Bath & Body Works Inc (BBWI) 2005 Q2 法說會逐字稿

Welcome to the Limited Brands Incorporated second quarter earnings release conference call. All participants have been placed on a listen-only mode until the question-and-answer session. To ask a question please press star one on your touch-tone phone.

Today's conference is being recorded. If you have any objections you may disconnect at this time.

Now I'll turn the meeting over to Mr. Tom Katzenmeyer, Vice President of Investor Relations.

Thank you and good morning and welcome to the Limited Brands second quarter earnings conference call for the period ending Saturday, July 30, 2005.

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 filings. Our second quarter earnings release and related financial information are available on our Web site LimitedBrands.com.

The call is being taped and be can replayed by dialing 1-800-337-6551 followed by the pass code 583. You can also listen to an audio replay from our Web site.

There are nine people joining me on this call today. This is who is here. Len Schlesinger, Vice Chairman and COO, Ann Hailey, EVP and CFO, Grace Nichols, CEO, Victoria's Secret Stores, Mark Weikel, COO, Victoria's Secret Stores, Neil Fiske, CEO, Bath & Body Works, Tom Fitzgerald, COO at Bath & Body Works, Ken Stevens, CEO of Express, Paul Raffin, President of Express, also Amy Preston, Vice President of Investor Relations.

After our prepared comments, we will be available to take your questions for as long as time permits. So that we can speak with as many callers as possible it's important that you limit yourself to one question.

All results that we will discuss this morning are adjusted results. We believe this adjusted information helps in understanding our financial results. A reconciliation of GAAP, G.A.A.P., to adjusted results is included in the press release and is also available from our Web site.

And now I'll turn the call over to Len Schlesinger.

Thanks, Tom, and good morning, everyone.

Our second quarter earnings were $0.27 per share versus $0.29 last year. We exceeded our initial guidance of 23 to $0.25 a share, primarily due to upside at Victoria's Secret where we achieved a 230 basis point improvement in operating income on a 2% comp.

Bath & Body Works had a solid quarter and several successful new product introductions this spring.

Apparel performance continued to be poor with negative 10% comps and a significant decline in operating income primarily related to Express. Grace, Neil, and Ken will provide substantially more detail in their prepared comments.

Our third quarter earnings are projected to decline driven by an increase in SG&A as we invest in operational capabilities to support growth and by a decline in apparel profitability. While we believe we have taken the right steps to return Express to profitability, the brand will continue to be in transition for some time.

Ann will discuss our third quarter guidance in more detail during her presentation.

Now I'd like to update you on several strategic initiatives that I discussed on the last call.

First was in our lingerie group. We continue to be pleased with the performance of PINK.

We're building on this success by testing an expanded assortment in 46 stores this fall beginning in late October. We will consider a test of free-standing PINK stores next year after evaluating the results of the expanded assortment offering.

As you know, we've been testing Intimisimi boutiques in a handful of Victoria's Secret stores. Intimisimi is a premier Italian lingerie brand which adds a fast-turning fashion element to our stores.

Based on the success of the initial test we will also be expanding the number of Intimisimi boutiques in Victoria's Secret stores. We plan to have 26 Intimisimi boutiques by the end of this year and 160 by the end of 2006. We will also be opening a free-standing Intimisimi store this October at Easton.

Victoria's Secret Beauty is in the initial stages of developing the new beauty line of Intimisimi. This combination of fine fragrances, color, and personal care products are to be sold in Victoria's Secret stores next year.

Victoria's Secret also just launched a revamped Beauty Web site and catalogue featuring 25 new national names and brands including Nars. Vincent Longo, Frederick Picci and Pout. Early customer response has been quite positive.

In our personal care group, we're excited about the launch of Bath & Body Works.com in October to capitalize on holiday selling. The site will include an edited assortment of BBW products with a heavy emphasis on gifts including a build your own gift interactive module.

We're opening six new Bigelow stores in the next couple of months in the Boston, Chicago, and New York markets, and we're also beginning the process of identifying locations for additional Henri Bendel stores for construction in 2006. These stores will offer beauty, personal care, accessories, lingerie and denim.

