Bath & Body Works Inc (BBWI) 2001 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Limited Inc. third 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. Ladies and gentlemen thank you for standing by. 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 third quarter earnings conference call for the period ending Saturday, November 3, 2001. Before I begin and as a matter of formality, I need to remind you that any forward-looking statements that we may make this morning are subject to our safe-harbor statements filed 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 our offices 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 583. You can also listen to an audio replay from our website. As you know, Intimate Brands also reported their third quarter results this morning and will be holding their conference call immediately following the close of ours. To listen to that call live, dial 1877-518-7310 at the close of this call. You can also listen to a replay of their call by dialing 1800-294-4342 followed by the pass code, which is 434. 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, along with [M. Crussen]. 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. All the results that I will discuss exclude an after tax gain of $102 million or $0.24 per share reported in the third quarter as a result of the sale of the Lane Bryant, the charming shops in August. Sales for the third quarter were 1.906 billion compared to sales of 2.168 billion last year. Comp store sales decreased 7%. We lost $0.3 in the third quarter compared to earnings per share of $0.11 last year. Gross margin declined 352 basis points during the quarter to 29.7%. Growth margin at the apparel businesses increased by 250 basis points in the quarter, primarily an episode of lower merchandised margins. The DNA rate increased slightly as we were unable to leverage these costs against the -5 apparel costs. The overall SG&A rate increased by 220 basis points in the quarter, and the SG&A of the apparel group improved by 50 basis points. On a dollar basis and excluding Lane Bryant, total SG&A expense increased by approximately $16 million in the quarter. This increase in SG&A expense reflects the net addition of 267 stores at Intimate Brand. SG&A cost per average store was flat year over year. Inventories at the apparel group at the end of the quarter were down 13%, first we will go into those costs, and then we will discuss inventory in more detail Now for the brand results and as always, you should have the following headings across to your page; the name of the brand, sales, comps, external gross margin rate, operating income rate, and operating income dollars. Let's begin with Express; Express' sales in the third quarter were 388.8 million, comps were down 4% and external gross margin rate, operating income rate, and operating income dollars were all down. At Lerner New York, sales in the third quarter were 219.9 million, comps were -5%, external gross margin rate was up slightly, operating income rate, and operating income dollars were also both up slightly. At the Limited, sales were 151.5 million, comps were -3%; external gross margin rate, operating income rate, and operating income dollars were all up. At Structure, sales were 119.9 million, comps were -10%; external gross margin rate was down slightly, operating income rate was down significantly, and the operating income dollars were down. As we mapped in the third quarter, external sales were 84.7 million, external gross margin rate was down, operating income rate was down slightly, and operating income dollars were down. So, in summary, for the apparel businesses, including knit, sales were 964.8 million, that is against 998.1 million last year. The comps were -5% in the quarter, external gross margin rate was down 260 basis points, operating income rate was down 210 basis points, and operating income in dollars, again this is after overheads was 1.7 million that is against 23.4 million last year. That concludes my prepared comments, and now I would like to turn it over to Ann Hailey for further comments.

