Bath & Body Works Inc (BBWI) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Limited Brands second-quarter earnings call. At this time all participants in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As reminder, this conference is being recorded. Ladies and gentlemen, thank you for standing by. I would like to turn the call over to Mr. Tom Katzenmeyer, Vice President of Investor Relations. Mr. Katzenmeyer, you may begin.

Thank you. Good morning, and welcome to the Limited Brand second quarter earnings conference call for the period ending Saturday, August 3rd, 2002. Before I begin and as a matter of formality I need to remind you that you any forward-looking statements that we may make today are subject to our Safe Harbor Statement found in our SEC filings. This morning we faxed to your offices the second-quarter earnings release and related financial information. This information is also available on our website, limited.com. If you have not received this fax, please call our office at 614-415-7076, and we'll get it out to you right away. This call is being taped and can be replayed by dialing 1-800-337-6551 followed by the passcode ltd which is 583. You can also listen to an audio replay from our website. Ann Hailey, Executive Vice President and Chief Financial Officer is joining me this morning. Last Friday Ann had shoulder replacement surgery as a result of an accident, and although her recovery's going very well, Tracy Travis, Senior Vice President of Finance and Stuart [INAUDIBLE], Vice President and Controller are also joining us this morning. Giving the intense interest in back to school we've asked Michael Weiss to participate in this call this morning. Ann and Michael will be making comments after I finish, and then we'll be available to answer your questions at the end of the call.

All results that we will discuss on this call are adjusted results which include the following items which were outline in our press release. Adjustments to eliminate minority interest expense and increase weighted average shares outstanding to reflect the recombination of Intimate Brands Inc. as if it had occurred at the beginning of 2001. Adjustments to exclude a pretax nonoperating gain of $62.1 million or 9 cents per share resulting from the initial public offerings of Alliance Data Systems and Galions Trading Company in the second quarter of 2001. Adjustments to exclude the 2001 results from Lane Bryant which was sold to the Charming Shoppes in August 2001. Lane Bryant represented earnings per share of approximately 2 cents in the second quarter of 2001.

Total second-quarter sales were $2.113 billion, that's compared to adjusted sales of $1.961 billion last year and comps were up 4%. Second-quarter earnings per share more than doubled to 16 cents per share this year compared to adjusted earnings per share of 7 cents last year. Gross margin increased 270 basis points in the quarter to 34.3%, and the overall SG&A rate improved by 100 basis points. Inventories at the end of the quarter were down 1% per square foot at cost and down 3% per square foot at the apparel brands. Inventories are very clean and spring carry over units at the apparel brands are down approximately 25% to last year. Ann will discuss the second quarter results in more detail later in the call.

Now for the branded segment results and as usual you should have the following headings across your page. The name of the brand, sales, likes, external gross margin rate, operating income rate and operating income dollars. We'll begin with the Victoria Secret segment. At Victoria Secret stores which includes beauty, sales in the second quarter were $615.3 million, the comps were 5% and external gross margin rate, operating income rate and operating income dollars were all up significantly. An excellent second quarter at Victoria's Secret stores, results were driven by continued great performances from the bra and panty categories and a successful semi-annual sale.

Beauty also had a great second quarter. Growth was driven by the continued success of various 2001 fragrance launches including Pink and Very Sexy for him as well as expanded as well as an expanded color collection and strong garden results. Results were also favorably impacted by the Body by Victoria's fragrance launch in April. Looking ahead to the third quarter, early August featured the relaunch of the Body by Victoria Full Coverage bra. Next week we will introduce another subbrand into the portfolio, Angel, a line of smooth comfortable everyday bras with core styles under a $30 price point. TV and print advertising will support the launch. In early September Victoria Secret Beauty will launch Secrets, a line of five scents. Secrets is Beauty's first fragrance targeting what we call "bridge", a price point between Garden and Prestige. The price points are roughly half of the current Prestige line.

