Bath & Body Works Inc (BBWI) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen and 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, Senior Vice President Investor Media and Community Relations. Please go ahead,sir.

Thank you. Good morning and welcome to the Limited Brands second quarter earnings conference call for the period ending Saturday, July 31, 2004. Thank you for joining us today. As a matter of formality I need to remind you that any forward-looking statements we may make today are subject to the Safe Harbor statement found in our SEC filings. Our second quarter earnings release and related financial information are available on our website, limitedbrands.com. As always the 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, Ann Hailey, EVP and Chief Financial Officer, and the co-leadership teams at the brands, which includes Grace Nichols and Mark Weikel at Victoria's Secrets stores, Neil Fiske and Tom Fitzgerald at Bath & Body Works, Ken Stevens and Paul Raffin at Express, are all joining me this morning. Stuart Burgdoerfer, Senior VP and Comptroller, and Amy Preston, VP of Investor Relations, are also with us. Len will open the call with some brief comments. Ann will follow with a discussion of our financial performance and then Grace, Neil and Ken will conclude with overviews of their brands. We will all be available to answer your questions at the end of our prepared remarks. Our GAAP results, that's G A A P 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. Now I'd like to turn the call over to Len Schlesinger.

Thanks, Tom. I'm pleased to report that sales and earnings momentum continued at Limited Brands with record results for the second quarter and spring season. Comparable store sales were up 9% in the second quarter and up 8% for the spring season. Adjusted second quarter earnings increased 53% to 29 cents per share and spring season earnings increased 41% to 41 cents per share. These results reflected significant tactical and strategic progress that's been made in each of our brand. And while we are happy with these results we are still in the early stages of implementing core strategies which will enable us to build a family of the world's best fashion brands and continue to deliver sustained growth and value for our shareholders. These strategies involve escalating innovation, elevating quality and engaging in direct to our customers while continually improving the operational capabilities and talent to support our growth. First, we will exploit the capabilities of speed and innovation. We plan to substantially increase our product line commercialization capability and increase product innovation through a focus on multiple pathways including internal design, centered design team and outdoor separates. We are still in the very early stages of developing and testing third party product and we expect to significantly pick up the pace of this activity over the next year. Second, we will provide sophisticated merchandise at a great value by developing products that engage our customers emotionally, meet their functional and technical expectations and encourage them to trade up. Our initial successes in this arena exclude pink and Henri Bendel home fragrance and we've seen an encouraging early response to Express Design Studio that we will talk about late in the call.

Third, we will engage and delight our customers by creating compelling instore marketing and visual presentation by revamping our promotional cadence and by building a robust customer marketing platform. As you all know, we've eliminated most of the brand eroding in promotional activity that discounts the entire store in favor of more targeted promotions combined with tactful quarterly or semi-annual sale events. Fourth, we continue our longstanding effort to improve the operational capabilities and systems to support our growth. We've already implemented solutions in numerous areas including human resources, payroll and non-merchandise procurements. Finally, we will continue to build and develop our talented team. And on that note I am particularly pleased to announce the new leadership team at Victoria's Secret Beauty. I would like to first thank Robert -- Robin Burns for her efforts and leadership at VSP over the last six years. She left the business in an incredibly strong position with a strong and deep management team. The fact that we are able to announce the promotion of two existing Victoria's Secret Beauty executives to lead that brand is a simple reflection of the strength of that team. This morning we are announcing that Jill Granoff, formerly the Executive Vice President and Chief Administrative Officer, has been promoted to Chief Operating Officer, and Sherry Baker, formerly the Executive Vice President and Chief Marketing Officer, has been promoter to President of Victoria's Secret Beauty. Jill will provide leadership and direction for the operational outfit of the business and Sherry will provide oversight for merchandising, marketing and design. Both Jill and Sherry have distinguished careers in the beauty industry and I know they will be great leaders for the brand. We are excited and we look forward to a smooth and seamless transition at Victoria's Secret Beauty. In summary we believe that the implementation of these strategies will drive continued growth of sales and profit at Limited Brands. To discuss the details of the second quarter let me turn the call over to Ann Hailey.

