Bath & Body Works Inc (BBWI) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to The Limited Brand's fourth quarter and year end 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 Katzenmeyer (ph), vice president of investor relations. Mr. Katzenmeyer, you may begin.

Thank you. Good morning. And welcome to The Limited Brands fourth quarter earnings conference call for the period ending Saturday, February 1, 2003.

As a matter of formality I need to remind you that any forward-looking statements are subject to the Safe Harbor statements found in our SEC filing. This morning, we faxed to your offices the fourth quarter earnings release and related financial information. This is also available on our website, limitedbrands.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 pass code 583. You can also listen to an audio replay from our website.

Len Schlesinger, vice chairman and chief operating officer, Ann Hailey, EVP and chief financial officer, Grace Nichols, president and CEO of Victoria's Secret stores, and Michael Weiss, president and CEO of Express are all joining me this morning. Tracey Travis, senior VP of finance, and Stewart Burgdoerfer, senior VP and controller, are also with us this morning.

We will all be available to answer your questions at the end of our prepared remarks. And Amy Preston (ph) is also with us.

I'll start with a brief overview of the fourth quarter and year-end results. First overall and then by brand. Then Grace and Michael will discuss their brands' fourth quarter performance and the outlook for the first quarter -- their fourth quarter performance and the outlook for the first quarter. Len will follow with an update on Bath & Body Works and Ann will close our prepared remarks with comments about our financials.

Our GAAP results, that's g-a-a-p, have been reported in our press release. All results that we will discuss on this call are adjusted results which include the adjustments outlined in our press release. For the fourth quarter sales were 2.966 billion, compared to 2.839 billion last year. Comps for the quarter were flat. Fourth quarter earnings per share were 67 cents, were equal to last year's record result in what was a very difficult retail environment with continued declines in mall traffic and a shorter shopping season.

A 15% growth in operating income at Victoria's Secret was offset by declines at Bath & Body Works and to a lesser extent Express. Gross margin decreased 160 basis points in the quarter to 41.6% as a result of increased apparel group markdown and lower margins at Bath & Body Works due to the higher percentage of lower margin gift set sales. The fourth quarter SG&A rate improved by 70 basis points to 21.8%. Inventories at the end of the quarter were up 1% per square foot at cost.

For the full year, sales were 8.445 billion versus 7.927 billion last year, and comps were up 3%. Earnings per share increased 27% to 99 cents, a record result for the company. Gross margin improved by 50 basis points to 36.6% and the SG&A rate improved by 110 basis points to 26.3%.

Now for the brand and segment results. We'll do this like we always do. You should have a cross at the top of your page -- the name of the brand, sales, comp, external gross margin rate, operating income rate and operating income dollars. I'll begin with the Victoria's Secret segment. At Victoria's Secret stores which includes beauty, sales in the fourth quarter were 980.8 million, the comps were 5%, external gross margin rate and operating income rate were both up and operating income dollars were up significantly. In the full year for Victoria's Secret stores, sales were 2.647 billion, the comps were 6%, and external gross margin rate, operating income rate and operating income dollars were all up significantly.

At VS direct, sales in the fourth quarter were 301.4 million, the sales change was plus 13%, external gross margin rate was up, operating income rate and operating income dollars were up significantly. And for the full year at Victoria's Secret direct, sales were 938.7 million, the sales change was plus 8% and external gross margin rate, operating income rate and operating income dollars were all up significantly. VS direct fourth quarter results were driven by continued strength in the closing category and supported by increased circulation of the Christmas Dreams and Fantasies book.

The clothing category is benefiting from the more competitive price point offerings and the broader casual assortment. Intimate apparel sales were up to last year, driven by the growth in the panty and sleepwear categories. The Victoria's Secret segment in total -- for the fourth quarter, sales were 1.282 billion, that's against 1.169 billion last year. The comps were plus 5%, external gross margin rate was up. Operating income rate, again, this is in the fourth quarter, was 24.3%. That's against 23.2% last year. Operating income dollars were 311.3 million versus 271.6 million last year.

For the Victoria's Secret segment in total for the full year, sales were 3.586 billion versus 3.272 billion last year. The comps were 6%. The external gross margin rate was up significantly. The operating income rate was 17.1% versus 13.9% last year. And operating income dollars in the segment were 614 million versus 453.6 million last year.