Victoria's Secret Direct. The second quarter sales were $249.2 million, that sales change was up 9%. External gross margin rate was up slightly and operating income rate and operating income dollars were both up. Victoria's Secret Direct results were driven by good performance in the spring books. The clothing category is benefitting from the broader price point offering and the balance between casual and dressy in the assortment. Bras, dresses and knit bottoms particularly the yoga products were strong categories in the quarter. So for the Victoria's Secret segment in total, sales were $864.5 million, that's against $792.1 million last year. Comps again were 5%, external gross margin rate was up significantly. Operating income rate in the segment was 16.8%, that's against 13.3% last year, and operating income dollars were $144.9 million, versus $105.2 million last year.

For the Bath & Body Works segment sales in the second quarter were $374.3 million, that's against $358.9 million last year. Comps were down 2%, external gross margin rate was down significantly. Operating income rate at Bath & Body Works in the quarter was 8.4%, that's against 12.9% last year. Operating income dollars were $31.4 million against $46.3 million last year. Bath & Body Works second quarter sales trends improved driven by successful June sales. Aroma Therapy, True Blue Spa and the Real Essences fill candle continued to perform well. August features the relaunch of the Antiback line. These products have been repackaged and also include a new line for kids including a foam and can wash and Antiback wipes. We continue to have very conservative expectations for Bath & Body Works. The business is focused on executing a successful fourth quarter.

And now the apparel segment, starting with Express. At Express sales in the second quarter were $449.5 million. The comps were positive 5% and external gross margin rate, operating income rate and operating income dollars were all up significantly. Michael Weiss will provide further details on Express in a moment.

At New York and Company, sales in the second quarter were $200.4 million. The likes were positive 7%, external gross margin rate and operating income rate and operating income dollars were all up significantly. New York and Company had a solid second quarter. A strong merchandise assortment and continued focus on inventory and expense management contributed to a significant improvement in operating income. Successful categories include the active collection and woven tops. The Brand is focusing on denim for back to school and its successful active wear collection.

At the Limited sales in the second quarter were $141.6 million, the likes were positive 13%, external gross margin rate, operating income rate and operating income dollars were all down. Limited second quarter comp of 13% represents a continuation of the positive momentum and improved merchandise performance of the first quarter. Merchandise margins were down against a high margin in the second quarter of last year. Sales results were driven by cut and sew and woven tops and accessories. The August back to school focus on casual pants and tops and pants and will move to where to work in September.

In summary for the apparel brands segment sales were $791.5 million, that's against $759.4 million last year. Comps were plus 7%, external gross margin rate was up significantly. The operating income rate was .6%, that's against minus 6.6% last year. Operating income dollars were a profit of $4.8 million, that's against a loss of $49.9 million last year. For the other segment which includes Mass, Henri Bendel and total corporate overhead in the second quarter, sales and this is for Mass and Henri Bendel sales were $82.6 million, versus $50.5 million last year. Henri Bendel's likes were plus 3% and operating income was negative $40.9 million versus negative $40.3 million last year. Negative $43.8 million last year. Let me just say that, operating income in the other segments, negative $40.9 million this year, negative $43.8 million last year. That concludes my prepared comments and now I'd like to turn it over to Michael Weiss.

Good morning. I'm very happy with our second quarter performance. As Tom said our combined comp was 5% up and we significantly increased our operating income. Our combined sales of $932 million for the spring season were our highest ever and our spring profit was our highest since 1995. A key success factor this season was planning and managing to an improved inventory turn. For the spring season women sales results were driven by very strong performance in knit and active tops which had a record season. We also had strong results in skirts, casual bottoms, dresses and accessories. Results in sweaters and cord denim were below plan. In the men's business we continue to achieve strong growth in woven shirts and denim. Performance in knit tops and sweaters was disappointing.

We converted or opened 23 Dual Ginger stores this year and plan to open or convert another 23 by year end. We're pleased with early performance. Sales are up and productivity is up even more. In August we're up against record results in the women's business in the last two years. Our focus in both men's and women's in the back to school period is denim, and we're supporting that emphasis with print and TV advertising as well as in store and direct mail promotions.

