Bath & Body Works Inc (BBWI) 2001 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Limited Inc. first quarter earnings call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference is being recorded at the request of the Limited. I would now like to turn the call over to Mr. Tom Castlemeyer, Vice President of Investor Relations. Mr. Castlemeyer, you may begin.

Thank you and good morning. Welcome to the Limited Inc first quarter earnings conference call for the period ending Saturday, May 5th 2001. Before I begin and as a matter of formality, I need to remind you that any forward-looking statements that we may make today are subject to our safe-harbor statements found in our SEC filing. This morning we faxed to your offices the first quarter earnings release and related financial information. This information is also available on our website, www.limited.com. If you have not received the fax, please call my office at 614-415-7076 and we will send it to you immediately. This call is being taped and can be replayed by dialing 1800-337-6551 followed by the pass code LTD 2583. You can also listen to an audio replay from our website. Ann Hailey, EVP and Chief Financial Officer, Len Schlesinger EVP and Chief Operating Officer, and Michael Weiss, CEO of Express are joining me this morning. Ann and Michael will be making some comments after I finish and then we will all be available to answer your questions at the end of the call and ____00:01:39 has also joined us this morning. Sales for the first quarter were 2.127 billion compared to sales of 2.125 billion last year, com stores sales decreased 2%. First quarter earnings per share were $0.7 that is down 50% from $0.14 per share last year. Gross margin declined 130 basis points during the quarter to 31.5%. Growth margin at the apparel businesses increased by 30 basis points in the quarter, although apparel merchandise margin declined for the quarter, this decrease was more than offset by an improvement in the buying and occupancy rate. The SG&A rate increased by 170 basis points in the quarter. The SG&A of the apparel group increased by 110 basis points. The $37 million increase in SG&A expense was almost entirely the result of an increase in store-selling expenses. The increase in store-selling expense was due to the net addition of 162 stores and due to an increase in average wage rate, a result of both the mix of employees and higher rate. Inventories at the apparel group at the end of the quarter were down 3%, first we will go into costs, and then we will discuss inventory in more detail. Now for the brand results and we will do as always. You should have the call-in heading across to your page. This information is also contained in the fax that we sent out namely the name of the brand sales, comps, external gross margin rate, operating income rate, and operating income dollars. We will begin with express sales at Express in the first quarter were 348.9 million, comps were +1%, and external gross margin rate, operating income rate, and operating income dollars were all down. At lerner New York, sales in the first quarter were 228.3 million, comps were +6%, external gross margin rate, operating income rate, and operating income dollars were all up significantly. At lane Bryant sales in the first quarter were 236.7 million, comps were +5%, external gross margin rate and operating income rate were both up slightly and operating income dollars were up. At the limited, sales in the first quarter were 145.3 million, comps were -1%; external gross margin rate was down slightly, operating income rate was down and operating income dollars were down slightly. At Structure, sales were 102.3 million, comps were -5%; both external gross margin rate and operating income rate were down significantly and operating income dollars were down. Advances in the quarter sales were 28 million. External gross margin rate, operating income rate, and operating income dollars were all up slightly. So, in summary, for the apparel businesses, sales out of the group were 1.090 billion, that is against 1.071 billion last year. Comps in apparel were +2%. External gross margin rate was up 30 basis points. Operating income rate was down 80 basis points and operating income in dollars again after overheads was 4.6 million in 2001 as opposed 12.4 million last year. The results for Bendel, which are included in "others", are as follows. Sales of Bendel were 9.3 million, comps were -4%, external gross margin rate and operating income rate were both down significantly, and operating income dollars were down slightly. As you know, Intimate Brands also reported their first quarter results this morning and will be holding their conference call immediately following the close of our own. You can listen to their call by dialing 1800-294-4342 followed by the conference call ID # which is 424. That concludes my prepared comments and I would like to turn it over to Ann Hailey for further comments.