Thank you, Len. Good morning, everyone. Our second quarter earnings per share result of 29 cents, an increase of 53%, exceeded our expectations, primarily due to better than anticipated gross margins. For the second quarter sales were up 10% to 2.211 billion compared to 2.014 billion last year. Comps for the quarter were up 9%. Gross margin increased 120 basis points in the quarter to 36.1% and the SG&A rate improved by 60 basis points to 25.8%. Second quarter operating income increased by 56.6 million. Operating income dollars increased in all three segments, at Victoria's Secret by 13.9 million, at Bath & Body Works by 24.6 million and at apparel by $18.6 million. Our results include 2 cents of accretion in the quarter from returning value to the shareholders to our $1 million tender offer earlier this year. Sales and profit results for all the brands are included in the financial package that is available on our website. Regarding our financial position we ended the quarter with 2.1 billion in cash. We have substantially completed our $100 million share repurchase program. As of the close of business yesterday we had spent 90.5 million and bought back 4.7 million shares at an average cost of $19.36 per share. Following the completion of this program our board has already authorized an additional 250 million share repurchase program. This authorization reflects our board's confidence in the strength of our business and our commitment to returning value to our shareholders. With respect to capital spending our estimate in 2004 remains between 500 and 550 million.

On a cost of goods available for sale per square foot basis, which measures our cash investment in inventory over the quarter, total inventories were up 2% in the second quarter and apparel inventories were flat. Turning to our outlook for the remainder of the year, we are comfortable with the current third quarter earnings per share consensus estimate of 6 cents per share. This estimate is based on mid to high single-digit comps and roughly flat gross margin and SG&A rates. We expect the total inventories on a cost of goods available for sale basis for the third quarter will be up and apparel inventories will be about flat. The increase in overall inventory is related to new product introductions and accelerated delivery of holiday merchandise at Victoria's Secret Beauty and at Bath & Body Works. For the year, given the upside we delivered in the second quarter, we are increasing our earnings per share estimate to a range of $1.30 to $1.35 per share predicated on mid to high single-digit comps, a slight improvement in the gross margin rate and a roughly flat SG&A rate. August sales to date are running slightly below our initial expectations for a low single-digit positive comp, resulting primarily from softness in apparel results. Ken Stevens will provide more information on Express later in the call. That includes my prepared comments. Now I would like to turn the discussion over to Grace Nichols.

Thank, Ann, and good morning. Mark Weikel, our Chief Operating Officer, is also joining me this morning and is available to answer your questions. For the second quarter Victoria's Secret stores reported a 7% comp and roughly flat operating income. This was due to the planned costs associated with the roll-out of pink and our top 160 store initiatives. For the spring season comps increased 11% and operating income was up significantly. Our second quarter sales performance was primarily driven by an increase in bra sales, the national launch of pink and the successful semi-annual sale. The semi-annual sale delivered a solid comp performance on top of a strong comp performance last year. The first day of the sale event was the single largest sales volume day in Victoria's Secret stores' history. Pink exceeded expectations in the quarter with the continued roll-out to a total of 846 stores by the end of the second quarter. Pink cotton panties performed consistently throughout the quarter. The pink sleepwear assortment received a positive client response during the July event. Pink's roll-out was substantially completed by July with only 86 stores remaining. Currently, stores are featuring the body by Victoria's Shaping Full Coverage bra, or the It bra that was initially launched in March. The relaunch is supported with national advertising including the teaser campaign and a panty sampling and we are pleased with our August start.

In September stores will feature the new Satin Angels lift bra which will be supported with national media and a panty and Angels EDP sampling offer. In late September we will feature the New Body by Victoria's shaping demi, an updated version of our most popular bra. This will be accompanied by a new advertising spot and a Body by Victoria panty and EDP sampling campaign. Turning to the holiday season we are concentrating our efforts to distinguish the Victoria's Secret brand as the destination for holiday gifting. Our strategy focuses on a holiday bra launch, investment in upgraded packaging, upgraded visual presentation and transaction driving gift with purchase programs. Thank you all and now I think I will turn things over to Neil.