With that I'll turn the discussion over to Ann. Thank you, Michael. Good morning, everyone. As Tom mentioned our adjusted second quarter EPS more than doubled from 7 cents last year to 16 cents this year. The strong response to our merchandise assortment that occurred in the first quarter continued as we achieved 4% comps in both quarters in a difficult environment. We stayed with the strategy that has been working for us. That is maintaining our flexibility to chase proven winners and focusing on inventory discipline. Cost of goods available for sales, a term we called cogat is the primary metric that we use to manage inventory. These were flat per square foot to last year for the spring season.

Our overall gross margin increased 270 basis points, driven primarily by improvements in merchandise margins, and to some extent by favorability in the buying and occupancy expense rates. We also leveraged SG&A cost which were down 100 basis points as a percent of sales. This result was aided by our continued emphasis on our efficiency initiatives. [INAUDIBLE] selling expenses, the largest expense category, declined as a percent of sales and increased slightly on a dollars per average store basis. Home office expenses were also down on a percent of sales basis and on an absolute basis. Home office head count continues to be down from last August when we established our head count review process.

We will continue to manage our expenses carefully and thoughtfully on both a near-term and a long-term basis. Month to date, August sales are running at the lower end of our expectations which were for a low single-digit positive comp. The current environment is challenging. Mall traffic in the last few weeks according to the service that we subscribe to, which is the National Retail Traffic Index, is down 7% month to date. Several points lower than spring which was down 4%. The unemployment rate is at an eight-year high. Consumer confidence is low and trending lower. And the global political situation remains very unstable. All of these factors cause us to be cautious about our expectations for the fall. At this point we remain comfortable with the current first call consensus estimates for the third and fourth quarters of 4 cents and 76 cents respectively. Assuming comp store sales growth in the mid single-digit range for both quarters.

In the third quarter, we expect an improvement in the gross margin rate similar to what we experienced in the spring. The third quarter SG&A rate is expected to be roughly flat. Last year's expenses were favorably impacted by less travel as a result of 9/11 and we're now starting to lap our head count cap. Additionally we expect an increase in third quarter marketing expenses for advertising at Express and at Victoria's Secret. We will continue our discipline inventory approach in the third quarter and apparel cogat per square foot are planned to be down slightly to up slightly in that range versus last year.

For the fourth quarter, we're projecting gross margin rate to be flat to down slightly as we are up against last year's strong margin results and low inventory levels. We expect the fourth quarter SG&A rate to improve. We still have substantial flexibility in our fourth quarter inventory positions. We're closely monitoring our sales trends over the next 30 days with a view to fine tuning our placement levels before we have to make the final fourth quarter order date. We estimate that our capital spending this year will be $400 million or less which is slightly below our previous guidance to you of $430 million. This decrease reflects our continued discipline around capital spending. The majority of our capital will continue to be focused on stores. We plan to open approximately 100 new stores and remodel about 130 others. We expect to close about 160 stores. The net of those changes will result in about flat square footage by year end. Our balance sheet continues to be very solid. We ended the quarter with nearly $1.2 billion in cash. And our investments in equity securities including Galions, Alliance Data and Charming Shoppes were worth approximately $400 million at the end of the second quarter.

I know that many of you are interested in our plans for the use of this cash. That's probably the understatement of the day. We're currently in the process of a review of the capital structure of the Company. Including our debt levels, available financing, dividends rates, and three to five year capital requirement projections. The results of this analysis will obviously impact our decisions about our cash requirements and use of that cash. The uncertainty of the current environment and our cautious outlook leads us to defer our decisions about the use of cash until this review is complete which we anticipate to be on or before the end of the fall season. In closing, I just like to reiterate that as was mentioned on our July sales call, we do plan to file our CEO, CFO statements with the SEC on the scheduled due date of September 17th. With that I'll turn it back over to Tom, and we'll be happy to take questions.

Thank you, Ann. Operator, we're ready to take questions, I'd like to remind everyone, we'd like to take one question per person, that has worked well, the last couple calls and it has allowed us to get to everyone who has dialed in. So if we could stick with that that'd be great, and we'll turn it over to the operator.