At Bath & Body Works, sales in the fourth quarter were 777.2 million. That's against 767.3 million last year. Comps were minus 1%. External gross margin rate was down significantly. Operating income rate in the fourth quarter was 30.7% versus 34.9% last year. Operating income dollars were 238.4 million this year versus 267.4 million last year. For the full year at Bath & Body Work, sales were 1.781 billion, that's against 1.747 billion last year. Comps were minus 3%. External gross margin rate was down significantly. Operating income rate for the full year was 16.8% versus 19.9% last year. Operating income dollars for the full year were 299.7 million versus 347 million last year.

Bath & Body Works fourth quarter performance was disappointing as a strong gift set assortment and growth in aromatherapy and True Blue spa were not enough to offset soft sales in daily beauty rituals. Gross margin was down as expected due to the higher percentage of lower margin gift sets in total sales as well as an inability to leverage buying and occupancy costs on the negative comp.

And now for the total apparel segment. For fourth quarter, apparel sales were 806.1 million, that's against 839 million last year. The comps were minus 4%. External gross margin rate was down significantly. Operating income rate in the quarter was 9.9% versus 11.2% last year. Operating income dollars in the quarter were 79.9 million against 94 million last year. For the full year in the apparel segment, sales were 2.711 billion, that's against 2.662 billion last year. (inaudible) were plus 3%, external gross margin rate was up. Operating income rate was 4.2% versus 2.4% last year. Operating income dollars in the segment were 114.9 million dollars versus 55.2 million dollars last year.

Both sales and margins for the apparel brand were below planned in the fourth quarter. Apparel inventories ended the quarter down 2% per square foot at cost.

And now for the individual apparel brand results, beginning with Express. At Express in the fourth quarter, sales were 623.7 million, (inaudible) were minus 4%, external gross margin rate, operating income rate and operating income dollars were all down significantly. For the full year at Express, sales were 2.073 billion, the comps were plus 3%, and external gross margin rate, operating income rate and operating income dollars were all up significantly.

At Limited stores, sales in the fourth quarter were 182.4 million, the comps were minus 1%, external gross margin rate was down, operating income rate was up significantly, operating income dollars were up. For the full year at The Limited, sales were 637.7 million, the comps were plus 7%, external gross margin rate was down, operating income rate and operating income dollars were about flat. Fourth quarter sales were below plan as the challenging environment contributed to a decline in traffic and sales. Despite this disappointing expense, management resulted in an improved operating income result in the quarter for Limited stores.

That concludes my prepared comments and I'd like to turn it over to Grace Nichols now.

Thank you, Tom. Good morning, everyone.

I'm pleased with our fourth quarter performance. As Tom said, our comp was 5% against 10% comparison last year. Fourth quarter results were driven by the strong performance of the Very Sexy collection, an effective customer relationship marketing campaign and a very successful January semi-annual sale. For the quarter, performance was driven by both regular and sale price merchandise, including the post-Christmas and January sale periods. Our continued focus in our best (inaudible) category of bras led to double digit growth in this category in the holiday period driven by the Very Sexy sub-brand, including the continued strong performance of the key styles that are push-up-oriented and the introduction of a new lace oval plunge.

The panty category was also strong, driven by shape interest on the fashion side, specifically tanga (ph) styles and low-ride styles in all fabrications. Beauty also achieved exceptional holiday results due to planned and executed growth in gift sets and the performance of the Very Sexy for her fragrance, the new Prestige fragrance introduced during the fall time period.

Sleepwear comps were about flat to last year's outstanding performance.

Looking ahead to spring, our focus will continue to be on our core sub-brands with new product introductions planned each month. We'll support our key sub-brand launches with advertising, both television and print and targeted customer relationship marketing CRM campaigns. CRM is a major focus and an area of investment for 2003, as we continue to build stronger relationships with our customers. For spring, total direct male circulation of 15.5 million is up nearly 20% to last year. In addition, we've created --we've increased the impact of our successful panty sampling campaign with the addition of a $5 off any bra offer which proved to be effective in the fall.

As for the near term, we're pleased with Valentine's sales which were above last year driven by the Very Sexy push-up in lace introduction, continued strong panty performance and a positive reaction to our sleepwear assortment. Currently, the focus in our stores is on Such a Flirt, a collection of flirty, sexy bras and panties, and on March 4th we'll switch gears and feature our new Angels sub-brand, including the introduction of new and exciting styles to this collection.