Thank you, Grace, and good morning everyone. Tom Fitzgerald, our CFO, is also with me this morning and is available to answer -- answer questions. We are very pleased with Bath & Body Works' second quarter performance. Comps increased 20% and operating income increased 24.6 million. Operating income for the spring season increased 17.2 million or 25% to last year. Sales growth in the quarter was fueled by very strong response to our semi-annual sales theme, importantly because margins are still very attractive in sale, profit also grew significantly. Outside of the sale period volume for the quarter was slightly down to last year; a result of our strategy to concentrate promotional activity in the two big semi-annual sales to reduce the quantity of instore deals and to cut back dramatically on cash off promotional offers. We believe our spring performance on top of last springs 16% profit growth is a clear signal that the brand transformation continues to be on the right track as we are delivering healthy profit growth while fundamentally reinventing the brand along several key dimensions. Turning to fall our profit plan is heavily weighted towards the fourth quarter and holiday as we focus on 3 brand building initiatives in the third quarter, winning at holiday, investing in our new product pipeline and testing major new products in advance of their national launch. Currently stores are featuring a true blue spa theme focused on in-home spa regimens and the Great American Hand Soap event. At the end of August we will launch the Perfect Autumn, a collection of home fragrance products in the fall sense of pumpkin, maple and green apple. Additionally we will feature a new fragrance in our daily beauty rituals line, Black Raspberry Vanilla. Similar to the Peony launch in March we see this theme as the official kickoff to fall. Aroma therapy will be the focus of the stores in late September featuring a new line of hydrotherapy products.

At this time we will also expand the distribution of Henri Bendel Personal Care from 100 to 200 -- 275 stores and begin testing a Provence expired line called Lukavau Deminen(ph), developed in partnership with Loxitane, in 250 stores. Our holiday season begins on October 18 consistent with last year. We are enthusiastic about this holiday season for several reasons. First, this year's assortment tested stronger with our customers than last year's assortment and garnered strong reviews from beauty editors at our Christmas in July event in New York. Second, our Perfect Christmas Collection is bigger and better than last year and includes personal care items. Finally we will be leveraging holiday to nationally launch a highly indulgent new body care line called Petidulcie(ph). We look forward to sharing more about holiday at our October investor conference. With that I will turn the discussion over to Ken.

Thanks, Neil. Good morning, everyone. Let me start by saying that I am pleased to be on the call for the first time representing Express. Paul Raffin, my co-leader is also available on the call to answer any questions. First I will talk about the new plan for the businesses we've developed and then update you on our second quarter results. Express is in the beginning of a turnaround after three years of inconsistent results. We are repositioning the business for consistent growth in three key areas. One, elevating and bringing to life the new Express brand. Two, providing a preferred shopping environment in a predominantly dual gender store format supported by a sophisticated and integrated marketing approach. And, three, improving our core processes and talent base to improve productivity and accelerate profit growth. First I'd like to briefly describe our new brand position. Our vision for the new Express brand is to become a young, sophisticated fashion brand that is the destination for both work and casualwear among fashion forward young men and women. Our vision starts with four key principals. Number one, a designer orientation emanating from our New York based design teams. Two, great fitting pants. Three, complete wardrobing for work, going out and casual. And, four, superior product quality.

We believe the designer voice of the brand presents us with a unique customer proposition and have adopted an integrated product, marketing and service strategy that is the Express Design Studio for EDS. We tested the first evolution of our new vision in spring '04 with promising results in 80 stores and are expanding the concept to all stores this fall. We believe that the focus on offering a predictable fit with a consistent, sophisticated fashion perspective will ultimately drive more consistent growth. Second, our go forward store environment will continue to be the dual gender store format that we have been rolling out since 2002. Express has opened or converted 153 dual gender stores as of the end of July '04 and we expect to have roughly 190 by the end of our fiscal in January '05. Dual gender results have been encouraging with sales and profit growth in dual gender stores continuing to outpace the balance of the fleet, with sales productivity increases of over 30% on a pre versus post conversion basis. We are focusing on repositioning the brand as a regular priced business with price integrity and using promotions selectively and strategically while continuing our practice of periodic sale events to clear distressed goods. The third key component of our change agenda is to build the right organization, talent and processes to improve productivity and accelerate profit growth. We are also making progress on this front. As you know we established a co-leadership model that has been well received and proven effective since the change was announced in late February. And we are in the process of upgrading talent in a number of key positions including the recent addition of a new Head of Stores and Ahead of Brand Development.