Good morning. Clearly, we were not happy with the overall results for the first quarter. The largest disappointment was the IBI, which accounted for about 85% of our decline in operating income. More details about IBI's performance will be available, as Tom said, on their conference call, which will immediately follow, so I am not going to spend a lot of time on it this morning's call and instead I will talk more about apparel. With respect to apparel, we did also fail to improve our operating income for the brands in total and our results by business were mixed. First, Express: Even though Express was up against the mid-teen tough comparison for 2000, the 1% first quarter comp was disappointing. Merchandised margins were down driven by softness in some key categories. Michael will provide a more comprehensive view of Express results in just a moment. Lerner's results were positive with an improvement in comp, in margin, and in operating income. Lerner has corrected last year's fashion misstep and maintained a disciplined and _____ 00:06:59 approach to their inventory management. As you know, in the fall of last year, we re-branded 79 Lerner New York Stores in three markets to New York and company. Based on the evaluation at that test, we have just approved another 7.6 million to remodel up to another 45 stores in 11 markets. Lane Bryant also had improved results in the first quarter. Their top 15 items performed well and denim and intimate apparel were also about plan. Our plans for the divestiture of Lane Bryant are on track. Limited stores operating loss for the first quarter increased very slightly from last year. Virtual Stretch continues to be a success and it is expanded to three fabrics for spring. Structured comps were down 5% in the first quarter and operating income was down to the marked downs taken to address slower moving and over inventory items primarily in the pant department. Michael will have a few further comments as to status of the transition of Structure to Express in just a moment. With respect to inventories, apparel inventories were down 2% per square foot of cost at the end of the quarter. The inventory continued to be focussed on Bendel and Women's merchandise category. We are more conservatively positioned in the second quarter than we were in the first quarter, and plan to continue our cautious approach to inventory in the fall. A quarter to fall, we are planning concept available for sale per square foot to be up no more than mid-single digits, which is less than the sales per square foot increase that we are working for. Although, it is difficult to precisely forecast the timing of delivery, we also expect beginning this month inventory increases per square foot to be up no more than mid-single digits. Turning now to expenses, we have spoken before about our expenses and we have taken the first step as outlined on our yearend earnings call. As we said we would do, we began with a thorough review of expenses at lerner. We have removed $30 million from original budget submission and are currently forecasting flat dollar spending versus 2000. We will continue to pursue opportunities. Our goal is to reduce another 10 million. The Brands have also been closely reviewing and monitoring their expenses and we will turn our focus and our efforts towards them in the second quarter. As we also said on the yearend call, we will see benefits from this work and follow one with more significant results in 2002. And now, I would like to make some comments about our expectations in the second quarter and for the full year. Given the continuing negative comparable store sales trend and the uncertain economic and consumer environment, we expect the next two quarters to be particularly challenging and we expect earnings to be down slightly in 2001 for full year. For the second quarter, we expect comps to be down slightly, a result of negative mid-single digit comps at IBI and flat comps at the apparel group. We expect the gross margin rate to be down and the SG&A rate to be up resulting in a significant decrease in operating income dollars. Weighted average shares outstanding should be roughly between 436 and 438 million shares. We expect second quarter earnings per share to be down significantly for last year. For the year, we think we delivered flat to slightly negative comp. This reflects the flat to slightly negative comp that IBI and the flat apparel comp. We expect the gross margin rate to be up slightly and the SG&A rate to be up. Operating income and earnings per share will be down slightly for the year. Our weighted average shares outstanding should be roughly between 438 and 440 million. Now, I will turn this discussion over to Michael Weiss for his comments.

Good morning. As Tom said, our comps were up 1% in the first quarter and operating income was down from last year. We were of course disappointed in our performance. Although the environment was difficult to move up against the very strong performance from last year, we did have merchandise and its relevant issues. Firstly, we had a mix issue. We decreased inventory levels in skirts and shorts and favored upper merchandise categories; which as Ann said, did not generate a net additional volume. Debt in the accessories and our sweaters was up particularly with wear to work sweater. Looking ahead, we will be taking aggressive measures in the second quarter to clear the inventories. In fact, if you were in the malls this weekend, you would have noticed that the best of summer sales would begin this weekend. As a result, operating income could be down significantly in the second quarter. I am optimistic about back to school. We have a very strong denim presentation, which will be highlighted in August and September issues of the 11 magazines including Cosmopolitan, Glamour, In Style, and Vogue. Let us now see our Structure transition through Express. The first thing we have focussed on is the product. Viscosity in merchandise with Express labels in the stores in July. We have also addressed personnel and have put together a combined executive team. As I mentioned on the yearend call, we continue to be very disciplined about not taking our ____00:12:49 business and are therefore proceeding very slowly in the product to structure transition. With that, I will turn it back over to Tom.

