NEW YORK — If sweaters had sold as well as bras during the fourth quarter, Limited Brands chief executive Leslie Wexner would be a very happy man.

Instead, apparel sales and margins lagged behind those of innerwear dynamo Victoria’s Secret, holding down Limited Brands’ fourth-quarter bottom-line increases to 8.1 percent. Additionally, chief financial officer Ann Hailey said the company expects a 10 to 20 percent decline in earnings per share for the first half of the year, with flat to slightly better results in the second quarter offsetting declines in the first, and full-year EPS comparisons of flat to up 5 percent.

"I wish I could tell you I foresee a good economic environment in 2003, but it is clear that 2003 will be extremely uncertain with continued challenges around consumer sentiment, mall traffic and political instability," Hailey told investors on a morning conference call. "We are, however, watching carefully for significant improvement so we can react quickly to capitalize on any opportunity."

The Columbus, Ohio-based specialty retailer said Thursday that net income for the three months ended Feb. 1 grew to $352.9 million, or 66 cents a share, from $326.5 million, or 75 cents, during the final quarter of 2001. Dilution attributable to a greater number of shares outstanding was responsible for the drop in EPS. Excluding the effects of the November 2002 sale of Lerner New York, net income would have been $357.3 million, 0.8 percent above the prior-year mark of $354.4 million.

Total company sales increased 4.5 percent to $2.97 billion, from the prior-year quarter’s $2.84 billion, and comparable-store sales were flat. At the apparel group, which consists of Express and Limited stores, sales slipped 3.9 percent to $806.1 million compared with $839 million, while comparable-store sales abated by 4 percent.

The 1,014-unit Victoria’s Secret was the only division to have a positive comp, up 5 percent on top of a 10 percent increase last year. Express was down 4 percent while both Limited and Bath & Body Works dropped 1 percent.

Gross margins contracted 160 basis points to 41.6 percent of sales due to increased markdowns at the apparel group and lower margins at BBW, due to a higher percentage of lower-margin gift set sales. Selling, general and administrative expenses increased by 70 basis points to 21.8 percent of sales.Even with a somber outlook, investors, who’d driven Limited’s stock to a 52-week low of $10.88, as recently as Tuesday sent shares up 14 cents, or 1.3 percent, to close at $11.26 in New York Stock Exchange trading.

Grace Nichols, VS’ president and chief executive of VS stores, said on the call: "In the quarter, the performance was driven by regular and sale-price merchandise, including the post-Christmas and January sales period."

She singled out the Very Sexy sub-brand’s strong holiday performance, both in innerwear and fragrances.

To continue the momentum, Nichols said the focus will be on core sub-brands with new products introduced each month, supported with television and print advertising and targeted customer relationship marketing. For spring, total direct mail circulation spending will increase nearly 20 percent over last year to $15.5 million.

Contrasting VS’ merry holiday, Express president and chief executive Michael Weiss said all results were disappointing, particularly on the women’s side.

"In women’s, we were unable to make up for the drop in sweater volume, but saw solid performance in knit tops and bottoms, driven by velour track suits, and we did well in dresses and woven tops."

The knit top, the cornerstone of the women’s spring business last year, is showing early signs of continued growth, Weiss said.

Weiss said the move to Express Men’s, previously known as Structure, is achieving its initial objectives, including a reduction in operating losses and better sales momentum.

Company executives said the primary focus for 2003 will be to optimize the productivity of existing real estate rather than finding new locations. "The composition in real estate is a shift with a reduction in new stores and increases for reconstruction," Hailey said, adding that capital spending in 2003 is budgeted at $400 million, 70 percent of which is going directly to the stores. "We believe it is imperative to have store designs which are a current reflection of each brand’s positioning, designs which keep the brands interesting and vital for customers, designs which evolve the brand and keep it fresh."

Over the next 10 years, the company has developed specific plans for stores in the top 160 malls, which represent a disproportionate share of sales and profits. Total square footage of the newly designed stores will not increase.In 2003, LB plans to reposition about 100 stores in 60 malls, representing about 20 percent of the stores to be revitalized as part of the plan. Plans include an expansion and remodeling of VS to look more like its 25,000-square-foot, two-level flagship in New York’s Herald Square; roughly doubling the average square footage of B&BW to 4,000 from 2,000 square feet; decreasing the total square footage of Express as it shifts to dual-gender stores, and the downsizing of Limited stores to 5,600 selling square feet, from 8,000.

The 1,031-unit Express unit plans to double the number of dual-gender stores this year to 112 stores, as well as converting the signs on the remaining Express men’s standalone stores.The company is encouraged that the 49 dual-gender Express stores are generating positive comps and double-digit increases in productivity.

Last October, as reported, CEO Wexner foreshadowed the new real estate direction by indicating that he’s learned "not to pursue the goddess of growth."

The 1,639-unit B&BW chain also recently announced a series of management changes under Neil Fiske, who, as reported, was named ceo of the unit this month. Mike Stromberg is responsible for core B&BW, Beth Kaplan for flagship stores and Christiane Michaels for home fragrances. Nils Peyron has joined the firm as chief marketing officer.

B&BW has begun a review of its processes so operations better fit the new direction of the brand, called "The 21st Century Apothecary of Well-Being," and eliminate redundancies, ensure internal consistency and maximize the effectiveness and innovation of products, Leonard?Schlesinger, chief operating officer of Limited Brands, said.

For the 12 months, net income sank 3.3 percent to $501.7 million, or 96 cents a diluted share, versus income of $518.9 million, or $1.19, in 2001. Adjusting to eliminate the effects of the Lerner and Lane Bryant divestitures and the recombination with Intimate Brands, net income rose 28.2 percent to $528.2 million, or 99 cents, from $411.9 million, or 78 cents. Net sales for the year were $8.44 billion, up fractionally from $8.42 billion a year earlier. Excluding the adjustment, sales increased 6.5 percent from $7.93 billion a year earlier. Comps rose 3 percent for the year.

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