Now moving on to second quarter results. We made measured progress at Express in the second quarter but are still in the beginning stages of the brands turnaround. Starting with financial results, second quarter operating income more than doubled on a 3% increase in comps. Operating income growth was driven by an improvement in the merchandise margin rate at the men's business and by a decrease in the buying and occupancy rate as we leverage these costs on our 3% comp growth. In women's, the wear-to-work category achieved strong growth led by the Editor pant. Unfortunately performance on the casual side of the business was disappointing, particularly in knits, shorts and casual bottoms. In men's, shirts, dress pants and knits all continued their momentum from the first quarter. The second quarter sale event exceeded our expectations and allowed to us effectively clear through seasonal merchandise with increased merchandise margins in the quarter. While early response to our new ware to work offering has been encouraging August sales to date are below our expectations due to declines on the casual side of the business and the significant levels of promotional activity that occurred last year during August. Marketing support and our focus on wear-to-work will increase throughout August and September and we remain confident that our new strategy will generate positive results. Wear-to-work and sweaters are the major volume drivers for fall and we have seen promising performance in wear-to-work so far. Thanks and now I will turn the discussion back over to Tom.

Thanks, Ken. Before we take your questions I would like to make a few comments about Limited stores. Comps for the quarter were down 2% and operating income improved significantly due to reductions in buying and occupancy and SG&A costs. Strong merchandise categories included pants and woven tops. Knit-tops were disappointing. Limited stores is continuing to make progress toward returning the brand to profitability by improving its merchandise assortment and focusing on expense efficiency. That concludes our prepared comments. At this time we would be happy to take any questions you might have. Again, in the interest of time and consideration to others please limit yourself to one question as we would like to get to as many as possible. We also have three executives on our end who are on the road so, operator, I would like to help facilitate this by serving as the moderator for the questions. So we are ready for the first question.

(Caller Instructions) Our first question comes from Richard Baum of Credit Suisse First Boston. You may ask your question.

Good morning, Richard.

Sir,your line is open you may ask your question.

Hi. Congratulations, everybody. My question is for Ken and it relates to marketing for Express Given the fact that you are undergoing the significant repositioning with the wear to work portion in the front of the store it seems that you -- you need to attract a new customer who is not aware of this. What are your plans to do that since my understanding is you don't do any external marketing?

I'm going to turn that over to Paul.

Richard, hi, it's Paul Raffin. Currently we are utilizing the brand projections through the several miles of window front that we have to communicate the transformational change in our brand. Additionally a direct mail campaign was mounted and actually the early results look extremely encouraging as some of our best customers are responding beyond our initial expectations. So the integration of those two strategies is where we currently have communicated the new Express Design Studio business model. But Ken and I are looking at additional means of using an integrated marketing format as we go forward.

Thanks, Paul, thanks, Richard. Operator, we are ready for the second question.

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

Good morning, everyone. Len, can you give us an update on Project Insight, what you are seeing there? And just lastly, Ann, Bath & Body Works and apparel delivered more operating profit growth than Victoria's Secret. Any additional insight into the drivers there and expectations go forward? Thank you.

Dana, first we will go to Len for the project question and then we will go out I think to Neil and Tom for the Bath & Body Works question.

Thanks, Dana. As -- as you know we've got a number of ongoing operational initiatives that are designed to improve our capabilities as an organization and all of these initiatives are really focused on increasing our speed and efficiency in areas that don't directly touch the customer. Up to this point we've already addressed issues in store labor management, addressed issues in loss prevention, addressed issues in non-merchandise procurement and human resources, as I talked about in the early part of the call. With respect to the stores now, through the Limited Brands operating system, we've got one set of operating standards and practices across all of the stores and through closer matching of traffic and labor hours and instead of changes to manage the overall wage rate we are managing payroll much more effectively and believe that we are striking a good balance between service levels and expense -- expense control. In the loss prevention arena we've implemented a series of process and organizational technology changes that have meaningful reduced shrink. And we're seeing traction in our efforts to leverage scale and technology in the purchase of non-merchandise goods and services already. With respect to HR we rolled out just last month our PeopleSoft HR software implementation and have created a shared service organization for payroll and for benefits and we substantially reduced external search fees over the last several years and are now mitigating the vast majority of our cost increases in the benefits area through a set of changes, some of which are now only possible after the technology roll-out. And we are also in the early stages of standardizing and upgrading our capabilities in the area of merchandise planning and allocation, finance and customer relationship marketing. And that really is what it is you've been asking about quite specifically. What you call insight is part of our ongoing efforts to build capabilities and our perspective at this point is we are continuing to make very, very good progress on the scoping of that work and on the design of enterprise architecture. To the extent that any of the benefits and costs that are related to these initiatives have a significant impact on our financial results we are committed to calling those out to you specifically but at this point our earnings and CapEx guidance includes the impact of all these initiatives, both the costs and the benefits. As we said on the first quarter call we expect to spend about 50 to $60 million in 2004, the majority of which is expense. In the second quarter it was in line with our projection of 10 to $12 million for the quarter. We continue to anticipate that for the remainder of the year and are feeling quite positive about the work we've achieved to date and where we are going.