Michael thanks that concludes our prepared comments at this time. We will happy to take any questions you might have. As a reminder, we have a very short period of time. The IBI call starts at 0845. We have to leave a little time to dial in for that and their leadership will be on that call and also the meeting begins at 900. So, we are going to limit - like we have done in the last couple of calls - to one question, and with that, I would like to turn it back over to the operator.

At this time, we are ready to begin the question and answer session. If you would like to ask a question, you may press *1 on your touchtone phone. You will be announced prior to asking your question. To withdraw your question, you may press the pound key. Again, if you would like to ask a question, you may press *1. Mr. Jeff Finer of Lehmann Brothers, you may ask your question.

Ann, possibly could you elaborate a little bit more on the impact of the promotional environment as you see it on your pricing strategy. You talked a little bit about gross margin trends, a little bit more on pricing. Over the next three quarters and talk a little bit more in terms of elaborating on the ability to gain some leverage given the outlook for comp store sales being still difficult.

What I would say that gross margin in pricing is that we are going to be more conscious than ever and we try always to be conscious and I think it is particularly important in this environment to not project it as our opening price point. There always seems to be some tendency to migrate a brand upward and while that is appropriate to some extent, we absolutely have to keep our eye on the opening price point. So, whether we start opening price points and allow promotions of what lerner does so successfully or the good better best strategy that Michael executes so successfully, I think that is extremely important and that is true in our apparel brands as well as in our IBI brands where we have a very strong focus on opening price point.

Our next question, operator.

Dana Cohen of Banc of America Securities, you may ask your question

Yeah, Hi. Good morning. I actually have two. One is Ann, can you address the inventories in the back half for the year ... it could be up given that they were up substantially last year. On a two year-basis, they will up like 20% per square foot. Given the environment that things are little aggressive, and then second, Michael, it sounds like you are changing the name on the product structure in the back half of the year. I had thought that you guys were going to be testing the name change, and can you elaborate on that?

Let me go first Dana. We ... I think that what my comment said is we will be up to no more than mid-single digit. It is a little premature to say exactly what the environment is going to be and so we are not committed. Our inventories for fall ... particularly the fourth quarters are on average in the apparel business I would say less than 30% committed. So, I am trying to be conservative of what I tell you, but we are going to read it and we will be more conservative with inventory if we need to be. Michael?

Yes, in terms of the name change Dana, we are testing the name change on the stores in terms of in the products. We are going to start shipping merchandize with Express labels as we said in July through the full season it will not be exclusively Express label, so we will be able to see the difference. However, we don't perceive or foresee any real problems with that since every other brand that we compete with has the same label in both names. Operator, I think we are ready for the next question.

Mark Friedman of Merrill Lynch, you may ask your question.

Good morning everybody. I was wondering if you guys could talk a little bit more about how you are looking at the fourth quarter, given the size of the quarter and the fact that the comparisons on the business do ease at that point once you get beyond the fall season, how are you planning on both the inventory and the outlook at this stage?

Well, I think I told a little bit about that one. I answered taking this question on the inventory. Right now, we are trying to be very ... we are planning to be very flexible on inventory. We are less than 30% committed in the fourth quarter, so that we can move in either direction. We can even not place the orders or we can go after the inventory as we see it term. We are planning a modest improvement ... for purposes of sales we are planning a modest improvement, for purposes of expenses we are planning, you know, flat comps so that we can focus on the expense category. I could not predict ... I wish I could predict or tell what is going to happen in the fourth quarter, so what we are trying to do is be as flexible as possible and be envisioned to deal with it.

Mark thanks, operator next question.

Steve Kernkraut of Bear Stearns, you may ask your question.

Yeah, hi. Two small questions, one if you, kind of, explain why the capital expenditure doubled in the first quarter and in terms of the apparel profits of the $4 million; can you give us some sense of where the business is more profitable and some allocation of that $4 million?

Let me refine to your second question first. Express continued to be almost profitable brand, although as we said earlier the operating income went down for last year. Lane Bryant and lerner both made money and they improved their operating income versus the prior year. Structure and Limited both lost money. Limited lost a little more than last year and Structure lost considerably more than last year. The answer to capital expenditure is simply timing. We simply are spending some of the money particularly on stores earlier this year.

