Bath & Body Works Inc (BBWI) 2004 Q1 法說會逐字稿

Good morning and welcome to Limited Brands, Incorporated first quarter and year end earnings release. This call is being recorded. If anyone has any objections you may disconnect at this time. I would like to introduce your host for today's conference, Mr. Tom Katzenmeyer, Vice President of Investor Relations and Communications. Sir, you may begin,

Thank you and good morning and welcome to the Limited Brands' first quarter earnings conference call for the period ending Saturday, May 1, 2004. Before I begin, as always as a matter of formality, I need to remind you that any forward-looking statement we may make today are subject to our Safe Harbor statements found in our SEC filings. Our first quarter earnings release and related financial information are available from our website, limitedbrands.com. This call is being taped and can be replayed by dialing 1(800)337-6551, followed by the passcode 583.

You can also listen to an audio replay from our website. Len Schlesinger, Vice Chairman, Ann Hailey, EVP and Chief Financial Officer, Grace Nichols, CEO of Victoria Secrets stores, Sharen Turney, CEO Victoria Secrets Direct, and Neil Fiske, CEO of Bath & Body Works, are all joining me this morning. Stuart Burgdoerfer, Senior VP and Controller and Tracey Travis, Senior VP of Finance are also with us along with Amy Preston. We will be available to answer your questions at the end of our prepared remarks. I will start with a brief overview of the first quarter results, then Grace, Sharon and Neil will comment on their brand. Ann will comment on our financials and Len than will close our remarks.

Our GAAP results 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. A reconciliation of GAAP to adjusted results is included in the press release and is also available from our website. For the first quarter sales were 1.978 billion, compared to 1.842 billion last year, comps for the first quarter were up 8%. Gross margin increased 100 basis points in the quarter to 34.2%. The first quarter SG&A rate increased by 80 basis points to 28.1%. First quarter operating profit increased by 10.3 million.

A $40.5 million increase at the Victoria's Secret segment was partially offset by declines of 7.4 million at Bath & Body Works, 3.8 million at apparel and $19 million at the other segments. First quarter earnings per share were 13 cents, an increase of 44% against 9 cents last year. Sales and profit results for all the brands are include in the financial package that is available from our website. I will now briefly review the apparel brands first quarter results and then I will turn the discussion over to Grace.

Express's comps were flat in the first quarter and operating income was slightly below last year due to a decline in merchandise margin. Women's results were disappointing in the quarter. Growth in the Wear to Work category driven by pants was more than offset by declines in other categories, particularly knits tops. Men's results exceeded expectations with men's first quarter comp performance outpacing women's. The shirt category continues to show strong growth and dress pants and knits also posted solid results. Limited Stores, also, reported flat comps in the first quarter and it's operating loss was about even with last year's results. Strong growth in pants driven by crops was offset by declines in dresses, accessories and softer than anticipated growth in knit tops.

That concludes my prepared comments. Now I would like to turn the discussion over to Grace Nichols.

Good morning, everyone, and joining me today is Mark Weikel, who is the Chief Operating Officer at Victoria's Secret Stores. We are pleased with Victoria Secrets stores first quarter performance. We achieved 15% comp store sales growth and a significant increase in operating profit. Our sales performance was primarily driven by the bra category. The March launch of the Body by Victoria shaping full coverage bra, or the It bra, was the most successful launch in our recent history and far exceeded our expectations. Marketing support which included national TV media, CRM and a teaser media campaign that was new to last year was instrumental in achieving our results.

In addition to Body by Victoria growth in the bra category came from successful style and productions in the Angels and very sexy sub brands. In April our introduction of a new unlined demi bra with lace to our Angels Collections met our expectations. Currently stores are featuring a very sexy summer theme which features the sexy collection and a new very sexy convertible bra. The semi-annual sale will begin on June 14th and run for three weeks this year compared to four weeks last year. Shortening the sales by one week was a strategic decision to quickly get back into our regular price selling.

Thank you and now I am going to turn things over to Sharen Turney.