And with that, I'll turn the discussion over to Michael.

Thank you, Grace, and good morning, everyone.

Fall results were disappointing at Express particularly on the women's side. Sweaters were weakened both --in both businesses. As you know, it was a bad season for sweaters. However, despite that we missed opportunities to maximize our share of the sweater business. In women's, we were unable to make up for the drop in sweater volume, but saw very solid performance in knit tops and bottoms which was driven by the velour track suit. We also did quite well in dresses and very well in woven tops.

In men's, the strength of our gift-giving shirts and ties and continued denim momentum (inaudible) to date, driving the total men's up. Even though we were disappointed with poor results in the women's business, as you know, Express had a terrific spring season in 2002 with the best performance since '95 and strong productivity growth. Therefore, results for the year are solid with positive comps on lean inventory driving significant improvement in profitability.

Now I'd like to give you a brief update on the Express men's conversion before I close with some comments about spring. The men's business is achieving the objectives we set forth year when the business was reunited with Express, which were number one, reduce the operating losses. Number two, re-engineer the margin architecture and -- pardon me -- number three, regain sales and momentum. We ended the year with 49 dual gender stores. Positive comps at these stores combined with reduced square footage has led to double digit increases in productivity.

Overall, we are pleased with the profit growth in these stores. We will more than double the number of dual gender stores in 2003. Additionally, we also plan to continue converting the signage on the remaining stand-alone structure stores to the Express men name. We will start with 100 stores in the top 11 markets during the first quarter. This will bring the total conversions to 14 markets. The long-range goal is to convert the bulk of the fleet to dual gender stores with increased productivity and profitability in the top mall.

In closing, a couple thoughts about spring. The knit top department is the cornerstone of the women's spring business. We were very successful in '02 by delivering fashion in our core program, as well as the key looks, the key fashion looks of the season. The knit top business this spring is showing early signs of continued growth. In men's, there's an opportunity to support the success of the 1 MX shirt with strong core programs in jeanswear tops to compliment our growing denim assortment, and both the knit business and casual business are thankfully showing signs of improvement. We'll continue to pay careful attention to inventory and expense discipline as we did in 2002. We'll also focus on agility and maximize our ability to react to trends as spring unfolds.

Thanks, and now I'd like to turn the discussion over to Len.

Thanks, Michael. Good morning, everyone.

Today I'd like to give you an update on the work being done at Bath & Body Works. As we discussed last October at the investor update meeting, Bath & Body Works has begun a review of their processes with a view toward realigning activities and operations to better fit with the new direction of the brand, which we're calling the 21st century apothecary of well-being. As a result, new processes and procedures have been put in place to eliminate redundancies, we're ensuring internal consistency and alignment, and to maximize effectiveness and innovation in our new products and seasonal planning processes.

We also expect that these changes will result in cost savings over the long term. We've also made significant organizational and management changes. The business has been reorganized to focus on three key categories. More Bath & Body Works, headed up by Mike Stromburg (ph), flagship stores run by Beth Kaplan (ph), and home fragrance headed by Christian Michaels (ph). This change in organizational structure will create increased focus and accountability as each manager has their own P&L statement.

I also want to review the other recent management changes. Beth Kaplan has joined the brand as executive vice president of BBW flagship. In this newly created position, Beth will develop and lead the strategic direction of our flagship stores across merchandising, marketing, visual and store operations. Beth was a senior executive vice president of Rite Aid, general manager of Proctor & Gamble's food and beverage division, and president of P&G's cosmetic and fragrance series.

Nils Peron (ph) has joined Bath & Body Works as chief marketing officer. He is responsible for marketing, visual, customer relationship marketing, market research and development, store testing and product segmentation. Nils joins us from Oglivie and Mader (ph), where he was the senior partner for worldwide and managing director. He has an extensive background in building brands for companies like IBM, Motorola, Citibank and Verizon Wireless.

We announced on February 10th the appointment of Neil Fiske (ph) as CEO. Neil joins us from the Boston Consulting Group where for nearly 14 years he specialized in consumer goods, retail and brand leadership. In 2000, he was appointed managing partner of BCG's Chicago office, one of the firm's largest and most highly regarded offices. In his new role, Neil is responsible for further defining the brand and brand strategy, and raising the level and pace of innovation. His efforts will be focused on new product development and seasonal and category planning processes, the integrated brand marketing and event calendar, and sub-brand definition and positioning.

