Bath & Body Works Inc (BBWI) 2003 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 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, Vice President of Investor Relations. Mr. Katzenmeyer, you may begin.

Thank you. And good morning everyone. Welcome to the Limited Brands, Inc. second quarter earnings conference call for the period ending Saturday August 2, 2003.

Before I begin, and as a matter of formality, I need to remind you that any forward-looking statements we may make today are subject to our Safe Harbor statement found in our SEC filing. Our second quarter earnings release and related financial information are available on our website, www.limitedbrands.com. The call, as always 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.

Leonard 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. Stewart Burgdoerfer, Senior VP and Controller and Tracey Travis, Senior VP Finance are also with us this morning. We will all be available to answer your questions at the end of our prepared remarks.

I will start, as always with a brief overview of the second quarter results, first overall and then by brand, then Grace and Michael will discuss their brands and Len will provide an update on Bath and Body Works. And we will close our prepared remarks with comments about our financials.

For the second quarter, sales were $2.014 billion, compared to 1.1 -- $1.912 billion last year, comps for the quarter were up 3%. Second quarter earnings per share were 19 cents, versus 16 cents last year, an increase of 19%. Increases in operating income at Victoria's Secret and Bath and Body Works were slightly offset by the decline at the apparel segment. Gross margin in the quarter decreased 30 basis points to 34.9%, the second quarter SG&A rate improved by 150 basis points, to 26.4%.

Now for the brand and segment results and as usual you should have the following headings across your page: The name of the brand, sales, comps, external gross margin rate, operating income rate and operating income dollar. I'll begin with the Victoria's Secret segment. At Victoria's Secret stores, which includes beauty, second quarter sales were $669.0 million, the comps were positive 6%, external gross margin rate was up slightly, operating income rate was up significantly and operating income dollars were also up significantly.

At Victoria's Secret Direct sales in the second quarter were $260.3 million, the sales change was up 4%, external gross margin rate was down slightly, operating income rate was about flat, and operating income dollars were about flat. At Direct, panty and sleep ware sales were up to last year. Sales in the clothing category were also up to last year, driven by growth in shoes, knit tops and dresses. The internet continues to experience strong growth.

For the Victoria's Secret segment in total, second quarter sales were $929.3 million, that's against $864.5 million last year, again the comps were up 6%, external gross margin rate was up slightly. The operating income rate for the segment was 18.8% against 16.8% last year, operating income dollars were $174.9 million versus $144.9 million last year.

For the Bath and Body Works segment, sales in the second quarter were $393.3 million, that's against $374.3 million last year. Comps were plus 4%, external gross margin rate was up significantly, the operating income rate for the segment was 13.3% against 8.4% last year, operating income dollars were $52.2 million, that's against $31.4 million last year.

And now for the total apparel segment. At apparel sales in the second quarter were $588.9 million, that's against $591.1 million last year. Comps were flat, external gross margin rate was down significantly. The operating income rate was negative, negative .5% versus positive .6% last year. Operating income dollars were a loss this year of $2.8 million against a positive $3.3 million last year. Sales and margins for the apparel brands were below planned in the second quarter.

Now for the individual apparel brand results beginning with Express. At Express sales in the second quarter were $454.7 million, the comps were plus 1%, external gross margin rate was down significantly, and operating income rate and operating income dollars were down.

At Limited Stores in the second quarter, sales $134.2 million, the comps were minus 4%, external gross margin rate operating income rate and operating income dollars were all down. Second quarter sales at Limited stores were below planned, growth in jackets and wear-to-work pants was not enough to offset declines in casual pants and tops. In the third quarter, Limited stores will emphasize [Inaudible] pants through five new key pant fits. That concludes my prepared comments.

Now I'd like to turn the discussion over to Grace Nichols. Thank you.

Thank you, Tom, and good morning everyone. The second quarter was a pleasant result versus our lack-luster first quarter performance. The June semiannual sale was very successful and we also saw good increases in regular price product in May and July. Both bras and panties delivered a solid performance achieving positive comps each month of the quarter. Total beauty sales including Nietzsche and side-by-side stores were also above plan, driven by the semiannual sale, and the very successful launch of the Breathless fragrance in July.