Thank you, Grace, and good morning, everyone. Victoria's Secret Direct continued the strong momentum from fall, 2003, into the first quarter. Our sales increased 13% on an 8% increase in circulated pages. We were able to grow our orders by 9% and increase our average order size by 4%. Moreover we enjoyed sales increases across our three primary businesses, intimate apparel, swim and clothing. In conjunction with our sales increase we were able to build our three-month file, boding well for our future.

Operating income improved significantly, driven by the sales growth, merchandise margin expansion and buying and occupancy expense leverage. Internet sales continued to grow as a percent of our total sales, aided by the use of online advertising and search engine marketing. But the primary driver is still our catalog contact. By calling out to her, there is always more online we actively drive customers to our website. Intimate apparel growth was driven by strong sales in bras, both the Very Sexy and Body by Victoria's collections are performing very well, benefiting from the new launches of our key items.

Consistent with what Grace mentioned both the Very Sexy convertible push up bra and the Body by Victoria's shape and full coverage bra exceeded our expectations. Strong growth in swim sales is due to a combination of successful strategy. One, we increased our beginning inventory by bringing in merchandise earlier in order to improve our fulfillment rate and reduce back orders. Two, we enhanced our appeal to the younger customer with the Beat Sexy collection. Three, we more competitively priced our core Miracle swim collection while maintaining margins. Finally, we looked externally for new product ideas and expanded our third party branded products assortment. The increase in the clothing category was driven by Wear to Work and knit tops.

For Wear to Work we continue to be pleased with our Body at Work collection, particularly the new Christie Flare pants, our best selling pant ever. In knit tops we launched a Tee Shop on the web to leverage our bra top and One by One tee. For the second quarter circulation is planned to be up mid single digits with the emphasis on the spring sale books early in the quarter and then transitioning to new fall products in July.

Thank you. With that I will turn it over to Neil.

Thank you, Sharen, and good morning, everyone. Bath & Body Works first quarter comps increased at 7%. Sales growth in the quarter was fueled by the Aroma Therapy theme in February and the bloom theme in March. The April theme of Glow from Head to Toe did not meet our expectations. Our new product launches, Botanical Nutrients and organic hair care line and Henri Bendel home collection met our expectations in the quarter. Merchandise margins were about flat in the quarter as we reduced the number of in-store promotions and effectively utilized incremental direct mail with targeted offers to drive traffic into the store. Our plan for operating income growth for the spring season is weighted heavily towards the second quarter as we target brand building investments for the beginning of the season to support new product development and launches.

In the first quarter operating income decreased by 7.4 million, primarily due to higher occupancy and product development costs and to increases in marketing and launch related activities. The stores are currently featuring a summer theme focused on True Blue Spa. We are also testing the new Henri Bendel personal care line in about 100 stores. As a component of our strategy to upgrade our fragrant body care business Henri Bendel will represent indulgence and luxury. Our June semi-annual sale will begin on June 7 and run for four weeks. As was the case this past December and January, this sale is planned to be a much bigger and impactful event than last year. In July we will feature a cross brand theme focused on summer travel.

With that I will turn the discussion over to Ann.

Thank you, Neil. Good morning, everyone. Our first quarter earnings results of 13 cents per share represents a 44% increase over last year and is at the high-end of the 11 cent to 13 cent range we communicated in mid March. The gross margin rate improved by 100 basis points, primarily driven by an increase in merchandise margin at Victoria's Secret. The SG&A rate increased by 80 basis points. This increase is primarily the result of a timing difference related to charitable contributions, a reserve related to a state legal matter, and increased incentive compensation costs. We achieved leverage in store selling expenses, our largest expense category.