Neil joins Ken Stevens (ph) who serves as president of Bath & Body Works. Ken has been at Bath & Body Works for one year and prior to that, served as chairman and chief executive officer of the Bank One retail group. He was also president and chief operating office of Taco Bell, senior vice president and treasurer Pepsi Co (ph), and a partner at McKenzie (ph) & Company. Ken will be focused on the operational activities related to brand delivery, stores, operations, human resources, finance and real estate.

From a product perspective, over the course of the spring season, we will be alternating emphasis on spa and aromatherapy, adding new forms to both. Mother's Day will focus on BBR gift sets and we will be introducing a new product line this summer. Bath & Body Works is in the midst of a significant transition. We are confident that the new leadership and changes that we have implemented will expedite this effort.

And with that I'd like the turn it over to Ann.

Thank you, Len. Good morning to everyone.

Looking back on 2002, unfortunately, as anticipated the environment was difficult throughout the year and worsened in the fourth quarter. In that context, we continued with our disciplined approach to inventory, expenses and capital, and delivered a 27% increase in adjusted earnings per share for the year, a record result. Total inventories ended the year up 1% per square foot at cost, and apparel inventories were down 2% per square foot at cost. We successfully cleared fall apparel inventory in January and as a result, carryover levels of inventory are roughly flat to last year's very low levels and below our budgeted targets.

We delivered a 110 basis point improvement in SG&A costs for the year through continued emphasis on our efficiency initiatives. And we were disciplined with capital expenditures with actual spending of about 305 million, significantly below our original projections. We ended the year with a very strong balance sheet, including over $2 billion of cash. We have taken advantage of the lowest rates in 40 years in the long-term debt markets, and added 300 million of ten-year debt with a 6.8 coupon and 350 million of 30 year debt with a 6.95% coupon.

Later today, we will announce a call of our existing 250 million of debt that carries a 7.5% coupon and matures in 2023. With the issuance of the 30-year money a couple of weeks ago, we have essentially replaced this 20-year debt with 30-year money at a lower coupon. As you know, we have started to put some of our cash to work with the announcement of 150 million share repurchase, and a 33% dividend increase, which takes our total dividends to a little over 200 million a year.

In this environment, we believe these steps are prudent ways to return capital to our shareholders while continuing to maintain our financial strength. I wish I could tell you that I foresee a good economic environment in 2003, but it is clear that 2003 will be extremely uncertain with the continuing challenges around consumer sentiment, mall traffic and political instability. We are, however, watching carefully for signs of improvement so that we can react quickly to capitalize on any opportunities.

Turning now to this spring, we are lapping a record season last year in 2002. At this point, we expect our spring earnings per share to be down 10 to 20% versus last year, consisting of a down first quarter and a flat to slightly improved second quarter. For the year, we're comfortable with an earnings per share range of flat to up 5% versus this year's 99 cents per share.

Looking to inventories, fourth quarter apparel cost of goods available for sales per square foot were flat versus last year and they plan to be roughly flat for the first quarter of 2003 as well. With respect to capital, we estimate that our spending in 2003 will be about 400 million. As has been the case in the past, over 70% of our capital spending is targeted to stores, with the remainder consisting of non-store spending principally technology, home office and distribution.

The composition of our real estate spending is shifting this year with a reduction in spending for new stores and an increase in spending for reconstructions. This spending represents a change in focus for us so I'd like to take a few minutes to provide you with some perspective. First of all, we believe it is imperative to have store designs which are a current reflection of each brand's positioning, designs which keep the brands interesting and vital for our customers, designs which evolve the brand and keep it fresh. In recent years we have been working on and have developed go forward designs for each of these brands.

While the redesign initiatives were under way, we postponed the majority of our remodeling activity, pending completion of the work. In parallel, we began a process last year to optimize our real estate portfolio with the goal of maximizing sales, productivity and profits. We recognized the change in the real estate mall landscape and began our work with the particular focus on the top 160 malls, which represent a disproportionate share of our sales and our profits. We have developed specific action plans for each of these 160 malls. We will implement these plans over the next ten years and the bulk of the work will be completed over the next five years.