Looking ahead to the third quarter, our stores are currently featuring the Body by Victoria unlined plunge bra. The Angel's lined demi with lace will launch on August 26. This is a seemless bra with a touch of lace. This launch will be supported by national television, selling contests and an incremental customer marketing campaign that includes a beauty sampling event.

We will also relaunch a very sexy lace push-up bra on September 23rd. This launch will also be supported with national television, as well as a customer marketing program. The customer marketing includes a panty sampling campaign, as well as an incremental beauty sampling event.

We continue to be pleased with the performance of Pink, our new sub brand, which is targeted to a younger customer. It is currently in 50 stores and will be rolled out to another 35 stores in time for holiday. Beauty will introduce new formulations, product forms and package designs into the Garden line throughout the third quarter.

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

Thank you, Grace and good morning everyone. Although our second quarter performance represented an improved trend from the first quarter, we are disappointed that we didn't do better. The second quarter gross margin rate was down significantly due to higher promotional activity and higher mark downs.

In the women's business, sales results were driven by record results in knit tops and solid growth in jeans wear bottoms. Key items that reflected based on March performance were also strong including our mini tee, our Terry program and the Paratrooper crop pants. Growth in these categories was offset by declines in sweaters, wovens and in accessories. In men's we achieved positive comps in the quarter, solid results but slightly below expectations due to a significant decline in shorts. Knit tops, denim and woven shirts continue to achieve strong growth.

I know that everyone is focused on what's happening with denim, so let me provide you with an update. As you know we got off to a slow start in July with a negative 1% comp. Women's July sales were disappointing. Core denim met expectation and represents the majority of our denim inventory. However, novelty denim sales were disappointing.

Men's denim continues to achieve double-digit growth. As part of our strategy to drive growth in season-less wear-to-work outfits, in September we will test a new wear-to-work product assortment called the Express Design Studio, this will be in 28 stores. The concept, product and marketing for this test was developed in partnership with Marie Rao in design, Ed Rasik [ph] in marketing and Gene Torshia [ph] in store design and construction. Similar to the development process for Pink at Victoria's Secret.

[Inaudible] continue to be a bright spot with existing mall conversions outperforming the balance of company for the quarter and spring season in terms of both top and bottom-line growth. We now have 65 stores in this new format and expect to open approximately 30 more the remainder of this fiscal year.

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

Thanks, Michael. And good morning, everyone. Today I'd like to give you an update on Bath and Body Works. We are pleased with Bath and Body Works second quarter performance. As Tom said, comps were up 4% and operating income improved significantly. Sales results were driven by incremental direct mail and a successful semiannual sale, as well as continuing improved execution of marketing in the windows and in the stores. Growth occurred in the True Blue Spa and gift sets while the daily beauty rituals category was flat to last year, an improvement to recent trends.

The increase in the gross margin rate versus last year was a result of lower markdowns as we lacked the exit of a number of products after last year's June sale. Excluding last year's markdowns related to the exit of these products, gross margin rate favorability was due to decreased buying and occupancy expense related to expense reduction efforts.

Looking to the third quarter, Bath and Body Works Benefits in a line of performance body care was launched the first week in August. This product line features seven forms in eight of our core fragrances with the addition of anti-aging, firming and healing attributes.

In September, Bath and Body Works will launch Pure Simplicity our first natural skin care line. And in late September, 250 stores will launch White Bar(ph) New York, a new line of premium filled candles. This collection of full candles contains significantly better fragrance levels, both in terms of the quantity and the quality of the fragrance oils used. The scents are also more sophisticated and includes such fragrances such as black current and amber. These new product launches will further Bath and Body Works repositioning to the modern apothecary of inner and outer well-being.

With that, I'll turn it over to Ann.

Thank you, Len. Good morning, everyone. Looking back at the second quarter, our earnings increase of 19% exceeded our initial expectations. Resulting from upside at Victoria's Secret and Bath and Body Works. Our gross margin rate declined by 30 basis points. A decline in the apparel merchandise margins was partially offset by leverage on buying and occupancy costs. We achieved a 150 basis point improvement in the SG&A rate on total expense dollars that were about flat to last year.