Thanks Steve. Next question operator?

Maura Byrne of Salomon Smith Barney, you may ask a question.

Good morning. A question for Michael Weiss on Express planning for I think operating income to be significantly below last year in the second quarter. How much of that is initial terms of Summer merchandise or how much of that is promoting or having to clear out spring and then what is your take way from what worked or did not work in the spring for the fall season?

It all goes to things ... in terms of what worked and did not work ... I think significantly that our less problematic season was the spring season and the spring seems to be when we have our problems in the balance between, sort of, wear to work and the real weekend sports wear and it is the same problem that we have had in the past. Not quite as bad, but we are really addressing that, but in terms of the market it is good. Operator, we are ready for the next question.

Richard Baum of Credit Suisse First Boston, you may ask your question.

Yes thanks. Could you quantify what you mean by ... you talk about the second quarter being down significantly in terms of earnings per share, this is probably for Ann ...

We are not releasing specific numbers at this time. Just saying that it is down significantly.

Next question please?

Marcia Aaron of Deutsche Banc, you may ask your question?

Yes good morning. Michael, can you talk a little bit more about the marketing plans ... you obviously are going in the magazines for the first time for the back to school season?

Yeah, certainly. We are going into magazines for the first time in the back to school season, but it is really not the first time. It is the first time since 1993 for us that we are going to go. We are excited about it as we did produce the final layout last week and it will be in 11 significant magazines, you know, Vogue, Glamour, and all those magazines. We double-checked out both months highlighting our back to school jeans wear. We are excited about it Marcia. Operator, next question?

Barbara Miller of Goldman Sachs, you may ask your question.

Thanks, just two for Michael. Just a comment on the competitive environment as it relates to Express ... whether you are seeing any changes, also in general in the Style as we move into the second half year over year and then can you make a brief comment Ann on where some of the additional expense opportunities may be?

Well, in terms of the competitive environment, we are finding it significantly more intense than last year. I mean everybody moved ahead and it is compounded with the transactions being done. Everybody is becoming more aggressive. I don't foresee that changing.

With respect to expenses, a couple of things worthy is everything is on table for consideration, but I think that ... I know that where the primary focus is, this is going to be towards selling. Of our 37 million increases in SG&A, 35 million came from selling expenses. They were up 10% in total and some of that ... a little bit of that was driven by the stores, which increased about 3%, so obviously there is something going on in those numbers other than the new stores. One of the things is the inability to leverage expenses overall comps of -2 and particularly the -7 results of IBI, but we need to focus on some other things too. We need to focus on wage raise, we need to focus on management mix, and we are evaluating the pursuing opportunities to control both of those and to reduce total store hours without impacting coverage or sales. We are starting to see a little bit of that ... a little bit of the results. The brands are closely reviewing their expenses and we assessed that hours were down 10% in the first quarter. So, we are going to take some of the learning's from them and spread them and that is the ... for telling ... this is going to be the primary focus, since I said everything will be on the table and we look at all opportunities.

Barbara thanks, operator next question?

Barbara Wyckoff of Buckingham Research, you may ask your question.

Hi, I have a question for Michael. It is about the balance between wear to work and casual for fall. Where was it last year and do you see it shifting one way or the other this year?

No, it in fact falls in natural season for a natural balance in most wear to work, because in fall our entire sweater category just about applies to our customer in terms of wearing to work, so that it is never been, you know, the fall balance has never been a problem for us, as it does not bear much in fall. So, we don't foresee that to be a problem against last year or at all actually. That is the effect of it. Next question please?

Richard Jaffe of UBS Warburg, you may ask your question.

Thanks very much. Michael, could you comment about the management team you put in place for Structure or Express Structure having been trying to work out and your role on some of the other key players?

Sure, what we did this week was we included three individuals from the Structure executive committee on the combined Express executive committee, and today that has been the significant combination. We have also combined some of the manufacturing function, which is already leading to certain economy.

So, really the three remaining Structure executives are part of Express and Express has now taken over the functions of merchandizing Structure ... is that correct?

Yes.

And are they adopting more change at that chain ... that is complete Mike?

