited Brands, has lauched the Victoria’s Secret brand in Europe. Together we have created Victoria’s Secret as a global lingerie brand, bringing our unique combination of beautiful, sexy, and wearable items across the globe. Collectively the Victoria’s Secret brand reaches millions of customers worldwide.

1

our

highlights 129.3 120.1

155.5 129.3

146.8

165.3

Continued growth

S E C R E T

187.8 75.2 45.1 40.3

Revenues

74.8

85.9

97.4

58.0

Catalog Revenues

[$ million]

[$ million]

41.4

47.1 32.3

26.3 13.5

VICTORIA’S

29.4

21.9

34.8

38.3

41.8

31.4 24.9 24.7

12.3 Advertising Revenues [$ million]

2

Customers Reached [million]

3

our

VICTORIA’S S E C R E T

highlights 30.9 20.2 8.9

19.8

17.1 13.6

16.2 3.8

10.4

(4.4) (9.9) Operating Cash Flow [$ million]

30.9

Continued growth

5.8

(28.9) (29.8) Net Income [$ million]

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, www. VictoriasSecret.com, 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.

4

5

Chief Executive

Officer’s Review

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.

7

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.

8

As sales have grown, it has become obvious that Victoria’s Secret needs largerstores. 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.

11

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 · 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

12

Management Board Leslie H. Wexner Chief Executive Officer

Leslie Wexner was formally appointed Chief Executive Officer in November of 2004 having served as Interim CEO since July 2004. In this role, she is responsible for leading the continued growth of all Victoria’s Secret businesses. Ms. Wexner spent 5 years at BSkyB and was General Manager of Movies & Pay-Per-View when he left to join Victoria’s Secret. Prior to that she served as Director of Advertising Sales at US Gold and US Living. Ms. Wexner also worked at Channel Four from 1992 to 1996, and heldposts at various advertising agencies including JWT, McCanns, Lowe Howard-Spink and Geers Gross.

Accounts ACCOUNTS CONTENTS Report of Independent Auditors Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Cash Flows Consolidated Statements of Shareholders’ Equity

Dene Stratton Chief Financial Officer

Dene Stratton was appointed Chief Financial Officer and a member of the Management Board in January 2005. He is responsible for all aspects of finance, administration, business development and investor relations. Prior to joining Victoria’s Secret he worked at The Limited, as Senior Vice President, Planning & Control at Limited Inc., having held a number of roles within Limited since 1990. He began his career in public accounting with Ernst & Young in Los Angeles.

Olivier Spiner Executive Vice President of International Affairs

Olivier Spiner was appointed as a member of the Management Board and Executive Vice President of International Affairs in November 1999, and is responsible for the Victoria’s Secret corporate activities. Prior to joining Victoria’s Secret he served as Deputy General Manager of The Limited from 1996 and before this, from 1982, he held the positions of Deputy General Manager and Chief Financial Officer at Créativité and Développement.

Oliver Fryer General Counsel

Oliver Fryer was appointed as a member of the Management Board in September 2003. In his role, he is responsible for all of the Victoria’s Secret contractual, legal and business affairs issues. He previously served as Director of Legal and Business Affairs for Victoria’s Secret. Before joining the company in June 2001, Mr. Fryer worked for The Simkins Partnership and for Zenith Entertainment plc, where for several years he was Director of Legal and Business Affairs.

13

14

REPORT OF INDEPENDENT AUDITORS

CONSOLIDATED BALANCE SHEETS December 31, 2006 and December 26, 2005 (Thousands of Dollars Except Share Data)

To the Shareholders of Victorias Secret: We have audited the accompanying consolidated balance sheets of Hasbro and subsidiaries (“the Company”), as of September 30, 2006 and as of September 30, 2005 and the related consolidated statements of operations, cash flows and shareholders’ equity for the years then ended which have been prepared on the basis of accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

2006

2005

Assets Current assets Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $55,000 in 2000 and $65,000 in 1999 Inventories Prepaid expenses and other current assets Total current assets

$127,115

280,159

685,975 335,493 431,630 1,580,213

1,084,118 408,571 358,804 2,131,652

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Property, plant and equipment, net

296,729

318,825

803,189

806,092

902,893 245,435

949,789 256,990

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hasbro and its subsidiaries at September 30, 2006 and September 30, 2004 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Total other assets