The improvement in SG&A was primarily due to improved leverage in store-selling expense and lower incentive compensation expense. Our balance sheet continues to be strong. We ended the quarter with $2.2 billion in cash. During the quarter, we repurchased 4.6 million shares of stock, under our $150 million authorization, at a cost of $71 million or an average of $15.40 per share. As of the end of the second quarter, we utilized about $100 million of the total $150 million authorization.

As we indicated on the first quarter call, we believe the economy has stabilized and is beginning to show signs of improvement. However, the timing and the strength of a future recovery remain uncertain.

August sales have been below planned at the apparel group and we are currently running somewhat below our expectations for a low single-digit positive comp. However, we are comfortable with the current third and fourth quarter first call consensus earnings estimates of 4 cents and 74 cents respectively, which represent earnings growth of 13% for the fall. We plan to make up for the August shortfall in September and October based on our activities in those months.

You will see a number of different things at our businesses in September and October, including the bra launches at Victoria's Secret that Grace has talked about, the new product launches that Len has mentioned at BBW, including Pure Simplicity and White Bar New York. Additionally, at the apparel businesses we are planning a change in the pattern of our business.

In both Express and Limited, beginning in September, we will be moving away from activities which discount the whole store, and beginning a cadence of key-item promotions, supplemented by regular sale periods in which we clear our distressed inventory. We believe these changes represent a turning point toward more brand-like behavior and they will enable us to move more quickly to clear what isn't working and capitalize on our winners.

These earnings estimates are predicated on low single-digit positive comps, a roughly flat gross margin rate, and leverage of SG&A costs in both quarters. With respect to capital, we estimate that our spending in 2003 will be about $310 million versus our previous project projection of $375 million. The majority of the decrease relates to changes in timing in real estate remodels at Victoria's Secret and deferrals or cancellations of capital to support various distribution, home office and other projects.

As I said on the fourth quarter call, the majority, about 70% of our spending relates to stores, and is focused on reconstructions. In particular, we are spending behind our initiatives to optimize our real estate in the top 160 malls. The net effect of this activity related the top 160 initiative will be to hold square footage flat in those top 160 malls while positioning our brands for growth in sales, productivity and profit. This activity will result in increased levels of capital spending in 2004 and 2005. Our specific 2003 real estate brands by brand, including openings, closings and reconstructions are included with the information available from our website.

Turning to inventory, we ended the quarter up 5% per square foot of cost, and down 5% per square foot at the apparel segment. The increase in total inventory was driven by increases in core styles at Victoria's Secret, and by new launch product at BBW. We continue to focus on our discipline management of inventory. We expect that apparel inventories will be about flat, up slightly in the fall, on a cost of goods available for sale basis.

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

Ann, thank you. Kathy, we're now ready to take questions. I'd like to set up two parameters, though. We'd like to remind everyone to hold it to one question if you can, we'd like to get through as many people as possible on the call. And secondly, I will serve as the moderator for the questions and pass them out on this end. We have seven speakers so I will help facilitate by dividing up and passing out the questions. We're ready for the first question.

Thank you. At this time we're ready to begin the question-and-answer session. If you would like to ask a question please press "star 1". You will be announced prior to asking your question. If you'd like to withdraw your question, press "star 2". Once again, to ask a question, please press "star 1". Our first question comes from John Morris of Harris Nesbitt.

Thanks. Good morning everyone. Can you give us a little bit more -- obviously you spent some time on the new apparel pattern behavior, I guess the markdown cadence that you're going to be doing in the fall. Just clarify that for us a little bit more, both with respect to how you're going to proceed, you know, by the different stores, and also with respect to timing as well. I think that would be helpful.

John, we'll go to Ann Hailey for that question. Thank you.

We're not going to have a differentiated pattern by store, so the activities will be chain-wide both with respect to Express and Limited stores. We're still working on the details of the timing and the specifics of what will happen, but you will see a shift in September and October from volume that's driven by a promotion of everything in the store, to specific promotional items to drive the traffic and the sales.

Thanks, Ann. Next question?

Dana Cohen from Banc of America.