Turning to the second quarter, we are comfortable with an earnings per share estimate at the low end of our previous guidance of 23 cents to 26 cents per share. This estimate is based on high single-digit comps, a slight decline in the gross margin rate, and slight SG&A leverage. For the year, we are projecting earnings per share growth of 14% to 17% versus last year's $1.11 result. These numbers are predicated on a mid single-digit comp and flattish gross margins and SG&A rates. Now that we are emerging from a period of time in which we maintained a defensive posture we are beginning to invest in initiatives that will drive top line growth. Our forecast includes expenditures to support these strategic initiatives. Turning to the balance sheet, as you know in March we completed our repurchase of $1 billion of our common stock through a modified Dutch Option self tender.

We repurchased 50.6 million shares of stock at $19.75 per share. This morning we also announced that our board has authorized a $100 million share repurchase program. With respect to capital, our estimate for spending in 2004 remains between 500 and 550 million. Our inventories ended the quarter up 10% per square foot at cost and 12% per square foot at the apparel segment. These increases were driven primarily by timing differences. On a cost of goods available for sale per square foot basis, i.e. our cash investment and inventory over the quarter, total inventories were up 4% in the first quarter and apparel inventories were up 2%. We expect that inventory investments for the second quarter will be similar to the first.

With that summary I will turn it over to Len.

Thanks, Ann, and good morning. I am just going to take a few minutes to talk about a significant initiative that the company is in the midst of undertaking. In January of this year we began an initiative to scope out the process system and organizational changes and finance merchandise planning and the collection analysis and use of customer data. Internally we are referring to this multi-year transformational initiative as Project Insight. Findings from the initial three-month scoping study suggests that there is significant opportunity to substantially increase our capabilities as an enterprise.

In finance these opportunities include substantially improving the speed of decision making through easier, faster access to data, standardization of processes and investments in supportive technology and reducing the cost of transaction processing and accounting activity through the creation of financial shared services, process redesign, and increased use of common technology. With respect to merchandise planning and demand chain analysis, fundamentally we are trying to accomplish three things. One, to plan better assortments based on merchandise attributes such as fit, fabrics, price point and fashion tier. There is a lot of opportunity here.

To the extent that we do this well today, we do it with muscle, not with tools. Two, by and float quantities to the stores that are based on store tiers which reflect local consumer preferences along with the physical realities of each individual stores' space. And three, increase our speed to market and maximize agility and flexibility so that we can move key decision points much closer to the time of customer purchase, such as fabric cut decisions and also by creating upstream visibility to the production and logistics activities and status. Again, although we do this work today, we do it with muscle. And we believe when supported with clear process and integrated technology we will be able to drive substantial incremental sales dollars and improve margins through lower markdowns in the brands.

And finally with respect to the collection analysis and use of customer data, we believe there are material opportunities to substantially increase the capture of data, maintain it in a manner that facilitates effective analysis, and substantially increases the sophistication of our customer contact. We are also exploring the systems and other infrastructures needed to do support growth in our direct business. Intuition and preliminary analysis indicates that the most significant payoff from this project will relate to the merchandise planning and allocation and demand chain activities. As we move forward we've hired a small four team of executives that have substantial accomplishments and experience in this kind of work.

This core team will work with the leaders of our businesses over the next several years to do the necessary scoping and design work and to implement this exciting set of changes. This is clearly a multi-year transformational initiative and we are clearly in the earliest stages of that work. As a result we are not yet prepared to provide estimates of the ultimate impact on our financial results or the cost. We obviously believe that the aggregate impact will be positive or we would not go forward. At this point we expect to spend between 50 and $60 million in the balance of 2004, with the substantial majority of it being expensed. At this point it's way too premature to project the total cost of the project beyond that.

Thanks and I will turn over the discussion back to Tom.

Thank you, Len. That concludes our prepared comments. At this time we would be happy to take any questions. Operator because we are at different locations I, again, am going to serve as moderator. We would like to remind everyone one question per person, please, so we can get to as many as possible. And I also want to remind everyone that our annual meeting begins at 9 so we'll have to depart shortly before 9 to attend that. Operator, we are ready for the first question.

Thank you. Our first question comes from Brian Tunick of JP Morgan. You may ask your question.