Thank you, Tom. Good morning, everyone. As Tom already mentioned, our loss for the quarter was $0.3 per share. Our operating income declined by a $121 million in the quarter, 94% of this decline was in IBI. More details about IBI's performance will be available on their conference call, which will immediately follow our call this morning. Operating income at the Apparel businesses declined by almost $22 million. We are pleased that Lerner and Limited improved their performance. However, those improvements were not positioned to overcome operating income declines at Express, Structure, and Demand. Michael Weiss will be reviewing both Express businesses results in just a few moments. I will cover Lerner and Limited store results now. Lerner New York basically held their own in the third quarter. Despite comp decline of 5%, operating income improved slightly and they were able to drive higher merchandise margins and inventories that were down at 11% for the quarter on the cost of goods available for sale basis. With respect to Lerner's fourth quarter, inventory levels will continue to be down significantly down compared to last year. They are planning to drive traffic with sharply priced item promotions each week throughout the holiday period. For Limited Stores, third quarter comp was down 3%. However, productivity improved slightly as we closed unproductive stores. Limited had solid merchandise offering for the third quarter, which combined with tightly managed inventory and expenses drove a reduction in their prior year loss. Virtual Stretch pants continued the momentum of the spring season and achieved significant year over year growth for the third quarter. Woven tops also showed stronger growth against the poor performance last year. For holiday, Limited plans to drive volume with opening price point sweater promotion. That concludes my comments about those individual businesses. Now, I would like to talk about our three initiatives, inventory, expenses, and capital. First, inventories. Apparel Inventories were down 13% per square foot of cost at the end of the quarter. Throughout the year, we have been analyzing and monitoring inventories closely. We have made reductions every month in fall apparel inventory, and more specifically, cost of goods available for sale will be down 200 million versus last year. And remember, that is the number at cost. Inventory in the fourth quarter will continue to be down high-single to low double digits and will be focussed on key merchandise categories such as denim and sweaters. Regarding our outlook for spring, we will continue to be conservative until we see a stabilization of the economic environment. So spring inventories will be down year over year. With respect to our efficiency initiatives, our R&D expenses continued in the third quarter. As Tom mentioned earlier, our total SG&A costs including all businesses and the center were flat per average store in the third quarter. As we said previously, we expect a savings of $100 million or about a 100 basis points over the next two years. We will see the most significant benefits from this work that is 75% of it in 2002, and the remainder in 2003. Turning to capital, on last quarter's call we were projecting capital spending of 450 million. We now believe that number will be closer 435 million versus an original budget of close to 500 million. Fourth quarter, we will talk about our expectations for that. We are comfortable with the current consensus earnings estimates for the fourth quarter although we realize that the economic environment does remain uncertain. More specifically, we expect comps for the fourth quarter to be down in the mid-single digit range reflecting the current apparel trend and some improvement from the third quarter comp trend at IBI. We expect the fourth quarter gross margin rate to improve over last year. Merchandize margins are expected to increase, partially offset by BNO rate deterioration due to negative comp store sales. Although, we expect the holiday retail environment to be very competitive and promotional, strong inventory discipline will allow us to focus on key item promotions at sharp opening price points that are planned and engineered to drive traffic in margins. We will some benefit from our expense initiative during the fourth quarter. Excluding lane Bryant, we expect total SG&A cost to decrease, although rate will increase on negative comp store sales. Weighted average shares outstanding should be roughly between 432 and 435 million shares. Our balance sheet continues to be strong. We expect to end the year with about a billion dollars in cash and 400 million of debt. Now I am going to turn the discussion over to Michael Weiss for his comments about the Express businesses.

Good morning. First, I will discuss the women's business. As Tom said, our comps were down at 4% in the third quarter and operating income was down to last year. We are up against a very tough 18% comparison from last year, and in this weak retail environment, we used direct mailing and extra promotions to drive traffic. Denim was very successful for the back to school period with a double-digit comp against a double-digit performance last year. Sweaters and sports and tops were strong in the third quarter. For the fourth quarter, we expect negative comp trends to continue. In the choice of plan compared to last year and the increases we have in a few strategic categories such as denim and knit top. In terms of holiday strategies, especially Thanksgiving weekend, we will be promoting the best of our sweaters, we will be promoting jeans, our micro-tulle pants, our velveteen processed jeans, coats, sweaters, and woven tops collection have been very good for the fall season. So we are leading with our strength rather than with markdowns. In terms of men, a little about structure's third quarter and it's transition to Express. As I mentioned in the last call, we continue to be very disciplined about not taking our eye off the women's business, and therefore are proceeding very slowly and methodically with the Structure transition. Third quarter comps of -10 were disappointing and the operating loss increased. About 85% of the products in the store carry now the Express label. However, one emphasizes that this is the product that we were able to change the labels on quickly. This merchandise does not necessarily reflect the impact of the new team from the beginning of the line where we go forward in direction of the brand. We expanded the denim-associated pants and we are pleased with the results. During the holiday, we will be promoting the sweaters and we will be promoting jeans, our two strongest categories, and for this weekend, we are going to be having a DWP watch with a $75 purchase, a very nice watch. With that up, I will turn it back over to Tom.