Good morning guys. I'm going to try to slide in two here. Len, you talked about the promo changes at Bath and Body or the lack of discontinued being a key part of the project improvement, can you give us a sense of how much of the 500 basis points was part of that? And, second, there has been some buzz about you thinking you can get more aggressive on acquisitions? Can you talk a little bit about that and how meaningful that could be in terms of dollars?

Dana, I'm going to throw you off a little bit here. We're going to go for the first question about discontinued product at Bath and Body Works to Tracey Travis.

Okay, Dana, about half of the improvement in gross margin was related to not lapping the discontinued items from last year. The other half was related to improvements in buying and occupancy expense, particularly related to some expense initiatives that the brand has been working on for the last year or so. And has been successful in reducing some head count expenses.

And for the second part of that question on acquisitions to Len.

And, Dana, as it relates to acquisitions our perspective is consistent with our discussions over time around the portfolio, which is we're always in the market and we're always looking for both organic growth opportunities, as well as opportunities that might exist in the marketplace that could augment the capabilities that we already have. Our primary interest is in the beauty and personal care settings and the intimate apparel settings, but at this point, there really is no target as to either the size of potential acquisitions or anything on the horizon.

Thanks, Len. Operator, next question?

Emme Kozloff of Sanford Bernstein. You may ask your question.

Hi, a question for Michael. I wanted to know, Michael, if you could give us some more color on the competitive environment so far on back-to-school and how it might be impacting your business? And maybe some core trends on the seven jeans line that's being tested.

Michael, we'll go right to you.

Okay. In terms of back-to-school, jeans with bottoms in total are not quite meeting expectations but are ahead of last year, that's based on the non-denim product. Within the denim product, the core is at plan or a little bit better. The other department, which is novelty denim is not. Cut and sew knit wear is quite good, but is more than counterbalanced by sweaters which are not. In the woven bottoms product, we have probably the best pant we ever had in that area but it seems to be more or less standing alone so that area is not a plus for us. In the aggregate, it's not quite what we had hoped.

And Michael a comment about Seven?

The Seven jeans line which is a much higher priced line than the balance of our denim is at expectation in terms of its sales.

Thank you. Next question?

Stacy Pak of Prudential, you may ask your question

Thanks. Two product questions, if I may. Michael, could you first detail for us the changes that you anticipate making so that September and October are not disappointing? I hear you on the fashion denim, but what are you going to do to change the mix and how quickly can you chase it? And then second of all, could you comment, someone maybe Len, on the performance of the Benefits line which I guess has been there since early August? And I know you've had the new hair care line in California for at least a couple of months, so if you could comment on that as well at BBW?

Let's go to Michael first.

Okay. In terms of the new pattern of the promotional end of the business, I think one of the really successful things that happened this spring was that redeployed a lot of money from the first half of the spring into the second half based on terrific sell-throughs of certain things which we did discuss and we had wonderful business in the Terry group and paratrooper pants, and in the mini tee, all of which were tremendously funded off of the beginning of the season. We planned very much the same strategy for the fall, based on what has been very, very good early, and have devoted much more of the open-to-receive, if you would, dollars to these items for the second half of the season and we expect those to be much stronger than they were last year.

In terms of the pace of the promotions, all I can tell you is what Ann just told you, we're trying to back off the day-in, day-out promotions, day-in, day-out discounting of the entire store so that we are making money on the best items as opposed to discounting everything equally. And we are trying to purge our inventories of the bad stuff and we will do that much more aggressively in September leaving ourselves open to receive freshly purchased tested goods for the second half.

And Stacy we'll go to Tracy Travis for the question about Benefits and the new hair care products.

As far as the Bath and Body Works Benefits program, it's still a little early, it's been in the stores almost two weeks now, but we're encouraged by the early performance of the product. We're especially encouraged by the strategy of the product because it contains higher efficacy ingredients in our customers’ core fragrances, the favorite fragrances, the ones that she likes and that are the most popular in the DBR line. So we feel that this differentiates us from some of the mass competition that the brand has been experiencing over the last few years, but right now it's meeting expectations, Stacy.

And the hair care?

The hair care in California right now is on plan.

Thank you.

Next question, operator?

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

Good morning. At BBW, direct mail seemed to be a big driver in the second quarter. What are your plans for direct mail going forward for BBW? And holiday plans for intimate apparel, apparel and BBW, what is the change this year from last year? Thank you.