Thanks, good morning. First question is for Grace. Sharen mentioned some of the third party brands at Victoria's Secret Direct and I was just wondering if you could elaborate, are we going to see anything in the stores as far as third party brands in the coming season?

Thanks, Brian. Grace.

Sure. We've always had a mix of some third party brands in our business. We haven't talked about it openly but we have a lot of partnerships out in the marketplace. Specifically as we go into the fall season we have a significant introduction in a limited group of stores with Shantelle(ph) Thomas, she's a French designer, and it's a partnership with Sarah Lee Courtauld. We also have been testing the shock absorber was recently introduced in Boston. So we are on the same page in terms of looking for more of these opportunities that compliment our own brands, specifically with the objective of bringing new customers into the portfolio.

Thanks, Grace, next question?

Tom Filandro of SAG, you may ask your question.

Grace, a question for you. Can you just give us an update, please, on pink, what's going on? How many stores do you have? Just, maybe, a general view of the incremental pop to sales you are experiencing on an annualized basis?

I am going to let Mark answer that question. He has all the numbers at his fingertips.

Thanks, Grace. Pink is meeting our expectations. We are in about 498 stores at the end of the first quarter. And we are right on target.

Any comments on what the incremental pop in business is on an annual basis?

4 to 5%.

Wonderful. Thank you.

Operator, next question?

Stacy Pak with Prudential, you may ask your question.

Hi. I guess on the earnings, can you just chat about what's changed from your previous feelings that would cause you to be more conservative on Q2 and why we should see a pick up in the balance of the year, and maybe comment on where the spending on this initiative that Len was talking about should show up and when?

We will divide that question in two. We'll go to Ann for the first part on earnings.

As you know, Stacey, guidance is a projection at a point in time. So we are at the low end but certainly still within the range that we predicted earlier in the year. And there is an amount built into the second quarter and the go forward to cover the numbers that Len referenced in terms of the Project Insight.

But is that the new piece, Ann, that causes low end versus midpoint?

You know, Stacey, there is no one new piece. That is certainly one of the factors but we re-evaluate everything on a regular basis. We look at margins. We look at each brand's performance. We look at the inventory and what markdowns we expect to take to move it. So I can't actually point to one specific item that drives our number up or down.

Thanks, Stacey. Operator, we're ready for the next question.

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

Thank you, good morning, everybody. Neil, I was wondering if you could talk about some of the things that put some pressure on costs, product development, anything you can go into specifically as far as new launchings for the rest of the year? And then on the direct mail side the impact there and what that's going to be going forward, also. Thank you.

Okay. So as Ann referenced earlier our operating income was impacted by a reserve related to a state legal matter. Also in addition our operating income growth for the spring season was heavily weighted toward the second quarter, specifically the targeted brand building investments that we made in the first quarter were around building our product development pipeline, bringing new products to market, improving our in-store experience through better marketing and visual support, an increase in our direct mail circulation to drive new customers into the store, and some higher occupancies, primarily related to our flagship store initiative. With respect to the trade-off of newer in-store deals and more direct mail spending, as you know that has been a strategy of ours for the last year or so and we are comfortable with the way that that's working and we are spending a lot less money in in-store deals and using those markdown dollars to support our direct mail program. And generally speaking have been pleased with the results that we've gotten.

Thanks, Neil. Next question?

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

Good morning, everybody. My question is for Len. This Project Insight initiative, because it is so important for you guys, could you talk about who are the executives that are in charges hired from the outside, I assume but not necessarily, and who they will be reporting to and exactly what will be their [inaudible]?

We've hired five senior executives, all of them from the outside. And all of them people who have played either leading consulting or operating rolls in a broad array of organizations on similar kinds of implementations. The day-to-day leadership of the project is in the hands of a gentlemen by the name of he Ian Downs who just joined our organization, having come to us from Cap Gemini where he headed their North American IT transformation, business transformation practice for all of North America. And he was involved with us in the phase I scoping activity for Project Insight. That group right now currently reports to Nick Lahowcheck(ph), who is the President of Limited Logistics Services and is taking on the incremental responsibilities associated with providing the executive leadership oversight of the Insight project reporting directly through to me.