Thanks, Len. Now, Dana, we will go to Tom Fitzgerald for your question for further thoughts on Bath & Body Works.

Thanks, Tom. In terms of Q2, Bath & Body Works profit growth, as Neil said, was -- was largely driven by our performance in sales. And we really leveraged the learnings from our prior January sale to make this sale even bigger and better and actually more margin friendly, if you will. As Neil said our margins in sale are still very strong. That coupled with the expense -- expense management focus we've continued to have while investing in the product pipeline provided expense leverage with the stronger comp performance.

Thanks, Tom. Operator, we are ready for the next question.

Barbara Wyckoff of Buckingham Research Group. You may ask your question.

Morning, congratulations. Grace, can you talk a little bit about sleepwear? You know, I heard you talk about pink but can you talk about the rest of the sleepwear and your plans going into holiday?

Grace, we will obviously go out to you for that.

Okay. You know, our pink sleepwear we are very pleased with the performance and -- and think that there's great potential for that category as we go into the holiday season. In terms of the balance of our sleepwear what I would say is that our glamour sleepwear business has consistently been performing throughout the season in both the first and second quarter. It ran approximately 8% comps for the season and we are anticipating that it will continue on that trajectory as we go into the fall and holiday season. We've really been cutting back on the casual sleepwear business on a planned basis in order to make room for pink. And we think that that's a better strategy that's more consistent with our -- with our customer -- in line with our customer demand. So we think we've got a good game plan as we go into the holiday season and a balance of all three of these differentiated sleepwear businesses, the glamour part of our business, the young casual and the -- which is pink, and the slightly more mature casual products.

Thank you, Grace. Next question, please.

Tom Filandro of Susquehanna, you may ask your question.

Thank you. First question. Neil, I was recently in that Bigelow store and I saw the Henri Bendel candle and personal care stuff presented there. I was kind of wondering what the relationship is there and how that will play into sort of future product or concept roll-outs and just for Grace, can we get an update on the -- the test in the Italian collection? Thank you.

Neil, we'll go to Len first for the question about Bigelow and then we'll go out to Grace, for the question about Intimissimi.

As you know we announced several months ago that we have a development partnership with Bigelow that resulted in them playing a material role in working with us on new product development activities. As part of that process the Bigelow apothecary store in New York also is one of a number of third party retailers who are representing significant opportunities to test the Henri Bendel line, both fragrance and personal care line, outside of our normal retail distribution channels. So whether it's the Bigelow apothecary store in New York or Amen Warranty in Aspen, the Fred Siegel Studio out in Santa Monica or Selfridges in the U.K., all of them are actually now really making significant progress in moving the Henri Bendel brand and we fundamentally believe our ability to demonstrate the attractiveness of that brand through high-end specialty retailers simply reinforces the position through our stores.

And, Grace, if you can give us a comment on Intimissimi.

Sure, Intimissimi is part of a broader strategy to escalate product introductions by accessing third party brands. And so in our third party brand strategy perhaps one of the most critical launches that we are going to have in the -- in the holiday season is the introduction of the new Chantelle Tomas(ph) line which will be basically rolled out to over 120 some odd stores. Intimissimi actually is a very small test. It's only in four stores at this time. It's really too small a sampling for me to give you any kind of comment in terms of its performance other than you do see them clustered in -- the four stores happen to be in the New York area so you are probably bumping into them. We are going to run with those four stores through the holiday season and then assess what we think might be the potential.

Thanks, Grace. Next question, please.

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

Thanks. My question's also for Grace. You mentioned that the operating margins in Victoria's Secret were planned to be roughly flat this year in the second quarter given the launch of pink. Can you give us what the expectations should be for operating contribution of Victoria's Secret should the business continue to comp in the back half similar to the second half level. Thank you.