Thank you, Michael. That concludes our prepared comments and at this time, we would like to begin to take questions. As you all know, we have a short period of time. The Intimate Brand call starts in less than a half hour. So again, we ask everyone to limit themselves to one question, and with that I will turn it back over to the operator.

Thank you. 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 *2. Again, if you would like to ask a question, please press *1. Jeff Stein of MacDonald Investments, you may ask your question.

There is only one question. How about your plans for utilization of cash next year given that the apparel businesses are in a consolidation mode and that IBI is really the only business that you have been investing in, what are your plans for that billion dollars in cash?

Well, as you know, periodically, we do work out the best use of the cash as the Company and the Board both review it regularly, and we will do so again in the spring and look at it in the context of opportunities to invest in the context of the environment, and on how conservative we want to be on the balance sheet, and we will decide then what to do with it. To expand a little, at the current time, we do not have any plans other than to be conservative and we will be looking at it early next year.

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

Good morning. I was wondering if you could talk a little bit about in detail about, as you sport spring for Lerner and limited where those stores still relative to Express are not performing. What changes are you planning to implement from a merchandising or product strategy to get those businesses rolling?

Those businesses are both in a focus on a basic mode. So focussing on the basics for them would be best at, which indicates that Limited stores is Virtual Stretch and building a repeat customer and a business around that strong program best at for lerner New York is pants bringing the customer back in on a regular basis for pants that fit, so that will be definitely be one area of focus. With respect to the rest, at lerner New York, as you know, we have re-branded them in some stores to New York end companies. So there is about a 130 stores reopened under that brand name. We are going to back to lean back and watch that and see what promise that holds for the future for that brand. Other than that, it is focussed on basics. For Limited stores, it is the same thing. We have a couple of new store designs that we are testing, so that when we do see that business moves into a position of profitability, we will know where we want to take it to in terms of store design in the next work. So until that happens, they again are focussed on basics, best at inventory discipline and expense control.

Operator, we are ready for the next question.

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

Yes, good morning. Question for you. We are out in Columbus a little over a month ago. I think your expectations for the fourth quarter was about a flat comp and we are not talking about negative med. Can you just give us the biggest changes to the expectations sort of as a business or what is going on?

Well, I think that, you know, as you look at the business what we have done is try to take an conservative view and plan our inventory and expenses around that conservative view. So, I think at that time we were comfortable with the Street earning expectations, which is unchanged. We are still comfortable with the Street earnings expectations.

Next question?

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

Hi, thanks. Could you just give us a little more detail on inventory by business going forward ... the marked down percentage versus last year and the strategy with regard to disposing of excess products in the off price channel.

Let me talk about inventory by business. At the end of the quarter, as I have said in my prepared remarks, the apparel inventories were down 13% for total costs. Lerner, Limited, and Structure were all down over 20% from last year and inventory at Express and Women's was up slightly. We would expect that perhaps not quite that deep on some of those businesses, but we are going to continue to be down throughout the fourth quarter, but proportionately it would be the same. Lerner, Limited, and Structure being down more than Express, whose numbers are in the flat to slightly up to slightly down category depending upon which beginning of the month inventory that you look at. With respect to the disposal, you know, the carry over goods, we are maintaining the same disciplines that we have had in the past around making sure that we marked out the old goods and get them off the floor so we can move into spring and the fault carry over level should be about where they were in the year at the end of the fiscal year 2000.

Thanks Stacy, operator we are ready for the next question.

Robert Olhms of Morgan Stanley, you may ask your question.