In 2003, we plan to reposition about 100 stores in about 60 malls. These stores represent about 20% of the total stores to be revitalized as part of this plan. In general, these plans involve the following in the top 160 malls. First, an expansion of the Victoria's Secret space and a remodel to the new store design, which I hope you have seen at Herald (ph) Square. The new design positions Victoria's Secret for the future and supports growth in existing bras as well as further development at key opportunities such as pink, panties and beauty.

Second, an expansion of Bath & Body Works as we remodel to the flagship store design. This new design better represents the brand as BBW transitions to the 21st century apothecary of well-being. And we'll support the categories that represent the future of the brand -- aromatherapies, spa and home fragrance, which all performed well at holiday. It will also allow us to accelerate the testing of third party product lines such as Birth Bees (ph) and Davy's Gate (ph), which have had encouraging results in the 22 current flagship stores.

Third, a decrease in the total Express square footage as we close men's free standing stores and convert to the dual gender format. As Michael mentioned, we have seen double digit increases in productivity in the current 49 dual gender stores.

And finally, a downsizing of Limited stores as we remodel to the current store design. The average Limited store will decrease from 8,000 selling square feet to 5,600 selling square feet. The net effect of this activity will be to hold square footage flat in the top 160 malls while positioning our brands for growth in sales, productivity and profit. Our specific 2003 real estate plans by brand including openings, closings and reconstructions are included with the information you receive this morning. This information is also available from our website.

With that, I'll turn the meeting back over to Tom. We'd be happy to take your questions.

Operator, that concludes our prepared remarks. We're ready to take questions now and I'll help by serving as the moderator. We'd like to remind everyone to limit yourself to one question.

Thank you. At this time, we're ready to begin the question and answer session. If you would like the 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, please press star two. Again if you would like to ask a question, please press star one. One moment, please.

Our first question comes from Brian Clunnic (ph) of J.P. Morgan.

Thanks. Good morning. A question for Michael. As far as the marketing plans at Express for spring, this year, can you remind us if you're up against any spring marketing last year and also that your credit card program, how that rollout has been progressing?

We're up against fashion magazine advertising in the months of March and April. We are repeating fashion magazine advertising in March and April, although slightly differently in terms of the books that were in and the frequency of the books that we're in. We're anniversarying just about all of the CRM that we're up against. We expect that the marketing --the placement of the CRM and the placement of the magazine dollars should indeed generate more volume than last year.

Okay. As far as your credit card program, how are the rollouts progressing?

I'm sorry, we continued to reissue credit cards although we're not reissuing as many this year as last year.

The average dollar sale on those credit card purchases versus noncredit card purchases?

The average dollar sale on the credit card purchases is about 15 to 20% above the noncredit card purchases.

Thanks.

Operator, we're ready for next question.

Lauren Levitan (ph), you may ask your question.

Thanks. I was hoping to get a sense on how the best practices are being deployed at the other brands, in particular at Bath & Body Works and a view towards using the advertising dollars differently as part of the restoration of the BBW plan. Thanks very much.

Grace will go out to the first part of that and I think Tracey Travis will handle the question about Bath & Body Works next.

The direction that we've used on our CRM activity is primarily to look at very closely at customer activity in our credit card file. And so, for example, if we are running a Body by Victoria event, the mailings are directed toward non-Body by Victoria customers. Or if a customer has only bought one Body by Victoria event in the past year, we might be trying to escalate her purchase activity. So it's very segmented. The same thing would apply to Angels. We would be looking at non-Angels customers during an Angels event or we would be looking at non-Very Sexy customers by a Very Sexy event.

So it's -- it's focused really on driving customer loyalty and repeat purchase and that's what I could say for it. It's worked very well for us. And as we continue to build our file, which we have been very successful at, opening more than a million new accounts a year, and actually slowing down the rate at which people leave the credit card file, we find that they're -- there are still continued opportunity for us in the next two or three years in employing the strategy.

Thanks, Grace. To Tracey for Bath & Body Works.

Good morning. For Bath & Body Works, they will be anniversarying the two direct mail programs that they ran last first quarter. So one was at Valentine's Day and that has already passed or on March 9th, the redemption period. Then in the April/May time frame they're running a direct mail program to support Mother's Day which they also ran last year. In addition to that, to the question that was asked, they are doing some targeted promotions similar to what Grace is doing to bring customers into the store to see the new aromatherapy and spa lines, so we will be doing three incremental direct mail programs at Bath & Body Work, probably in the second quarter geared towards those new product lines. And some of that direct mail will be targeted towards last customers who haven't been in the store in the past 12 to 24 months to bring them back into the store to see the new products.