Thank you, Len. Next question?

Pat Slater with Lazard, you may ask your question.

Hi, good morning. Could you discuss the progress on your IBD initiatives and if that is generating some increased conversion and when you see that being rolled out fully in all the brands? Thank you.

We'll go to Len for that question.

We're extraordinarily pleased with the continuing progress of the integrated brand delivery activities which really now has become basically the worker stores. It's progressed to the point where all of our brands have reviewed all of the work and have transitioned us to what we now call Lobos Limited Brand Operating System and enables us to have standardized systems and processes across all of our brands and not only improve the quality of our execution but also be able to provide better career opportunities for our people by being able to transition people from brands to brands in a given geography with the only requirement fundamentally being to learn the product and the selling model. Beyond that at this point the continuing evolution of the technology into more decision support tools and automated labor scheduling tools continues apace and the finishing of the roll-out of the POS technology in the brands continues to be handled on a pay as you go basis.

Is that going to get rolled out into, I think it's in Victoria's Secret now. Is that going to get rolled out in other brands?

It's fully rolled out in the Victoria's Secret organization.

Is that planning to get rolled out into other brands?

Our plan is to role it out enterprise wide on a pay as you go basis.

And has that resulted in any increase in conversion.

There are so many variables that drive those kinds of outcomes that we don't handle it in terms of direct cause and effect but clearly we are very pleased with what we have achieved and we continue to be committed to the evolution of the technology and the project.

Thanks. We are ready for the next question, operator.

Emme Kozloff of Sanford Bernstein, you may ask your question.

Thanks. I'm still having problems reconciling your original guidance for a declining gross margins to the pretty strong results you put in. Given that your monthly comments on merchandise margins were flat in February, down in March but in line with the plan and up in April, but in line with the plan. So it seems like the quarter's upside had to also be the result of leverage of buying and occupancy on the 8% comp. Is that right? And if so how much of the 100 basis point increase in gross margin was that leverage? And then just, can you tell us what percentage of COGS buying and occupancy represents? Thanks.

Emme, we are going to go to Ann Hailey for that question.

That was several questions. I am going to try as best I can to get to the answers. In total our MMU rate for Limited Brands improved by about 100 basis points. For the most part all the brands improved. Apparel was down slightly in terms of MMU. In terms of buying and occupancy, we were flat as a percent of sales to last year.

So basically the comment about in line with plan for March and April in the comp calls was in line with revised plan since the original plan was gross margin down slightly?

We update every sales call how we're doing versus our expectations.

And then what percentage of COGS is buying and occupancy?

I'm going to get back to you on that number.

Okay, thanks.

Thanks, Emme. Next question?

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

Hi, everyone. I have a question for Neil. Looking back if you could do first quarter over again what changes would you make and I guess really across the board merchandising, operations, et cetera?

Neil, we will go out to you for that. Thank you, Barbara.

Okay. So our first two themes of the quarter were very strong. Our Aroma Therapy theme got out of the gates ahead of our plans, actually, and Aroma Therapy relaunch to relaunch month to month from February, '04, to February, '03, was up by about 75%. That was a great theme. Our second theme was Bloom which was an explosion of color and seasonal fragrance and that also was a great theme. Where we really missed was in our third theme called Glow from Head to Toe. And we took a calculated bet to go after spring skin care and put the emphasis on performance skin care products. And our hindsight on that was that the market was still very much in sort of an Easter or floral, more pastel kind of look, and we were just not right for that particular consumer mind set.

That was just two serious?

Two serious, yeah, and there is a fair amount of gifting business around Easter that we missed this year as a result of putting the emphasis on skin care. And we didn't build into Mother's Day with the momentum that we did last year as a result.

Thank you.

Thanks, Barbara. Our next question, please?