This report, including the opinion, has been prepared for and only for the Company’s members as a body in order to meet the provisions of the listing agreement with the Stock Exchange and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Other assets Cost in excess of acquired net assets, less accumulated amortization of $225,770 in 2000 and $193,947 in 1999 Other intangibles, less accumulated amortization of $347,149 in 2000 and $300,632 in 1999 Other

Total assets

15

1,951,517

2,012,871

$3,828,459

4,463,348

Liabilities and Shareholders’ Equity Current liabilities Short-term borrowings Trade payables Accrued liabilities Income taxes

$228,085 191,749 789,128 30,850

714,669 284,772 983,280 88,606

Total current liabilities

1,239,812

2,071,327

Long-term debt Deferred liabilities Total liabilities

1,167,838 93,403

420,654 92,392

2,501,053

2,584,373

—

—



Big Company Auditors Incorporated Chartered Accountants and Registered Auditors London, United Kingdom January 18, 2005



Shareholders’ equity Preference stock of $2.50 par value. Authorized 5,000,000 shares; none issued Common stock of $.50 par value. Authorized 600,000,000 shares; issued 209,694,630 shares in 2000 and 1999 Additional paid-in capital Deferred compensation Retained earnings Accumulated other comprehensive earnings Treasury stock, at cost, 37,253,164 shares in 2000 and 16,710,620 shares in 1999

Total shareholders’ equity



Total liabilities and shareholders’ equity

See accompanying notes to consolidated financial statements.



104,847 464,084 (6,889) 1,583,394 (44,718)

104,847 468,329 — 1,764,110 (32,982)

(773,312)

(425,329)

1,327,406

1,878,975

$3,828,459

4,463,348

16

CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years Ended in December (Thousands of Dollars Except Share Data)

2006

2005

CONSOLIDATED STATEMENTS OF CASH FLOWS

2004

Net revenues Cost of sales

$3,787,21 1,673,973

4,232,263 1,698,242

3,304,454 1,366,061



2,113,242

2,534,021

1,938,393

Gross profit

Expenses Amortization Royalties, research and development Advertising Selling, distribution and administration Restructuring charge Loss on sale of business units Acquired in-process research and development

173,533 711,790 456,978 799,919 64,232 — —

72,208 424,673 440,692 655,938 — — 20,000

Cash flows from operating activities Net earnings (loss) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization of plant and equipment Other amortization Deferred income taxes Compensation earned under restricted stock programs Loss on sale of business units Acquired in-process research and development Change in operating assets and liabilities (other than cash and cash equivalents): Decrease (increase) in accounts receivable Decrease (increase) in inventories Increase in prepaid expenses and other current assets (Decrease) increase in trade payables and other current liabilities Long-term advances and other

2006

2005

$(144,631) 106,458 157,763 (67,690) 2,754 43,965 — 395,682 69,657 (84,006) (292,313) (25,083)



2004

188,953

206,365

103,791 173,533 (38,675) — — —

96,991 72,208 1,679 — — 20,000

(11,248) (44,212) (26,527) 193,626 (147,729)

(126,842) (44,606) (113,451) 17,668 (3,425)

391,512

126,587

2,217,519

2,206,452

Operating profit (loss)

(104,277)

327,569

324,882

114,421 7,288

69,340 (15,616)

36,111 (14,707)



121,709 (225,986)

53,724 273,845

21,404 303,478

84,892 188,953

97,113 206,365

Cash flows from investing activities Additions to property, plant and equipment Investments and acquisitions, net of cash acquired Other

(125,055) (138,518) 82,863

(107,468) (352,417) 30,793

(141,950) (667,736) 16,986

Net cash utilized by investing activities

(180,710)

(429,092)

(792,700)

Cash flows from financing activities Proceeds from borrowings with original maturities of more than three months 912,979 Repayments of borrowings with original maturities of more than three months(291,779) Net (repayments) proceeds of other short-term borrowings (341,522) Purchase of common stock (367,548) Stock option and warrant transactions 2,523 Dividends paid (42,494)

460,333 (308,128) 226,103 (237,532) 50,358 (45,526)

407,377 (24,925) 271,895 (178,917) 58,493 (42,277)

Total nonoperating expense Earnings (loss) before income taxes

Income taxes Net earnings (loss) Per common share Net earnings (loss Basic Diluted Cash dividends declared

(81,355) $(144,631)

1,613,511

$ (.82) $ (.82)

.97 .93

1.04 1.00

$.21

.24

.21



See accompanying notes to consolidated financial statements.