Thanks, Tracey. Next question, operator?

Tom Selandra (ph) of Goldman Sachs.

Good morning. Just an update on pink. And I thought it was interesting with Ann's comment about the expansion in those 160 malls, as she mentioned, panties as an opportunity. If you could update us on the two categories, I'd appreciate it.

Grace, we'll let you handle that.

Pink, I think -- you know, last year, pink was only present in 14 stores. It really was kind of a toe in the water test. We had excellent sell-throughs in those stores. We believe that it drove some amount of comp performance in the one or two percent range in that group of stores. And based on that we've gone out to 50 stores for the spring season. The initial results, the first two weeks of the spring and the 50 stores is very good in terms of sell throughs. We're still evaluating to what extent it drives comps. We're actively looking at other open, available spaces for us to add pink to our assortment and the type of real estate active that Ann talked about in terms of increasing Victoria's Secret square footage is going to give us even more opportunities as the future rolls out to place this product store.

We're just in the early throes of bringing up a design team, and a production team as well as expanding our resource we have behind merchandise planning. The panty business is -- I think the story in the broad market beyond Victoria's Secret is it's the one category in intimate apparel where there is a real fashion story. And other retailers are also experiencing increasing customer interest in actual comp growth in panties. So we're not unique in that. I think we're unique in the fact that we have been very aggressive where -- we're picking up market share and it's really driven by a lot of new shapes and it's kind of an -- of a fashion accessory of the lingerie business. It goes anywhere from boy legs to tan gas to low rises to new shapes in thongs. Some of it is driven by the direction of outerwear in terms of the low rise jeans story. But I think about half of it is also driven around it's a big fashion part of lingerie business. If you saw our panty boutique at 34th street when it opened, we were able to replicate that kind of presentation of the flavor of it and the fair amount of stores for the fourth quarter.

Thanks. Operator, next question.

Barbara Wicoff (ph) of Buckingham Research Group, you may ask your question.

A question for Michael. Could you elaborate more on women's on what's working so far in February? Any big trends surfacing?

Yeah. As I said, the -- it was quite good. The other things that are quite good are the things that we forecasted to be the looks of the season which are the flight pants in conjunction with Very Sexy top, both cam soles and lingerie-inspired tops. The spring results are really, really, really a tale of two cities. On the West Coast into the Northwest, into the Southwest where we had decent weather, we have had really wonderful comps. But in the aggregate with what has happened in the East and especially the Northeast, the aggregate does not look as good as I believe it one a little better of the W word which we're not allowed to use around here. What has been significantly good are the looks that we forecasted which are the utility-looking military looking flight pants with Very Sexy tops.

Barbara, thanks. Next question?

Amy Kozlov (ph) of Sanford Bernstein.

Hi, my question is on Bath & Body. What's on in the top line beyond the rehashing of spa and body? When exactly should we begin to see new meaningful proprietary introductions that can obviously replace more of the DBR business and restore margins?

Len?

Part of the repositioning of brands of the 21st century of well-being, we're going to continue to grow and introduce next product lines that actually fill out the work that we have been introducing in aromatherapy and spa. And as Ann said earlier, both of those lines performed extremely -- extraordinarily well at holiday and serve in to go forward strategy.

Also, throughout the rest of 2003 and into 2004 beginning in late summer, you will see a full array of proprietary performance products beginning to be introduced in some of the essential categories as skin care, hair care and body care. And we're quite excited about the work that's been done there and are actively planning product introductions in all of those categories over the next 12 months.

Next question.

Jeff Kleinfelter (ph) of U.S. Bancorp, you may ask your question.

Yes. Considering the guidance you did give in the second and the full year, Ann, generally speaking what sort of comp sales gain is baked into that? And if you could break that down for concert for maybe the first quarter or two. Then within the overall comp are you looking for -- what kind of traffic are you baking into it versus what kind of transaction value? Thank you.

Thanks, Jeff. We'll go to Ann for more a little more flavor on that.