And finally, we're very pleased to announce the hiring of Ed Bucciarelli as CEO of Henri Bendel and President of Limited Brands Accessories. Ed, who was formerly Group President of Accessories and Cosmetics at Liz Claiborne, will provide great vision to the Henri Bendel brand as well as leadership and expertise in creating innovative new accessories collections for all of our other brands.

Thanks so much and now I'd like it turn the discussion over to Ann.

Thank you, Len. Good morning, everyone.

The second quarter our comps were flat and sales increased 4%. Our gross margin declined 150 basis points to 34.6%. A significant decline in merchandise margins driven by apparel results was partially offset by leverage on buying and occupancy costs.

Total SG&A dollar spending increased by about 3% in line with our expectations and leveraged slightly on our 4% sales increase. Second quarter operating income declined by $23 million.

By segment, the results were: Victoria's Secret operating income increased by 35.7 million; Bath & Body Works increased by 7.9 million; apparel results declined 58.3 million; and the loss in the other segment increased by 8.4 million.

Regarding our financial position, we ended the quarter with $719 million in cash.

We have completed our $100 million share repurchase program, buying in total of 4.5 million shares at an average price of $22.34 per share. Year-to-date, we have spent 200 million and repurchased 8.8 million shares.

We are pleased to announce that the board has authorized an additional $100 million share repurchase program.

Inventories ended the quarter up 9% per square foot at cost driven by new products at Bath & Body Works and Victoria's Secret. Apparel inventories ended the quarter up 1% per square foot at cost.

Turning to our guidance for the third quarter, we are projecting an earnings per share range of negative $0.01 to positive $0.01 per share versus last year's $0.10 per share. Last year's results includes a $0.03 per share gain from a favorable tax state settlement and a $0.01 per share gain from a land sale.

Our third quarter expectations are based on the following. We expect roughly flat black comps and mid single-digit increase in total sales.

We expect a decline in our gross margin rate driven by apparel, SG&A expense is increasing on a dollar basis as we invest in projects, talent and capabilities to support growth. Nevertheless, SG&A is expected to remain roughly flat to slightly up as a percent of sales.

Finally, interest expense will increase about $10 million as a result of our business recapitalization last year. The capitalization, while accretive to earnings for the full-year is $0.02 per share diluted to earnings in the third quarter versus being $0.04 per share accretive in the second quarter.

As you know, our profit for the fall season is heavily weighted to the fourth quarter as we make investments in the third quarter to prepare for the holiday season, to build our BBW e-commerce capability, to launch the PINK solution set stores, and to open six Bigelow stores in time to capitalize on the holiday season.

Turning to the full-year 2005, we expect earnings per share to be between $1.36 and $1.38. This estimate is based on roughly flat comp store sales, a decrease in the gross margin rate, and an increase in the SG&A rate.

For the month of August, we are currently projecting slightly negative comps driven by softness at Express. Our initial expectation was for mid to single-digit comps. We estimate the 2005 capital expenditures will be between 550 and $575 million.

Now, before I turn the discussion over to Grace, I'd like to make a few comments about Victoria's Secret Direct and Limited Stores.

Victoria's Secret Direct continued its strong performance in the second quarter with an 8% sales increase driven by sales improvement in almost every merchandise category. Operating income grew as well.

Limited Stores' second quarter comps decreased 2% and operating results were roughly flat. Operating results for the spring season at Limited Stores improved versus last year.

I'll now turn the call over to our brand leaders for their comments beginning with Grace and Victoria's Secret stores.

Thanks, Ann, and good morning.

For the second quarter the Victoria's Secret segment achieved a 35.7 million or 230 basis point improvement in operating income on a total sales increase of 6% and 2% cost. Results were above our expectations. This result was driven by a strong performance in both stores and Direct.

At stores, growth was driven by bras and PINK, and as expected we experienced declines in panties and sleepwear. Bra performance of low double-digit comps continued to be driven by successful launch of the Body by Victoria IPEX bra and growth in our Very Sexy sub-brand.