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

Good morning, everyone. Can you talk a little bit about initiatives as we look out towards the back half of the year. Express, do you see a big change with Express Design Studio occupying more stores and at Victoria's Secret initiatives for sleepwear going forward? Thank you.

Dana, we will split that up. We'll go to Tracey Travis, first, for some commentary about Express and then to Grace Nichols for sleepwear.

Express Design Studio is being tested right now in about 80 stores. Overall we are pleased with what we see in those stores in terms of the performance. And the initiative will be rolled out to all stores with a launch in late July on Express Design Studio for all Express women's stores.

As we look at the holiday season our holiday season is going to be dependent upon the momentum that we have going into the fourth quarter with three very good bra introductions already behind us. In addition to that, the dependency of a very good holiday launch. Third, the overall gifting strategy that in fact does include bras and panties as a significant piece of winning a holiday. In the sleepwear area specifically, our glamour business is running up double-digit comps and we think that that will bode well for us for holiday and what's really happening is the casual sleepwear business is that there's a trade-off between the pink casual sleepwear and the other casual sleepwear. And we are planning our business accordingly as we go into holiday.

Thank you.

Thanks, Dana. Next question?

Neely Tamminga of Piper Jaffray, you may ask your question.

Great, thanks. Tom, help me direct this question. With respect to Limited Brands and this cross marketing promotion going on right now with the Heavenly Fragrance can somebody talk more about what's going on there and then also talk about what's in future efforts and endeavors with maybe some of the other brands in the umbrella?

Neely, we will go to Ann Hailey for that question.

Thank you.

In all our brands, but particularly our apparel brands, as we've been talking about we have eliminated the heavy level of indiscriminate discounting and promotion that went on in-store, whether direct mail or coupons handed out in the store. In lieu of that we are trying to identify brand right promotions that drive incremental traffic that are attractive to the customer. So you will see both Express and Limited Brands testing a variety of those. The tie in to the fragrance at Victoria's Secret is something that we are in early stages of testing. We believe it's brand right and it has the added advantage of providing a great sampling opportunity for the Victoria's Secret brand.

Thanks, Neely. Next question, please.

Marsha Jong with Sanders Morris & Harris, you may ask your question.

Great, thank you. Good morning. Could you update us on your top 160 real estate initiatives? Thank you.

We will go to Tracey Travis, Marsha, for that question. Thank you.

Yeah, we are on track with our top 160 real estate initiatives. As we had mentioned on the last call we completed about 13% of the work in the end of 2003. We will reposition another 17% of our fleet by the end of 2004. The large square footage stores at Victoria's Secret continue to be quite successful. We are doing grand opening strategies with those stores and seeing significantly improved performance with those stores. And the other part of that strategy is obviously the conversion of Bath & Body Works stores to flagship stores carrying additional third party products that the core stores don't have as well as the conversion to Express dual gendered stores from standalone men's and women's stores.

Thanks, Tracey, next question.

Dana Cohen of Bank of America, you may ask your question. Jeff Stein of Key McDonald, you may ask your question.

A followup question on Project Insight, I'm wondering if you can talk about how this is expected to pay back and when it's expected to pay back? Because it looks like it's about 50 to 60 basis points of SG&A over the balance of the year and that's a pretty heavy load.

Let me talk about it as a delivery level then I will turn it over to Stuart to go through the numbers with you in some detail. Clearly what we are talking about here is in terms of opportunities, there's a set of opportunities that essentially come from the consolidation, integration and improvements of efficiency in financial systems part of the organization. And there are clearly going to be significant opportunities on the customer side. But as we talked about on the call, our expectation at this point is the biggest payoff to be, to the extent these payoffs exist, come from the management of the command chain and the merchandise planning and allocation activities, quite specifically around issues of flow, tiering, assortment planning, et cetera and so forth. That being the case let me turn it over to Stuart to show you how the funds flow over the year before we get into the bigger picture later on in the year about the overall business case.