Grace, I think we'll go to Mark Weikel for that. Great.

Hey, thanks, Tom. Well, in the second quarter the planned distorted charges primarily related to the top 160 and the roll-out of pink and these were planned --planned charges along with this roll-out. We think that our future performance levels are expected to return, you know, targeted levels that we would expect from these initial investments. And we expect all of these initiatives to pay off.

Thanks, Mark. I think we are ready for the next question.

(Inaudible) of Piper Jaffray, you may ask your question.

Great, thanks. This question is for Ken or for Paul. About the Express division I am just kind of curious as to the denim investment how you guys are positioned from an inventory standpoint right now, what are some of the trends you are seeing, you've mentioned that you've seen some weakness in casual but it also seems to me that you are under invested in inventory on denim this year versus last. Just a little bit more clarity there?

This is Paul Raffin. We have, of course historically, transitioned into the fall season with a very strong denim presence and also very promotional denim presence and contained within our operating plan we call for decreases in both inventory and sales performance on the denim casual side of our business more than offset by the growth that we anticipate in the wear to work Express Design Studio segment of our business. So there is a shift, as it were, in the mix of our business and we think that we have additional opportunity to optimize the way we transition in addressing the changing purchasing patterns of our customer during this transitional period.

So, will that be the same as a -- quick follow up -- will that be the same sort of tenor we can maybe anticipate in September? I mean, because September is obviously a pretty strong denim month as well.

Actually our pattern has indicated that August is the stronger of the two and we anticipate further ramping up of the penetration of the wear to work piece of our business as we enter the September period. Great, thank you.

Next question.

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

Hi, guys. Couple very quickies. One is on the August comp expectation just clarification that you are on plan ex apparel. Two, on Victoria's Secret clarification, did you actual plan profitability flat or is that where it came in given the very strong comp? I just want clarification. And third my favorite piece of the P&L, other, can you just give the pieces, cause I guess Insight is in there but you moved Mast last year, sort of what are the pieces just so we can understand how you got to the number.

Dana, thanks. First we'll go to Ann for the August comp expectation question.

The -- for the third quarter, as we've said, our guidance is for mid to high single-digit comp of which August would be the weakest of those months. We are expecting strong performance out of Victoria's Secret going into September and October and a positive number for them, strong performance for Bath & Body Works driven by the launch activity that Neil mentioned and continued improved performance in September and October as our apparel brand lapped the promotional activity. The first month that they will be completely clean of the promotional activity that we've been lapping now for the past year.

Then we'll go out to Mark Weikel for the question about Victoria's Secret profitability.

Thanks, Tom. The costs associated with both the top 160 initiative and the roll-out of pink are planned costs. And we expect those initiatives to continue to achieve the targets that we have planned. In addition to that in the month of July our underlying sales were soft primarily due to constrained inventories which was resolved during August. And we are also pleased with the August results to date.

Great, thanks, Mark. And for the final part of the question we will go back to Ann about other.

The other segment is flat and there are some items going both ways on that. We have increased gross margin in the other segment primarily related to Mast. We also have a favorability related to the timing of the charitable contributions which flipped into first quarter and you saw that impact in -- on our first quarter results. Those favorabilities were offset by increased spending related to initiatives both to support building of growth platforms and operational capabilities as well as an increase in incentive comp given the strong growth in earnings per share, our incentive comp this year was higher. All right, thank you

Thanks, Dana. Next question.

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

Thanks, good morning, everybody. Ken, Paul, I was wondering if you could talk a little bit about plans to use external brands in Express? Are you interested in pursuing that? And could you talk to us a little bit more as you transition to this more fashion forward customer what that target age is you are going after, what their income is? And should we expect to see like average pricing for the brand to go up as you look to sell certain -- more of a wear-to-work focus than maybe you had you in the past? Thank you.

Why don't we divide up that question, you can go first, Ken?

I'll actually take the second part. We, actually -- obviously sell to a fairly broad age range of customer in both the men's and women's side. We use a very specific edit point in order to create our apparel and that being in the low to mid 20s in women and late 20s for men. And what we see, I think, is a shift away from teens into what we might call young adults in terms particularly with the wear-to-work product. And I think we have some pretty good anecdotal evidence of that right now as we've begun to roll-out EDS and we will be confirming that as we do research throughout the fall. In terms of third party product?