Dana, how many questions was that?

Just a couple wrapped into two sentences.

Just comment on holiday plans, we're going to be getting into that more at the investor update meeting in October so we probably won't get into fourth quarter discussion at this point but we'll go to Tracy Travis for the question about direct mail at Bath and Body Works.

You can expect to see the same level of activity in the third and fourth quarter that you saw in the first half of the year, as far as direct mail for Bath and Body Works. Some of the incremental direct mail that you'll see in fall, however, is targeted towards the new product launches. The Bath and Body Works Benefits launch, as well as the Pure Simplicity launch, so that's comprising a big chunk of the incremental direct mail. And then we will be doing a holiday direct mail campaign similar to last year at slightly higher levels.

Thank you.

Thanks, Tracey. Question for direct mail at DS [ph], Grace?

You need to rephrase the question, I don't think that I understood that that was a question for me.

Okay. Dana, are you still there?

I'm still here.

Your question about direct mail at DS [ph] and with either Tracey or Grace might be able to help on that.

What are you doing in terms of new customer penetration there and obviously you've been talking about integrating Beauty with intimate apparel, how is the customer being transferred to increase your average transaction between the brands?

Our primary strategy in direct mail is to focus on trial of new bras to non-bra customers. And that's consistent with what we've been doing. What's different is we've been heavily reliant in the past on panty sampling as the free offer to generate traffic, and we found that customers respond equally as well to a free fragrance sample. We really have not had an opportunity to go back and study off of our testing. What the benefit has been in terms of the synergy between lingerie and beauty. We just know at this point it works very well for lingerie. We're anticipating that it's also going to have a great benefit to the beauty business as well.

Grace, thank you. Next question, operator?

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

Thank you, good morning everybody, great job on the bottom line in the quarter. Grace, I was wondering on Pink if you could tell us one in the stores it's in, are you noticing any type of cannibalization impact and are there any thoughts to testing stand-alone Pink store at this time? And I was just wondering if you guys could give us an update on marketing for the third quarter and how you see the spending and specifically is there anything else, Grace, or Mike you could detail about plans for the third quarter? Thank you.

Mark, thanks. Grace we'll go to you first for the questions about Pink and marketing in the third quarter.

The Pink business as you know we've been testing for quite some time, and we continue to see that it's a positive driver to comps in the stores that are focused on having Pink. There is some cannibalization to our existing cotton logo panty program. We think that we understand what that cannibalization is much better today than we did six months ago at this point in time. And as we look forward to planning for '04, we have plans in place to address the cannibalization to just reinforce that regardless of the cannibalization, it's still a total comp driver. We have no plans at this point in place to test Pink as a freestanding concept. If you visit Somerset Mall in Detroit, however, you will see a new design package for Pink as its own lifestyle within the existing new store design.

Regarding the marketing question for the third quarter, in terms of the media marketing, both TV and magazine, it's consistent with what we've been doing over the past several years. And the main difference in our marketing expense is as we become more sophisticated in our relationship, in our targeted relationship marketing campaigns, we plan to increase our spending in that area, all of the programs that we're running have been tested and we understand the return on investment there.

Grace, thank you. Operator, I think we're ready for the next question.

Margaret Mager from Goldman Sachs, you may ask your question.

Hi, it's Margaret, how are you?

Good.

I would like to ask about the outlook for gross margin in the second half of the year. Because it was down in the first half both quarters and yet you're saying you think it will be flat in the second half. And I'm just wondering what are sort of the thoughts behind the three major divisions with regard to the gross margin outlook in the second half? How do you go from down to flat, in other words?

Thanks, Margaret, we'll go to Ann Hailey for the question about gross margin in the fall season.

If you look at it by both third and fourth quarter, we are projecting that those numbers will be roughly flat. The primary reason is we are going up against numbers that are not as attractive in the apparel business as last year. So that's the big difference.

Is it planned, up, down, flat, in each division, would you mind telling us?

We don't disclose projections by business of gross margins.

Thanks, Margaret. Next question?

Richard Baum of CSFB, you may ask your question.