At this time we're ready to begin the question and answer. If you would like to ask a question, please press star one on your touch-tone phone. You will be announced prior to asking your question. To withdraw your question you may press star two. Again if you would like to ask a question please press star one. Our first question comes from Stacy Pack of Prudential Securities.

Thanks. Michael, actually for you. I don't know if you can say whether Express comps have picked up since the end of July. If you could we'd be interested. And even if not, can you just comment on sort of what's going on there, why it's not great number? Do you think it's the consumer, the wrong assortment, weakness in men's overall? And maybe a little more detailed comment on your feelings about the men's versus the women's businesses.

That's a big question, I'll try to be as.

It's one though.

I'll try to be try to be as brief as possible. What I did say when I spoke about the current businesses was that the disappoints had been in the spring in cord denim and in sweaters. Trends don't change that fast and quite obviously for back to school those two elements of the assortment count more than they do in spring so naturally they continue to be below plan. The good news on the other side of that coin, is that fashion denim is beyond all of our expectations. So in aggregate, between the two denims, cord being down, fashion being way, way up, it's the aggregated projection for back to school is the low end of our plan. The good news to that our, however, is on a go-forward basis. We really bounce the fourth quarter deliveries to the opposite of where they were going to our third-quarter which is much more heavily toward the fashion end and much lighter toward the core end which we see as the absolute right move. There is as you said, an overall bad business climate in men's wear and that is not any different for us. And that is in terms of the combined likes, the weaker part of the business. However, I would say that in men's denim currently is an absolutely triumph. We're very happy about it. Shirts are very, very good and sweaters are very problematic. So on a go-forward basis we have to adjust to that. Have I answered your question?

We're ready for the next question, operator.

Jess Kleinfelter of US Bancorp Piper Jaffray. You may ask your question.

Congratulations on this quarter. One quick question, Michael, maybe on a more macro level. In terms of denim trends, it sounds very strong for the guys side of Express. We've been hearing that a lot of people are stepping up their promotions, a lot of people are concerned about some of your large competitors starting get promotional with their fashion and basic denim. Can you give us a sense of what you're seeing in the first few weeks of August, and how that might change your plans in terms of your own promotional activity for denim going forward?

In men's, the truth of it is is that our current performance is such that we cut back our promotional structure. Our likes in men's denim are quite high, way above our plan. The best part of our denim performance is the same as in women's in the fashion end. Of course, in men's that means much more washes than it means silhouettes. But we're delighted with our men's denim performance. We don't plan to be any more promotional than we planned before the season started, and we plan to be in a much stronger position for fourth quarter based on third-quarter results. So denim is not a problematic area at all in men's.

Operator, next question.

Mark Friedman of Merrill Lynch. You may ask your question.

Thank you. Congratulations, everybody. Good morning. Michael, could you talk a little bit about the woven cycle? That seems to be picking up some momentum. Maybe that's partially impacting the sweater business. What are you doing there to impact that business and that usually has a lower price point than sweaters? What can you do to make sure that that doesn't hurt you on a volume standpoint?

Yes, yes, and no in that order. The wovens are very, very strong in both men and women's. We have a much stronger position going forward in wovens than we did last year and the price points are not lower than sweaters. That was the no. In women's, the wovens that I'm talking about are primarily the very romantic blouses that you're seeing in the store currently that in three weeks from now you'll be overwhelmed by. We really took a very strong position for September in that category and so far that seems that we're right. In men's woven, the cycle is being represented by the One MX shirt which is on or above plan depending on the week and it's basically that shirt is the biggest item in men's businesses have ever had. I will repeat, that between that shirt and the jeans which are so good, both pieces are very good, but they're really not enough to drive the men's business over the top, and we have to improve the sweater and the knit portion of the business which are really not as good as the other advances.

Thanks, Mark. Next question please.

Dana Telsey of Bear Stearns, you may ask your question.

Good morning. How are you planning the holiday season in each of the businesses with six fewer days between this year and last year and what's the reaction of the advertising Express and will you continue it? Thank you.

Why don't we go to Tracy Travis for the first part and Michael for the second part?