I will take that one, Ken. The -- much like Victoria's Secret and Bath & Body Works we also are very strongly involved with third party relationships and they take two forms. Primarily and currently in the form of providing us with a -- a resource or several resources of very sophisticated additional and supplemental ideas to our own vertically integrated design system. This puts us in a position of seeing top of the market product ideation and utilizing that to continue to delight our customers. And those programs, the selective programs are ongoing currently. We are also at this point entertaining the co-branding, co-branded third party relationships on a very select basis where we may, just as Grace has done, introduce a co-branded opportunity to additionally provide, again, a customer experience within the Express stores. But you are not currently seeing that second form at Express. It is still in the developmental stage.

Ken, Paul, I think there was also a pricing part to Mark's question about average price points going up if you could respond to that, too.

Average price points have gone up and as reflected in the -- the quality of the type of product that we are presenting to our customer. And we have had -- once again we are seeing great response in the wear-to-work category which is where the -- where the pricing has increased.

Thank you. Next question.

Stacy Pak of Prudential, you may ask your question.

Okay, thanks. This is for Ann. Ann, can you give us the just sort of directional operating mardin -- margin guidance by division that is imbedded in your current guidance? And also the spending that we should expect from Project Insight in '05.

Stacy we will divide that question up. As you know we do not give operating margin guidance by -- .

Directionally, I'm saying.

Directionally,I think we can give a comment on that and then we will go to Len on the cost.

Directionally, for the third and fourth quarters we expect that Victoria's Secret and Bath & Body Works will deliver meaningful profit growth for us. There will be an improvement although more modest at the apparel brands.

Is that margin or just dollars?

I was speaking to dollars.

Can you speak to margins?

Not by brand. I can speak to margin -- we don't project by brand margin, et cetera, to your point about rough guidance. I can give you information about the margins for the total business.

Okay.

And, Stacy, this is Amy, I do want to call out also what Neil mentioned in his script in terms of the Bath & Body Works profitability being heavily weighted to the fourth quarter. Similar to what we saw in the spring season.

Okay.

On the third quarter for comps we are looking as we did for the first half of the year to mid to high single-digits. The gross margin rate across our enterprise we are looking for roughly flat. And that -- the SG&A rate will be about the same at roughly flat. Again confirming that for the third quarter we are comfortable with the First Call consensus of 6 cents and for the full year we are at $1.30 to $1.35.

And then to Len for your thoughts on 2005.

With -- with response to the direct question about capability building investments at this point, what we are doing is, as I talked about earlier in the call, is we are focusing on a strategy of making sure that on our earnings and CapEx guidance that the impact of any of these initiatives both cost and investments are laid out and to the extent that any of these initiatives have a significant impact on the results we will call that out quite specifically at the time that we know it. So right now what we've been able to do is basically layout all of the guidance for '04 and moving into '05 we will call it out as the design work continues.

Thanks, Stacy. Next question.

Kimberly Greenberger of Smith Barney, you may ask your question.

Great, thank you. Good morning. This question is for Ann Hailey. I was just looking at your capital expenditures over the last ten years or so and it looks like you've been in a range of between 300 and 400 million per year. We've got a little bit of an escalation this year and I'm wondering if you can talk about what you consider to be maintenance CapEx levels on a go forward basis as we project free cash flow and what -- to what do you attribute the increase here in 2004? Thanks.

We are up over the last three years, but the last three years were a deliberately suppressed level of capital spending. For two reasons. One is, and we've talked about this a bunch of times, we anticipated some difficult economic times so we tightened up everything, headcount, caps, capital spending, across the board. The second reason is that we were in the process of going through store redesign work on all our brands. So it did not make sense to spend the same level of capital that we had historically when we didn't know quite where we were going to go with the store design in support of the brand work. So we suppressed it to abnormally low levels. If you go back and look at the years before that we were not quite at where we are this year at 500 to 550 but we were certainly healthily into the 400s. The go forward in -- consistent with what we've talked about as transitioning to growth in a more forward looking offense position for our company the go forward numbers I would expect to be more in line with this year than those are, you know, those heavily suppressed numbers of the past three years.

Thanks, Ann, thanks, Kimberly. I think we have time for a couple more questions.

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

Hi, question for Ann. The 120 basis points in gross margin improvement how much was merchandise margins versus buying and occupancy leverage and can you give us some color on this same split by division? Thanks.