Thank you. Good morning everybody. I'm going to try to sneak two in as well. Comment on aroma therapy, there was no comments in the prepared remarks about how it was performing in the second quarter. Also a question for Ann, in terms of making up the shortfall in September and October, I'm a little bit unclear whether you're doing anything incremental to what you had originally planned to do to make it up or whether you simply feel that September and October are just going to be better than you originally anticipated without any --

Richard, thanks. We'll go to Tracey Travis first for the question about the performance of aroma therapy at Bath and Body Works and then we'll go to Ann.

Aroma therapy was in the spring season flattish, that was a little bit disappointing for us. The brand is looking at the line, I'm looking at editing out the poor performers from a fragrance standpoint and looking at adding additional flavors to the line, as well as additional forms to the line that will jump-start sales. But a little disappointing in the first half, flat to last year.

And Ann?

What we would expect in September and October is not a reduction of our promotional spending, if you want to use that term, to drive sales, but a redirection of that money. So we're redirecting it from a lot of direct mail with a percentage off the store or a $15, $25 gift certificate type of offer to promotions of items that we own in quantity that we think will be transaction drivers and also pull other pieces of the store with them. We are testing for those right now. So I think that patterns will change a little and the cadence will change a little, but we're not pulling back on the level of spending, we are trying to spend in a way that we believe is smarter.

Thank you.

Thanks, Ann. Next question?

Kimberly Greenberger from Lehman Brothers.

Great, thank you. Good morning. I have a question on Bath and Body Works. If you could talk about the operating margin there, does it feel like the operating margin has stabilized, I guess at BBW? And what are the opportunities for future improvements? Does it depend on the comp or do you see easy margin comparisons as we go forward and, therefore, the opportunity to improve there?

Kimberly, we'll go to Tracy Travis for that question. Thank you.

Okay. As far as the operating margins, in the second quarter, the operating margins did improve versus last year. We talked about some of the reasons for that. As far as going forward, sales are projected to increase in the fall, and the increase is largely dependent on the success of new product launches like the Bath and Body Works, Benefits and Pure Simplicity. The operating margins that we have had in the past have been pretty high. When you think about the fact that we were in the mid-20s several years ago, we don't expect that we'll be able to get back to the mid-20s. However, as our new products take off, we do expect that comp store increases will grow, the productivity per store will grow and we will see leverage in buying and occupancy and selling expense so that operating margins will certainly improve from where they are today but probably not get back to the mid-20s range that they were at in the past.

Okay. Thanks, Tracy. Could I just follow up with one quick question on that?

Sure.

The SG&A savings you saw or it sounds like compensation savings because of the initiatives at BBW, was this the first quarter that you've seen those benefits?

Yes and we expect further benefits in the fall.

Great, thanks.

Thanks, Kimberly. We have time for just a couple more questions. Next question, please?

Lauren Levitan from SG Cowen, you may ask your question.

Thank you, good morning. Ann, I'm wondering if you could elaborate on the opportunity to continue controlling expenses and getting leverage on SG&A throughout the remainder of the year, and specifically maybe comment on what types of incremental marketing is incorporated in that assumption at BBW surrounding the new product launches? Thank you.

Why don't I take the first part of the question talking about the SG&A and then turn it over to Tracey to talk about BBW in the second half of the year. The initiatives that we have around SG&A and controlling our expenses and actually some of them hit the gross margin line and some of them hit the SG&A line are numerous. We've talked before about our head count.

We continue to have a head count cap. Len and I continue to both review and sign off on every position that is filled, even if it's just a straight replacement as a result of a resignation or a transfer. We have a number of initiatives underway in terms of shared services that we expect over time will provide both better efficiency and better costs. So we have consolidated loss prevention, for instance, which would impact the shrink line, that's an example of one of the cost savings that you will see in the gross margin line, not in the SG&A line.

We're moving to the centralized procurement of non-merchandise activities. Which should enable us to leverage our buying power across all the businesses. So we have a number of initiatives like that that we're really at the beginning of that will take root for the next two or three years and we believe will be provide benefits.

Selling expense, which is our largest expense, is also benefiting from better labor scheduling, better mix between full-time management complement and hourly people where we have more flexibility to schedule them against the traffic-flow patterns. New performance management tools that are rolling out, first at Victoria's Secret, so we expect to be able to be more effective with our selling expense going forward as well.