Hai. Two really quick questions ... one is can we get some guidance on how average ticket in Traffic trended in aggregate and maybe there is some variance by division and the second thing is if Michael Weiss could comment on ... a lot of companies recovered seeing IMU benefits from sourcing and where are you guys on the apparel side and things that you are doing on the sourcing side to help your IMU's go up ... thanks.

What we do is in terms of looking at more Traffic is I think is a pretty wisely used resource, which has been actual retail traffic index, which was down 5% in the third quarter. Against that transactions at Express were up slightly, transactions at Lerner and Limited were down in the range of where that low traffic was down and Structure was down somewhat more than that. So transaction in three of the four apparel businesses were down with Express up slightly.

In terms of the IMU Robert ... the IMUs in both the men's and women's continue to go up. The MNU resultant being a bit down strictly due to PRO promotions, which we were doing to promote Traffic and as you heard Ann say, the transactions are slightly ahead of last year, that is all POS, but the IMUs are up largely due to a much stronger position and strategy on sourcing. So, as we have spoken about in previous calls, the sourcing is indeed leading to very real higher IMUs in corporate indexes.

Operator, we are ready for the next question.

Jeff Feiner of Lehman Brothers, you may ask your question.

Yes, can you elaborate a little bit more on your comments on the gross margins in the fourth quarter and talk a little bit about it from a mixed standpoint and how do you expect mix to enable you to improve gross margins as you said in your guidance comments?

Well we are expecting gross margin at the apparel company to be down slightly as a percent of sales, but we think merchandised margins will be up in most of our businesses, we are just not going to be able to leverage our buying in occupancy expense out of the negative comp. So, we are not looking for a huge change, but we do think that they will be down slightly. Now, one of the key factors in the fourth quarter and the key driver in there is having a substantially less inventory to clear than we did last year. So, we think that will be a major enabler to the improvement in the merchandized margins.

Thanks Jeff, next question.

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

Good morning. This is for Ann. With regard to the fourth quarter, could you comment about your expectations for your major businesses on the apparels side in terms of operating income, you know, providing just some qualitative comments whether you expect it to be kind of break even for the business ... a little bit or a lot ... however you care to characterize the operating income expectations would be fine. Thank you.

Well, as you know, we do not release our specific results by apparel business and obviously we are thinking that it is going to be down in total and that decrease is spread pretty much across all of the businesses, although we are believing that with respect to Limited and Structure that the expense discipline and the significantly lower inventory level could lead to some improvement. So that is the kind of business we are looking for.

Next question?

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

Thank you very much. Some of the store clothing efforts have been productive that is to say in helping the business to get a little bit more focussed and a little bit more profitable ... is there an opportunity to continue that particularly in the limited division, or add these store assortment down further on each division ... what are the plans there?

We are going to continue to add at stores, although the level at which we did so in the past few years will continue. In apparel, we are working to close about 110 this year and I would expect roughly half of that level next year. And it is focussed and concentrated on the business that are the poor performers, although you will see even a strong performer like Express closing some stores that are not performing right. What you will also see next year is that we will continue to right size. We have done a lot of that in New York and Company re-branding effort and so it does not actually show as a store closing, but what we get is an improvement in the profitability by reducing those larger stores, carving out smaller store that is more right sized. We will continue to do that in both the Limited and in the Structure now and Express Men's business.

Thanks Richard. Next question?

Barbara Burn of Salomon Smith Barney, you may ask your question?

Good morning, I have a question for Michael Weiss on Structure ... I think you mentioned about 85% of the merchandize has the Express label, but how much of it is where you want it to be on the percentage basis and what categories do you think you have the most opportunities based on what you have learned over the past couple of quarters?

I think depending upon which stores you shop the percentages are very different. If you shopped our new store here at Easton, it would be about 100% and if you shopped the store at the bottom of our list, it would be about probably 65-70%, but I think the biggest opportunities right now is improving and cutting so many shops to better styling and the second biggest opportunity is broadening the assortment of casual pants where we really have improved the grading to fit dramatically so that we are now turning them at a very, very reasonable rate, which was a very unlike of what was happening in the past. So, those two categories provide tremendous opportunity for us.