We anniversaried the national launch of PINK throughout the spring season. The July PINK floor set, including the mini dog gift with purchase was well received.

[Dress] panty softness was primarily due to an assortment imbalance with an over distortion to V-strings and thongs and away from covered bottoms. This assortment has been reworked for the fall of the season, although we believe it will take some time for these changes to take hold.

The decline in traditional casual sleepwear was driven by the exit of this category at the beginning of the year, and we are testing a new line of casual sleepwear for fall. Most stores received this assortment in July.

Beauty performed below expectations, growth in body, color and hair has been partially offset by a decline in prestige fragrance.

Looking ahead to the third quarter, the stores are currently featuring the Body by Victory IPEX demi-bra. The launch has performed in line with our expectations.

In September we will feature Angels fashions and our Sexy Little Things fashions, a category that is doing well for us in the lead up to our first holiday floor set in mid-October.

Beauty is featuring a So in Love floor set with a gift with purchase offering this week. This will be followed by a Dream Angels purchase with purchase offering in the launch of Victoria's Secret Spa in mid-September.

And thanks and now I'll turn things over to Neil.

Thank you, Grace, and good morning, everyone.

Bath & Body Works comps increased 9% in the second quarter and operating income increased to 84.8 million. It was our ninth consecutive quarter of positive comps.

Operating income for the spring season increased 15.7 million or 18% to last year. For the quarter, leverage on buying and occupancy and SG&A expenses was offset by a decline in merchandise margin, a result of costs associated with exiting products as we introduce newness to the assortment.

We continue to invest in the brand. Second quarter results reflect our initial investments in developing e-commerce capabilities and opening new C.O. Bigelow stores this fall.

We ended the spring season with significant progress in bringing new products to market, including the recently launched Breathe body care line as well as Tutti Dolci, C.O. Bigelow and Le Couvent des Minimes. All are drivers of growth and important signals to our customers of the brands transition to a modern apothecary of beauty and well-being.

Also our semi-annual sale delivered strong comp growth on top of a tough comparison last year.

Turning to the third quarter, stores are currently featuring a Real Beauty theme, focusing on the new American Girl line. A result of our collaboration with the American Girl Doll Company, the line features body care, hair care, skin care, and fine fragrance aimed at girls 8 to 12.

At the end of August, we will anniversary last year's successful Perfect Autumn featuring four fragrances in our seasonal daily beauty rituals and home fragrance collections. We will extend our focus on fall across two themes through mid-October.

Our holiday season begins on October 17th, consistent with last year. We are enthusiastic about holiday for several reasons.

First, the strength of our assortment. Similar to last year, we will show case the perfect Christmas home fragrance collection, seasonal toiletries, gifts, and compelling with purchase with purchase offerings.

Second, our Web site will be e-commerce ready in time for holiday, providing another channel to meet our customers' needs. Lastly, we will launch the complete Patricia Wexler, M.D. line in flagships and C.O. Bigelow stores in October.

A result of our collaboration with one of the top dermatologists in the country, the cosmeceutical skin care line is a pivotal component of brands transformation.

With that, I'll turn the discussion over to Ken.

Thanks, Neil. Good morning, everyone.

We are very disappointed in Express's second quarter performance. Comps were down 12% in the second quarter versus down 21% in the first quarter as we took steps to aggressively promote underperforming merchandise in the May and June time period leading up to the quarterly clearance sale.

In women's, significant declines in knit tops and casual bottoms were partially offset by growth in woven pants and tops. Men's business experienced single-digit growth in Q2 where declines in sweaters, casual pants and accessories were more than offset by growth in dress pants and jackets.

From an expense standpoint, we are continuing the progress made last fall and in the first quarter as both stores and home office controllable expenses in the second quarter were down to last year.

Our first fall floor set launched on July 18th with an emphasis on denim and knit tops. This launch is the first step toward reinvigorating our casual and denim business.

We supported this launch with an in-store promotion, as well as a direct mail campaign.

Early results for denim and knit tops have been good with significant growth over last year and mid teens growth versus 2003. 2003 is our internal benchmark year given that we de-emphasized denim last year.