Yeah, that is pretty complete change. Any other changes would be changes that would happen naturally, because of the change of the perks in merchandizing ... things on a regular basis. Richard thanks, operator next question?

Theresa Donahue of New Berger Berman, you may ask your question.

Good morning everyone, just a quick question on the SG&A. Can you give us some sense for ... in terms of percentage or dollars as to how much of the reported SG&A is corporate versus the stores? I am trying to get a sense for what the full year impact on the P&L might be in total?

You know that I think that __________00:26:16 are going to need to be faxed to you with those exact numbers. I can tell you that ... I am not telling that this is the exact answer, but what I can tell you is that this is foolproof cost are about for 2000 were about 2.5% of sales, so that would give you some indication.

Operator next question?

Jeff Stein of McDonald Investment, you may ask your question.

Good morning. With regard to the re-branding of lerner it almost sounds as if the results are inconclusive and based upon the small incremental number of stores that you are going to re-brand. Can you comment in terms of how much better the comps have been at the re-branded stores and if it is worthwhile going forward with the remodeling ... why not do more stores?

First of all, we are doing nearly ... we are doing about half of those as many as we did last year. We are doing about 45. I would not say that the results were inconclusive ... the results were positive. Those stores outperformed other stores in their region and in particular the stores that were down 5 were probably just performing because in most of those instances we downsized the stores and volume went up. So, the productivity story was very attractive. The reason that we are not going further is we are trying to be very judicious and very careful about the investment of our capital this year and the capital just turns into our defenses next year. So, it is part of our program to really make sure that we are careful about what we have spent.

Jeff thanks, operator next question?

Stacy Pak of Prudential Securities, you may ask your question.

Thanks, two quickies. Ann, could you just comment on the way you are thinking about the real estate portfolio ... potential for closings and may be weave in what you found so far with regard to the Express-Structure combination and then Michael could you comment on your feel of the fashion cycle and if you think anything is happening there that is inhibiting Express's performance? Thanks.

Why don't we have Michael go first.

Well, in terms of the fashion cycle, I don't believe any of our performance would be attributable to a change in the fashion cycle like I said at the beginning, our performance is attributable to us. I think that the fashion cycles still are very beneficial cycles to Express and I hope we can capitalize on them being a much better fashion to go forward and Ann do you want to answer the real estate?

Yeah. We are planning about a 142 closings in the apparel business in 2001, which would bring us down to about little over 2600 stores. The largest number of closings are at lerner and the least where we have been the most downsizing in the past and where they are down already below 400 number, and with respect to subset question or your overall question about Structure and Express ... we really don't have any plan at this time. We are moving forward on that very cautiously in terms of trying to figure out what the right things to test are in 2001 and in 2002, but we don't have any specific plan at this point for what we will do with Express-Structure.

Operator, we have time for about two more questions before we have to let both Val and for the Intimate brand call ... if you can give us two more, that would be great.

Dorothy Lakner of CIBC World Markets, you may ask your question.

Good morning everyone. I have a question for Michael. If just you could elaborate a little bit more on expectations for denim in the fall ... what is going to be different this year versus last year?

Number 1 thing that will be different this year versus last year is that we have gotten very, very strong indications going forward on fashion denim, which is a higher retail and last year we really relied very, very heavily on promoting them. The other thing that is a good indication is that we are going into this very, very strong denim season having invested more dollars than last year, which I think is really good news starting at the beginning of July ... and one last question?

Our final question comes from Jeff Stinson of MidWest Research. Sir, you may ask your question.

Thank you. Good morning Ann. Could you give a little more detail and color on limited stores and some of the changes you may be trying to put in place there to improve the operations?

Yeah, we are doing a few things. One is, we are continuing to build on the success of Virtual Stretch 00:31:21. We have expanded that into a third fabric and we continue to seize the potential for that building and expanding of the brand. The second most important thing is that we get tough to go with that system and we particularly are focussing on open price point tops and on cut and frill tops that can be changed and finally we are paying very careful attention to the expense structure including the overtime or poor performing stores and closing them in or right sizing them as necessary.

I would like to thank everybody for participating in the call this morning. Just as a reminder that it is available for replay by dialing 100 337 76551 followed by our pass code that is 58358 directly.