Thanks Michael. Next question operator?

Dorothy Wagner of CIBC World Market, you may ask your question.

Yeah, thanks good morning everyone. Just going back to the question about store size and you mentioned right sizing a number of stores ... could you just tell us how many of those you have done this year and how many you still expect to do in 2002?

It was in the neighborhood of ... in the Apparel business in 2000 we have done about 70-80 remodels, which I would guess about half of those are downsizes and half are remodels in place because these were old and it was required that we remodel at that time. We are not final yet on our plans for 2000-2001, but as a rough planning it for 2002. As a rough planning assumption, I would use about the same level of activity next year.

Thanks Dorothy, next question.

Jeff Stenson of MidWest Research, you may ask your question.

Thanks. Ann could you speak of the cost savings that you expect to show up here in the fourth quarter and what might be some of the early cost savings that we can expect?

Sure, first of all, as everyone knows that the biggest area of expense in our cost structure is store selling. So, we are doing a number of things there. Our goal is to optimize hours and productivity without impacting or diminishing customer service. So, we are looking at a more effective labor scheduling including some new tools, management of wage rates where we have gone out and looked and taken segmentation geographically and provided our businesses with ranges of guidelines and regular reporting about where they are hiring on a mall-by-mall basis within those guidelines. We are looking the mix of associates between full-time and part time ... we are looking at the mix of selling and non-selling store hours. So, we are really digging into all the major drivers and again we don't want to diminish customer service. We think we started to see some impact of that in the third quarter. If you look on an average store basis, store-selling costs did decrease slightly in the third quarter and we do expect to make further progress in the fourth quarter and we worked on more than store selling costs. So, in the home office we are focused on everything. Payroll, which is 50-60% of home office expense, again is clearly one of the important things and we talked about the head count staff that all new hires, all internal moves, any job that still must be approved both Len Schlesinger and myself and home office head count is down since September 1, 2001. We have also focussed on some of the areas that are not quite as big an expense but they are symbolic in terms of setting a tool for being efficient and effective in how we act. So we have a reduction in outside services again with an approval process required for that, a reduction in travel, reduction in supplies, a significant, significant reduction in limited usage, approval levels for use of overnight packages. So we are trying to go at it both on an attacking the big dollars and on going after the smaller things, which while they may not add up to the same dollars as head counts or store selling, really do set a mood around here that we are going to be efficient and effective. We are going to watch our pennies.

Operator, we have time for two questions if they are very quick, thank you.

Todd Slater of the Lezard Freres, you may ask your question.

Hai, this is [Diane] calling in for Todd Slater at Lezard. We are wondering what your total square footage change would be this year and next year assuming the closing and downsizing you were talking about. Thanks.

Well, now for Limited Inc, that is obviously more influenced by IBI, and also the base of square footage change of about a 11% this year, I think we are working for that 8% next year.

Operator, I think we have time for one more quick question. Thank you.

Jennifer Black of Wells Fargo, you may ask your question.

Wells Fargo, can you hear me?

Yes, Jennifer.

Okay. Can you tell us how much your stake has gone up on Intimate brands since the quarter?

Not materially. It is about 84%.

Not materially? Okay. Thank you. Can I ask one last question?

Sure.

I wondered Michael, if you have incentives in place for your sales force during the holiday season that are above and beyond what you normally would do?

We normally at holidays have the contest, which are incentives, and we do have the contests that we have had last year. Hopefully, they are more structured and more directed and they will yield greater rewards.

Michael, thanks. I would like to thank everyone for their participation. As a remainder, you can replay the call by dialing 1800-337-6551 followed by our pass code, which is 583, and the call is also available on our web page, and it is now time for the Intimate Brand's call. Thank you.