Good morning. As far as the six days between Thanksgiving and Christmas, we have done the analysis as we do every holiday shift and we have looked at what the impact would be for our business. It is reflected in our projections. The reality is, it's a heavy gift giving time. I think and we think that our customers will adjust to the shorter shopping time frame. And we have like I said reflected that in our projections so --

Michael?

In terms of the advertising at Express, we're quite happy with the ads that we saw on television. Clearly we've done magazine advertising before we did it, last year we were up against the magazine advertising. We're currently really trying to analyze what the impact has been because we did cut back on some of our incentive marketing, and we're trying to ascertain what balanced what. But in terms of advertising what I would say is that we have every intention of going forward with it whether it's more or less TV, more or less magazine advertising. I really can't say right now. We really have to analyze that.

Thanks. The next question please.

Richard Baum of Credit Suisse First Boston. You may answer your question.

Thank you. Good morning. And, Ann, I have I hope you have a quick recovery.

Well, no one hopes that more than I do. The doctors are sure I'll have a full recovery, it's just getting through the process of recovery that's the difficult part.

And this is.

Thank you.

It will be for you but when do you to get back into the Columbus Yankee rotation? We need pitching badly.

It's my left arm so I'm sure I could do that very shortly.

A serious question is you indicated comfort with the projected third and fourth quarter earnings at a mid single-digit comp level. What is the sensitivity have you done it, I'm sure you have -- if the comps wind up being at the level or at the rate that they're running currently. That is low single-digit? If you can just bracket what the earnings might be in that case.

Well, I think that, you know, we thought carefully about the -- as we always do about the guidance that we gave for the third and fourth quarters and, you know, obviously very difficult to predict what the comps are going to be in the third and fourth quarter. So, you know, I think that there is some downside to the model there. But we're not prepared at this time to provide earnings estimate ranges. We, you know, -- our best guess based upon the comps are the numbers that we confirmed.

Thanks, Richard. Next question.

Dorothy Lackner of CIBC World Markets. You may ask your question.

Thanks, and good morning, everyone. I wanted to ask a question about the profitability of the apparel businesses. Obviously you had a big swing in profits for the season and I just wondered if you could give us a little bit more color on the components of that, for example, did Limited Stores make money in the quarter? What are your expectations for the second half of the year and any other color you'd care to give on apparel profits?

Thanks, Dorothy. We'll go to Tracy for that question.

All brands made money in the quarter and had improved operating income. Bath and Body Works actually declined in operating income, and all brands except Limited were profitable to answer your questions. The most significant improvements in the quarter were at Victoria's Secrets, Express and Lerner also had a very strong second quarter. For the spring season, all brands except Bath & Body Works achieved improvements in operating income and again, the most significant improvements were at the Express and Lerner.

Thanks. Thanks, Tracy, that's great. Our next question please.

Don Morris of GKM. You may ask your question.

Thanks, my question for Ann would be in the nice increase you saw in the merchandising margins, how much of that was coming from IMU and if you could give us a little bit more color there on what was driving that and how much of that will continue or is built into your assumptions into Q3 and Q4? Thanks.

I guess what I'd say about IMU is that I think that the more relevant number is in the MU because the relation, that reflects both the IMU and the mark down ratios and their obvious relationships, and so what I would say is that for the quarter MU was up, in all businesses -- I mean in all segments except for BBW, and buying and occupancy improved as well. By up I mean there was a pointed improvement. So we were able to drive gross margins in both of those areas. As I said in my earlier comments, we expect about the same level of change for the third quarter, and for the fourth quarter we actually think there could be some deterioration as we're lacking very strong numbers from last year.

Thanks, John. Next question.

Emmy Causlauff of Sanford Bernstein. You may ask your question.

I have a question on Bath & Body Works. While the new product seems to be getting traction from your comments, they are a small part of the mix so what other types of efforts are you embarking on to improve the business? It sounds like there was a dramatic decline in margins for this quarter. Thanks.