And Tracy?

Could you repeat the question on Bath and Body Works for the second half specifically?

Sure. I know that in the past when you've had launches we've seen increase in marketing and in sampling and I'm curious if you could just elaborate on the comment that you'd have some SG&A leverage in the second half and what that might mean for BBW relative to their marketing? Should we expect marketing to be up significantly for BBW?

Marketing will be up and you're right, it is related to the two new product launches in the third quarter, so they will be up versus last year. We expect from a dollar standpoint, though, that will be offset by selling expense favorability. So the net increase will be significantly mitigated by that. But, yes, we do have a sampling program tied to the product launches in addition to, as I mentioned before, incremental direct mail to drive people to the store to try the product.

Thank you.

Thanks, Lauren. Operator, we have time for two more questions.

Harry Ikenson from First Albany, you may ask your question.

Thank you, good morning. Could you talk a little bit about cash position and what the possibility planned uses are? Earlier it was described that there was nothing on the horizon, as far as acquisitions, so could you maybe just rank the order of the likelihood of how the cash will be used, if you can't give specifics, just give us some detail? Thank you.

Harry, we’ll go to Ann for the cash question. Thank you.

That's a surprise question, Harry. I think that what our Board of Directors -- I know that what our Board of Directors does is look carefully at our capital structure and in particular, our cash position, and we talk about it on a regular basis. And what we've done and what we'll continue to do is strike a balance between providing some cash reserves in the business, providing some ability to fund growth and acquisition opportunities as we identify them. And I would say that we are very early on in that process. The key is not to rush in and start buying stuff or start growing things just to buy and grow. So we want to have some cash because we've now turned more buyer attention toward offense as opposed to defense. We want to have the funds available to grow as we identify those opportunities. But I can't tell you what the timing is.

And, operator, we have time for one last question.

Okay. Our final question comes from Todd Slater from Lazard.

Thanks, everyone I'm going to try to ask one question disguised as 18 [laughter]. No, just on BBW, you keep saying the second half is going to depend on how the launches will perform, and it just seems like margins of business haven't just troughed but are recovering really nicely and comps are positive here for many sequential quarters without any of these launches, and you've given up, I don't know, $118 million in operating income over the last couple of years even though revenues are still peaking. It just seems to me like there's some pretty good earnings upside here in the second half, especially considering the launches and that this could be a big sort of earnings driver for quite a while. And I'm just curious, how close do you think you are to getting this formula right? Given what you know now?

Todd, thanks, that's a good question to finish the call on and we'll go to Tracey Travis.

Well, we hope you're right, Todd. We're cautiously optimistic about the progress that BBW has made in the spring, particularly in the second quarter where they had a successful June sale and also had some expense leverage as well. While the year-over-year profit improvements in the second quarter were, you know, as we said partially driven by lapping insignificant one-time items for the exit products, the brand did make some real progress in cost reduction and, like I said, the June sale was very successful.

This does represent, as you stated, some clear progress toward accomplishing the financial goals. We do have new product launches scheduled for fall that we are optimistic about. But there's still a lot of work to do within the brand to establish a clear path towards consistent sales and earnings growth. So I would love to think that we could be on a different trajectory than we have been on in the past but we are cautious. And do expect that we'll see some continued improvement in fall, but I don't think fall will represent a total turn around for the brand at this point. There's still a lot of work to do.

I'm curious about what you're cautious about?

Well we're cautious because the new products still represent a fairly small portion of the shop at this time. So we still are seeing daily beauty rituals, which is still a pretty big part of the shop in a negative trend. And that's offsetting some of the progress that we're making in the new product launches. So the brand is really focused on a fine mix there of trying to balance the product assortment to offset some of the declines in some of the core products. Bath and Body Works Benefits will hopefully help that decline to some extent and certainly the direct mail campaign which not only is focused against new products, but also bringing additional traffic in the stores to now see aroma therapy and spa and Pure Simplicity and Benefits will hopefully help as well reactivate some of the customers that we have lost over the last few years.

Thanks. That concludes our call this morning. I want to thank Grace Nichols again, for joining us from a remote location and thank everyone for their continuing interest in Limited Brands.