About -- it would mostly be, you know, leverage. It was, let's say, 25 - 75% merchandise margin versus B&O leverage of 120 basis point improvement. Tell me again what the second piece of your question is.

Just the color by division on the same split.

By division all of our brands improved gross margin dollars and all of our brands improved gross margin rate except for Victoria's Secret which was roughly flat. And by brand, again, it's the same store by brand the bulk of it for every brand was in B&O.

Thanks.

Thanks, Emme. Next question.

Mark Montagna of Wells Fargo, you may ask your question.

Hi. Just had a question about your spring and summer clearance inventory levels. Wondering if when you ended July if that was roughly at the same percentage of total inventory that you ended the previous -- ended last year in July?

Mark, was your question just about apparel inventories?

Yes, it would be about apparel.

We will go to Ken for that.

Well, I can speak to Express. We -- as I think we mentioned earlier our end of season sale met our expectations from a top line perspective and we sold through a very, very high percentage of our distressed spring and summer goods. And nice little byproduct is we had above expectation margins as well. What that enabled us to do was actually to start fall in a very clean inventory position and we were significantly better this year than we were -- were last year in terms of our inventory position going into fall.

Ann, do you have anything you would add to that.

The same story would be true for Limited Stores. They cleared their inventory in a semi-annual sale and, you know, we are going to continue go forward with this process of getting clean at the end of each of the quarters so that we can be fashion forward and go into the next season with a forward facing look to our customers.

Thank you.

Thanks, Mark. Operator, we have time for one last question.

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

Good morning, Margaret.

Hi, how are you.

Great.

Okay. Did you -- did you say in the presentation at all with regard to the outlook for 3 Q? With the high to -- mid to high single-digit comps how that looks by -- by business? And then within that context I'm curious, what is the contribution of pink to Victoria's Secret comp store sales in 2 Q being up 7 and what would be the outlook for that looking into the second half of this year? And why aren't you going to get leverage on your business with a mid to high single-digit comp in 3 Q?

Thanks, Margaret. We will go to Ann for the question about the third quarter and then we are going to go out to Grace and Mark for a comment on the contribution of pink.

The mid to high single-digit comp in the third quarter is going to be driven primarily by Victoria's Secret and Bath & Body Works. Victoria's Secret we are anticipating double-digit comps driven by the launches, which Grace detailed on her prepared comments portion of the call, and also by pink. We are expecting solid for the quarter positive comps at BBW, that's driven by the launch activity that Neil mentioned and also in the direct mail promotions that we've talked about. And in September and October for the apparel -- August for the apparel brands will continue to be a month where we are lapping the heavy promotional activity of a year ago but September and October are the time frame when we expect those comps to improve and start to get positive particularly in October driven by the fact that we won't be lapping heavy promotional activity.

Ann, thanks and we will conclude the call by going out to Grace or Mark with a final comment on pink.

Mark, why don't you take that?

Thanks. As I think everybody knows from the presentation we are very pleased with how pink is doing. The July event met our expectations. The second quarter exceeded our expectations. And we are very pleased that the roll-out is completed through almost 850 stores. We will complete the remainder of the stores prior to holiday. Pink had an impact in the second quarter probably in the 6 to 7% range. And our plan would be to still be in that range, probably 5 to 6% for the remainder of the fall.

Thanks, Mark. And then to finish Margaret's question we are going to go back to Ann for the portion on leverage.

Margaret, if I understood your question correctly it's, you know, why aren't we, you know, projecting more leverage based upon high single-digit comps. As we have been discussing and as you are going to hear a lot more about in October, we are a business that is in the process of shifting from defense to offence. We are investing in growth, consumer faith in growth activities. Pink is an example. Express Design Studio. We talked about Bendels on this call. We are also investing in our stores. The top 160 initiative would be an example of that. And Len talked about some operational initiatives which over time are going to increase our capabilities, enable -- better enable our brand leadership to focus on the customer and deliver merchandise quickly, also improving efficiency. So our early results on these initiatives, most of which we've touched on elsewhere in the call today, are encouraging. But it is the spending and the investments to support those and to support growth for the future that creates the situation that we are talking about.

Thanks, Ann. That concludes our call this morning. It's been a pleasure to be with you and thank you for your continuing interest in Limited Brands.

Thank you for participating in today's conference call.