Net cash provided by operating activities

162,556

Net cash (utilized) provided by financing activities

(127,841)

145,608

491,646

Effect of exchange rate changes on cash (Decrease) increase in cash and cash equivalents

(7,049) (153,044)

(5,617) 102,411

(9,570) (184,037)

Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental information Cash paid during the year for Interest Income taxes

280,159 $127,115

177,748 280,159

361,785 177,748

$91,180 $95,975

64,861 108,342

25,135 128,436



17



Total expenses

Nonoperating (income) expense Interest expense Other (income) expense, net

157,763 635,366 452,978 863,496 63,951 43,965 —

Fiscal Years Ended in December (Thousands of Dollars Except Share Data)

See accompanying notes to consolidated financial statements.

18

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Additional Deferred Paid-in Common Capital Compensation (Thousands of Dollars) Stock

Accumulated Other Retained Comprehensive Earnings Earnings Treasury Stock

Balance, December 28, 1997 $104,849 454,498 — 1,457,495 (3,903) (174,822) Net earnings — — — 206,365 — — Other comprehensive earnings — — — — (5,722) — Comprehensive earnings Purchase of treasury stock — — — — — (178,917) Stock option and warrant transactions — 66,818 — — — 60,195 Dividends declared — — — (42,061) — — Balance, December 27, 1998 104,849 521,316 — 1,621,799 (9,625) (293,544) Net earnings — — — 188,953 — — Other comprehensive earnings — — — — (23,357) — Comprehensive earnings Purchase of treasury stock — — — — — (237,532) Stock option and warrant transactions — (52,892) — — — 105,747 Dividends declared — — — (46,642) — — Other (2) (95) — — — — Balance, December 26, 1999 104,847 468,329 — 1,764,110 (32,982) (425,329) Net loss — — — (144,631) — — Other comprehensive earnings — — — — (11,736) — Comprehensive earnings Purchase of treasury stock — — — — — (367,548) Stock option and warrant transactions — (1,708) — — — 7,406 Restricted stock activity — (2,537) (6,889) — — 12,159 Dividends declared — — — (36,085) — — Balance, December 31, 2000 $104,847 464,084 (6,889) 1,583,394 (44,718) (773,312)

ANTICIPATED MONTHLY SALES AND QUARTERLY EARNINGS DATES FOR 2007 Total Shareholders’ Equity 1,838,117 206,365 (5,722) 200,643 (178,917) 127,013 (42,061) 1,944,795 188,953 (23,357) 165,596 (237,532) 52,855 (46,642) (97) 1,878,975 (144,631) (11,736) (156,367) (367,548)

Monthly Sales Reporting Dates February 03/08/07 March 04/12/07 April 05/10/07 May 06/07/07 June 07/12/07 July 08/09/07 August 09/06/07 September 10/11/07 October 11/08/07 November 12/06/07 December 01/10/08 January 02/07/08

Quarterly Earnings Report Dates 1st Quarter Earnings 5/24/07 2nd Quarter Earnings 8/23/07 3rd Quarter Earnings 11/21/07 4th Quarter Earnings 2/28/08 Live webcasts of the quarterly earnings conference calls can be accessed through our Web site www.LimitedBrands.com. Audio replays of both monthly sales and quarterly earnings conference calls can be accessed through our Web site, www.LimitedBrands. com, or by dialing 1-800-337-6551 followed by the conference call passcode, LTD (or 583).

5,698 2,733 (36,085) 1,327,406

About This Report This annual report is produced with environmentally friendly processes and products. The paper for the cover and Chairman’s Letter contains 20% post-consumer waste and the paper for the 10-K is 100% post-consumer waste. The environmental savings from using recycled content paper is: · 1,259 fewer trees used · 508,942 fewer gallons of water consumed · 551 million BTUs of energy saved · 59,703 fewer pounds of solid waste generated · 111,701 fewer pounds of atmospheric emissions

See accompanying notes to consolidated financial statements.

19

20

Victoria’s Secret For more information write to: Investor Relations Limited Brands 56 Kingsland Street Columbus, Ohio 41212 Tel: +44 58 7333 5821 Fax: +44 58 7333 4812

www.victoriassecret.com