We expect in the first quarter we're thinking about comps in the range of flattish. And the trends we would expect to see are not that different from what we saw in the fourth quarter with some mid single digit comps for our businesses and slightly less -- somewhat less than flat comps for DBW in the apparel brands. The second quarter we would think comps flat to up slightly, and the only change by segment versus the first quarter would be some improvement in apparel. But again, the business is leading the pack for the second quarter.

Thanks, Jeff. Operator, next question?

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

Good morning. A question for Michael. Could you talk a little bit more about the transition plan to dual gender stores? Because you have you have a lot of Structure stores or formerly structure stores out there. Are your thoughts that these stores would be closed or some of them would be converted to dual gender? And, you know, and how many of the existing stores can be converted to dual gender that are Express women?

Yeah, currently -- currently, what we're seeing is the structure stores that need to be closed are really not big enough in terms of square footage for dual gender. So that the structure stores that are going to be closed are structure stores that are going to be closed. There are significant number of women stores in -- within the top 160 malls that are in the 11,000 square foot range that will be converted and this we're working on. Most significantly in terms of the dual gender is really getting the name on the door in the Express stores to say that they are -- in the structure stores to say that they're Express stores. As I mentioned by the end of this season, we will be totally converted to the new name in 14 of the top markets. So as I said, we have more than 40 stores right now. That number will double by the end of the year to over 80 that are true dual gender as opposed to the side by side stores.

Thanks, Richard. Next question.

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

Thank you. Good morning, everybody. Len, I was wondering you could elaborate more on Bath & Body Works? You talked of some of the management changes and Structure. How do you see this operating so that it's smooth? It seems like it end up more complicating in getting product to market in the future?

In fact, the intent is just the opposite. To clarify the product to market strategy and to clarify inside the brand, the issue at this point is largely around improving the promotional cadence around launches, particularly. So I think you'll expect to see over the next 12 to 18 months fewer bigger launches across all of the segments of the brand, more targeted and tailored promotions. And more ability to actually recognize some of the customers' seasonal buying habits and tying in the promotional calendar to that. And a much sharper level of store segmentation that comes with the leadership team alignment around core store, home fragrance, and the flagship stores that we have talked about that Beth Kaplan is going to be running.

So quite honestly, at this point, it has been recognized that the product development calendar and the product to market strategy is absolutely critical. Absolutely critical part of the strategy on a go-forward basis. And Ken and Neil already have significant experience around that issue. Neil working on it as a consulting basis and Ken having led the product development calendar work that's gone on in the brand over the last six months.

Thanks, Mark. Operator, a couple more questions here.

Dana Cohen (ph) of Bank of America, you may ask your question.

Hi, good morning, guys. Len, I was hoping you could go into more detail the difference between this -- the way you're organizing BBW now, the flagship versus the whole fragrance strategy and what are the differences in these stores? Then also, on the stores you're expanding this year, Ann, I think you mentioned that those will be flagship store, how big will they be?

Why don't we divide that question up. Len, you go.

I'll walk you through the conceptual stuff and I'll pass it to Tracey for the numbers associated with it. In terms of testing the flagship inside that, we're pretty clear that we're evolving to a model that has the flagship stores serving as brand defining stores. They're currently 23 of the stores that are open and we expect to get to a total of 40 by the end of this year. And it's largely the larger stores in the best malls that we're focusing on.

From a diffusion status, you were talking of the flagships being applied to the balance of company stores. In terms of things that we have been fundamentally focusing on and learning in the flagship stores, it has largely been about assortment and visual display. A lot of energy going into making home fragrance, a much more central part of the flagship display and the merchandising strategy that exists in those stores. That's also the area where we have been doing significant experimentation with third party brands.

We'll go to Ann on the floor size question.

You'll be relieved this know, Dana, we are not building stores in the top 160 malls -- what's happening is we are roughly doubling from about 2,000 square feet to a little over 4,000 square feet.

Thank you, operator, next question.

Don Morris (ph) of Gerard Klauer, you may ask your question.

Thanks. Good morning. Michael, for you, if we can, it -- at men's Express, AK, Structure, it looks like you've take an different direction here in early going and spring. I wonder if you can talk of the merchandising and the direction and the revolution that you see going forward in spring? And then also for fall. Thanks.

We're actually -- we're actually quite pleased in the direction and the progress that the men's business has made. If you're seeing a different direction you're seeing something that I'm really not seeing. I think we have taken the same direction. I think spring automatically looks a bit different than fall because spring by nature of the season is more casual. But I think -- I think that that's not a change in the direction. I think what you are seeing, however, is that we're getting much better reads on two of the categories which are quite important in men's and which we were not having any success on which are -- which were cut and some knitwear and casual bottoms which are getting better in terms of our offerings so they're representing perhaps slightly higher percentage of the total.