With respect to 2004, Len mentioned 50 to 60 million of total spending and we would expect 10 to 12 million of that to hit SG&A in each of the next three quarters. That's the extent at which we are able to estimate it at this point.

Thanks, Stuart. Next question, operator?

Kimberly Greenberger of Lehman Brothers, you may ask your question.

Thank you. I'm wondering if you can just talk about one or two of the initiatives to support top line growth that you are working on to the extent that you can speak about them? And also if you can tell us what the EPS benefit in the first quarter was from the Dutch tender or other share repurchases?

I will answer the last part first, cause it's the simplest. There was basically no EPS benefit in the first quarter from the Dutch retender as we have calculated. With respect to growth initiatives, we have a variety going on. You've heard a lot about pink and we have investments in the balance of the year to roll-out pink to the remainder of the stores in the chain. That's a start designing construction resources, that's capital and that's the resource of Victoria's Secret to get it done. Express Design Studio is a major project transforming the Express brand from a fast fashion that changes every quarter brand to a brand that has a more sustainable business, repeat business, we hope, predicated on roughly half the business when it's all said and done, being a ware to work assortment of which Express Design Studio is a part.

So we are expending resources again on fixturing, on the design to support Express Design Studio and on the rollout of that in a material way for the fall '04, season. Our [inaudible] as you know within about ten standalone stores which we have now shutdown and we are putting back into the Victoria's Secret beauty and so we are supporting that roll-out. We have the White Barn Candle which is rolled out in many of the Bath & Body Works stores and we will be rolling out to more of those and we are also to hiring new executives to head the Bendel brand and we are doing exploratory work on what that brand can mean to us and how we can capitalized on it in a growth way going forward. That's just an expansion on some of our most key initiatives.

Thank, Ann.

Thank you. Operator, we have time for two more questions before we have to head to our annual meeting.

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

Yes, thanks, good morning. The question is for Len. If you could just give us a little bit more color on time frames for Project Insight. What kinds of things can we expect to see or results for the various phases of the project, just some idea of the time frame, thank you.

If you look at it at this point I think it's a safe bet to consider two or three things. One is that the business case will get crafted over in a very serious way over the next 6 to 9 months and we can be in a position, I think, certainly as we come into the third quarter, latter part of the year, to provide substantially more specificity both about the expected spending and the expected returns for each part of the Insight project. Secondly in terms of time frames, I think it's reasonable, based on at least our observation of other organizations that have gone through these types of activities, to expect that both spending and activity and economic return will get staged over a 3 to 5 year time frame.

Thanks, Len. Operator, one last question.

Joe Teklits of Wachovia Securities, you may ask your question.

Morning, hi. Thanks, everybody. I guess this goes to Tom or Ann in relation to Express and Limited as well. Can you chalk up Q1 women's disappointing business in Express and Limited looking a little disappointing as well, as just a fashion miss or is there some sort of greater issue going on there? And also maybe speak to the impact of your new promotional strategy, i.e. a big sale?

We are going to go to Tracey Travis for that question.

Okay. With respect to Q1 performance for the apparel brand there were a couple of things going on. Obviously the change in promotional strategy resulted in much lower promotional activity during the course of the season. We had our mid season sale and then the rest of the seasons and the quarter we were really promoting with key item drivers in the store and key category drivers within the store. We feel and are very committed to this strategy. We feel that it is more brand appropriate but given the level of incentives' marketing that we were doing last year, particularly within Express, it does have a negative impact on sales. And Q1 was a heavy promotion quarter for Express. Q2 was less of a promotion quarter for us.

So we don't expect to see as significant an impact related to the change in promotional strategy on the top line sales line. The second issue that both businesses are experiencing is in tops. I mean, one of the key assortment drivers for the season that both businesses invested in was tops. And those also were to be used as key item drivers. Both the top selection at Limited Stores as well as Express are not performing up to expectation. And we have had to take markdowns on those tops to move the items.

Thank you, Tracey. That concludes our call for this morning. We thank everyone for joining us and for your continued interest in Limited Brands.