Let me first comment on second quarter margin and then I'll talk about balance of year. Second quarter, they had their June sales. It was a week-longer, roughly a week-longer than it was last year so that impacted margins. In addition to that, as we get closer to identifying the transition to Next, there were some products that we actually marked down pretty significantly to clear out of the store, products like Imagine, some of the older aroma therapy products and some of the home fragrance products. So that's the reason why the merchandise margin was so significantly down in the second quarter versus how it has been trending. As far as third and fourth quarter goes, you heard in August that the Antiback line was relaunched. New packaging and new forms. We also had some minor product launches for the balance of the year for the Bath & Body Works brands. The big focus for them will be holiday gift sets, as I think all of you know, holiday gift sets and holiday [DVR] fragrances really are what drives the profitability or us for fall and it is the focus this year. They have applied the learnings from last holiday as well as Mother's Day and applied them to this year's gift set collections so we're optimistic that this holiday will show some improvement versus last year.

We're ready for the next question.

Laura Burn of Salomon Smith Barney. You may ask your question.

A follow-up question on Bath & Body Works. You left the fourth quarter estimates, street estimates. What's better than there in terms of Bath & Body Works. A little improvement over last year? Any color on your assumptions for the fourth quarter for Bath & Body Works?

We don't provide projections by business.

Next question.

Barbara Wykoff of Buckingham Research Group. You may ask your question. Miss Wykoff, you may ask your question. Ma'am, please check your mute button.

Barbara, are you out there? Why don't we move to the next caller.

Lauren Levitan of S G Cowan, you may ask your question.

Good morning. Thank you. I had some additional questions on the men's side of Express in particular. If you could comment, Michael, on your expectation with respect to timing of more conversions and if you think there's any consumer confusion with respect to being in a Structure store and seeing Express product. And I'm also curious if you could comment on if you believe that 25% less spring clearance going into the fall season, if that should have any impact on the comp performance either at the men's or women's side of the business? Thank you.

Okay. Starting at the last question and going -- working backwards. Yes, less spring inventory did impact both businesses, however, it impacted men's much more than it did women's and we see that in the unit performance. In terms of the conversions, all of the reborn stores are really doing quite well. As a matter of fact, when we've opened dual gender stores, the men's percentage is higher than we had anticipated. We've converted four markets in what we call rapid conversion which is really just merely changing the name on the door and we will be analyzing that within the next month or two. But early results on that seem pretty good so we do not see any confusion. We did see confusion early on but not any longer since all of the merchandise says Express in it. I would just like the name on the door to agree with the merchandise as fast as possible but there's got to be sort of an economic rationale for that.

Thanks, Lauren. Next question please.

Dana Cohen of Banc of America Securities. You may ask your question.

Great, thank you. Can you guys add maybe comment on Limited? You know, given the strength of the comp, you know, why was profitability down and what needs to happen to get the profitability up, it didn't look like there was a lot of promo in the stores during the quarter. And Michael can you see what you're seeing, there's some western presence in the store, it's a piece of the product, how is that trending?

I'll go first. I don't know what you mean by western. If you're talking about all of the ruffled stuff, we're calling that romantic. None of it appears western to us, but if it appears western I guess maybe it's western.

It's western peasant and the.

It's that's the best stuff that we have on the fashion side. It's really quite the best, and we're bringing in considerably more than we planned based on the early results to it. As a matter of fact, if you go in our stores in about three weeks hopefully you'll see a lot more.

Thanks, Mike. I think we'll go to Tracy for the Limited Stores question.

As far as the second quarter results and Dana, your call is correct, 13% comp much improved assortment of what happened. The margin from first quarter to second quarter did not change that much. If you look at the year-over-year comparison, they were up against a very strong merchandise margin last year, and it was related to some conservative estimates on mark downs on inventory taken in the fourth quarter of 2000 and the first quarter of 2001 which got reversed in the second quarter of 2001. So that's what drove the merchandise margin higher last year than where it is this year. The Brand continues to make great progress. We continue to be encouraged about their financial results. As far as breaking even, it's tough right now leveraging the home office expenses and the stores. Against the store base. So as we see continued improvements in Limited, we are cautiously looking at the possibility of opening a few new stores in the upcoming years.