But in terms of the real successes in the men's business, they exist in the jeans wear which continues to be expanded and in the -- in the woven shirt area. But as I said and I will repeat, we're really happy with the progress of that business.

Thanks, Michael. Operator, why don't we try to take three more questions.

Todd Slater (ph) of Lazard (ph), you may ask your question.

Thanks. My questions were answered, but I didn't hear any guidance on the comp number. Would you comment on that?

Yes. Todd. We'll go to Ann for the comp number.

As you know, we don't comment on results by brand for the month, but in total what we originally were guiding people to was about flat comp. It's pretty clear now that due to the impact of the -- what Michael would call the W word which I will say, the impact of weather that's not much upside to that as it probably cost us one to two points in comps. So we'd be thinking something like in flat. So single digit declines for the month of February. Low single digit decline.

Thanks, Todd. Operator, two more questions.

Richard Jaffey (ph) of UBS. You may ask your question.

Thanks very much. Maybe a question from 30,000 feet for Len in terms of strategy. His role and obviously a much greater participation today in Bath & Body Works, going forward how he sees his role unfolding with additional responsibilities and how he sees the organization behind him being reshaped in the most advantageous manner?

Simply put, the large part of the rationale for the adjustment in my role is driven by the need to free up the lead merchant to spend the time on the top line activities. So he's got day to day responsibility for all of the strategic activities at the firm with particular focus on working with the individual brand, CEOs, the marketing and merchandising function, creative team that he heads up that integrates all of the center-driven creative activity around design and marketing and the brand or business planning activities that link to the strategy of the portfolio.

I continue to maintain responsibility for all of the operational functions that I've had over the last two years, and the most substantive change above and beyond that is that Les and I have organized ourselves to share functional responsibility for finance, real estate, store design and construction and business affairs. And company affairs that fundamentally means that while he continues to drive most of the strategic input, so for example I will not be spending much time designing stores, he will. Okay?

I will not be spending a lot of time on the details of particular mall evolution strategies but I will be managing the function on a day to day basis. So we have split up the strategic and operational roles in those four functions so that I could pick up the ball there. But the fundamental logic now and the fundamental logic going forward is these are merchant-led businesses that are top line Orient and we make our money on the sell side. The more time we can free up among our merchants to provide leadership to the activities, the better all our businesses will be.

Thanks, Len. Operator, it's almost 9:00 so we'll take one more question.

Stacey Pak (ph) of Prudential Securities.

I was getting nervous there, Tom. My question is sort two parts. But on BBW I think the operating margin was down a little over 300 basis points in '02 and I think it's down about 900 basis points since '99. So the question is, what's --you know, let's stick to '02. How much was markdowns versus negative leverage and cost? When you're looking at '03, is there any opportunity in average unit retail, IMU or cost reduction and conversely when you're looking at Victoria's Secrets, that operating margin was up by about 300 basis points. What does AUR and IMU and cost opportunities look like in that division for '03?

Thanks, Stacy. We're going to go to Tracey Travis for that question.

Yeah, Stacy. As far as Bath & Body Works goes for 2002, about half of the decline in gross margin rate was related to merchandise margin declines. And that was largely driven by some higher promotional activity but in addition to that a mixed shift out of higher margin products and into lower margin products. So the home fragrance category has a slightly lower margin than some of the other categories in the shop, for instance. Then the other piece of it was just the deleverage of buying and occupancy on comp so that's what drove the BBW gross particular gin decline in '02.

As far as '03 goes, we expect that on a full year basis, a pickup certainly in the fall for Bath & Body Works. We don't expect the same level of promotional activity this year. And we do think that there are A -- there is AUR upside particularly in some of the new categories that Len mentioned we'll be introducing later in the year.

Victoria's Secret?

Victoria's Secret, we believe that Victoria's Secret has upside and certainly in AUR as well as leverage for buying and occupancy given the higher level of comps that we expect that they'll generate this year.

Thanks, Tracey. That concludes our call this morning. I want to thank Grace Nichols and Wendy Burton (ph) for joining us by phone again and we hope you all have a good day.