Thanks, Ann. Next question, operator.

Steve Kerncroud of Berman Capital Management. You may ask your question.

One follow up question in terms of your August outlook. A lot of questions have been asked about Express. But given that you're saying that mall traffic is down so far more significantly in August than it was in the spring, Bath & Body Works is really goes up and down based on mall traffic. Can you give us some description of how Bath & Body Works is doing in August versus plan versus Express?

Bath & Body Works was planned pretty conservatively in August. And they are relatively close to where they were planned in August at this point.

And Steve, just to remind you, they were flat in July, that was driven by July sale and the bounce back, bubble bucks, bounce back promotion and it is our expectation that they will be negative in August. Next question please.

Todd Slater of Lazzard, you may ask your question.

Good morning. Thank you. Guys, look August is off to a bit of slow start and the fourth quarter comps you're up against are the toughest you've faced all year similar to the first quarter and you laid out a whole laundry list of challenges I think rightfully so and just help us understand, I think you addressed a little bit on Richard's question, but help us understand the thinking behind the 5% comp trends in the back half of the year which would represent an acceleration from the first half. Hello.

Yes, we're here. We're --

You're talking specifically about the fourth quarter?

Well, the third and the fourth. I want to get my arms around it a little bit more. You're very cautious. I'm sorry?

We're not against a tough comp in the third quarter from last year so I think what you may be referring to is our fourth quarter.

Right. The fourth quarter comp is a tougher challenge. But the third quarter is off to a slower start.

It is. It absolutely is, but we have floor set changes coming up on the apparel side that are shifting from back to school to wear to work, and we're hopefull that those will pick up trends in the apparel businesses. We have a major launch coming next week for the Victoria's Secret brand and that's the Angels bra launch. We also have a new launch in the quarter for the Victoria Secret Beauty brand so we're hopeful that those things will help us to drive traction in the third quarter. On fourth quarter, you're right, is a much more difficult comparison and the main change in the fourth quarter is Bath and Body Works improvement versus last year and Bath & Body Works obviously had an extremely tough fourth quarter last year and that's primarily what's driving our overall comp in the fourth quarter.

Thanks, Todd. We have time for probably two more here, next question.

Jennifer Black of Wells Fargo. You may ask your question.

Good morning, and congratulations. Michael, since your the fashion guru, I wonder if you could comment, it seems as though peasant, Bohemian, romantic look is still here and your interpretation seems to be with more normal colors, I wondered how long do you think that this trends will last and what do you see is the next up and coming trends?

I know that everybody wants to hear long term pronouncements but as long as I don't have to buy longer than 120 days out I don't worry about it to tell you the truth. I think you're right, this trend has lasted longer than I anticipated it lasting when it began but when you really do -- when you look at this current trend which is basically your calling it Bohemian, there's a million names, western, whatever, I agree with you it is kind of a Bohemian, a romantic trend. It's very similar to the modern trends we experienced in the last five to seven years and I don't think that it'll remain in its current form but I think clothes are going to remain soft and feminine for a longer time than anybody anticipated, and we'll be there.

Thanks, Jennifer. I think we have time for one last question.

Kendra Devaney of Fulcrum Global Partners, you may ask your question.

My question is about your store programs, your openings, your closings and your CAPEX allocation and you mentioned possibly opening some more Limited stores. I know you're pretty diligent on your CAPEX allocation. Is more of that going to go to Limited Stores or should we expect that to start growing more?

This is Ann. We are remodeling a few Limited Stores so that as the business continues to improve we'll be prepared to know, you know, what direction we want to take the store look and the store focus. That's a relatively minor amount of capital. Should we see the results that we, that we hope for, the continued, you know, strong top-line growth and gross margin improvement and offerings of, you know, a strong fashion assortment at great price points that is underlying those comps, you should expect to see at some point in the future growth in stores for Limited. But we, you know, we want to be sure that we're there before we put a big chunk of capital behind that business.

I think that concludes our calls for this morning. We'd just appreciate everyone listening in and wish you well for the rest of the day.