Fortunately, this growth has not offset declines in sweaters, in woven pants and woven tops. August comps to date are running below our expectations driven by continued traffic declines and greater than anticipated softness in wear-to-work in the women's business.

We are aggressively working to fix our assortment issues, including canceling items that have not been well received and increasing orders on strong performers. We're also taking steps to increase traffic, including adjusting floor sets and window displays and implementing new direct mail campaigns.

Thanks. And now I'll turn the discussion back over to Tom.

Thanks, Ken. That concludes our prepared remarks. Wendy, we're now ready to go to the question-and-answer session. I want to remind everyone please limit yourself to one question so we can get to as many people as possible. We're ready for the first question.

Thank you. [OPERATOR INSTRUCTIONS]

Our first question comes from Dorothy Lakner, you may ask your question and please state your company name.

Thanks. Good morning, everyone, CIBC World Markets.

A question on Express I just was wondering what the time frame is for improving the performance there? Obviously you're doing better in denim than last year when there was none, but how confident are you in the move back to denim and knit tops and also just in the positioning of Express within the mall?

And a tie-on to that, could you just sort of go over where you think the differences are between the Express brand and Limited brand right now? Thanks.

Dorothy, thanks. We'll go to both Ken and Paul for that question.

Dorothy, I'll take the first part of that question.

On the last call, we described a new formula based upon the continued focus on customer loyal bottoms category with important re-emphasis on denim. And Ken mentioned some success in our X2 denim launch this back-to-school.

In addition to the continued wear-to-work pant business framed by the franchise in our editor program. That as a base, coupled with fast-turning fashion tops at accessible price points was really the core of our strategy.

Results to date have been mixed with some very encouraging affirmations and important portions of this formula are working, specifically both women's and men's fashion knit top businesses which are extremely strong.

We have studied the characteristics of success in both of these product categories and converted a large portion of our near-term on orders to further optimize this strong response. Conversely, our women's tops and sweater assortments have not been productive and we're taking very aggressive steps to alter the styling of these businesses within the next 60 days.

Ken touched on the denim business, and we believe we have won back a piece of this market share, acknowledging how competitive the category is. Our wear-to-work pant business, anchored by the editor, has exhibited a cyclical pattern for August and we will support this category with strong marketing programs as we head to Labor Day and beyond.

The men's business is performing very well on the back of three categories, specifically denim, shirts, and knit tops, and we feel very encouraged that the cohesiveness of the brand, primarily as exemplified in the dual gender store format, is much stronger than last year and fulfills more clearly the expectations of Express in the eyes of our customer as a fashion brand.

We are aggressively addressing both traffic and converted opportunities with a series of programs. We literally shocked our customer last August with averaging [at] retail increases in a quest to trade up in conjunction with the wear-to-work repositioning strategy.

We have seen those AURs moderate now and come down significantly as we provide our customer with more accessible price points, and as Ken referenced, we clearly still have a ways to go in gaining back the large core base of customers that we spent the past year alienating.

I'm just wondering --

We're encouraged by the responses we're getting from our best customers who are returning to the brand and to some select programs and key product categories that are performing. We also understand it's going to take time ad further corrective actions to build some significant momentum back at Express.

Ken, are you worried that you're trading off some of the pant business that you had before that was strong for the denim? In other words, is denim real, it's incremental, but is it simply taking away, siphoning off some of the woven pant business that you had before?

That was Paul that just spoke, and this is Ken now.

We think that what you really have to look at, particularly in the pant business, is what time of year you're selling which pants. And we think if we look back at '04, we actually got out of sync with what customers are interested in at a particular point in time.

So I think what you'll see over a 12-month period is you'll see kind of an ebb and flow of different types of bottoms depending on the time of year. We're obviously kind of in the middle, the beginning of the back half, if you will, of back-to-school period, and as we go into post Labor Day and then back-to-school period is really a denim focus.

And as we go into post Labor Day, you see consumers turning much more to a more wear-to-work pant and away from denim. And so what we are doing is going with that consumer flow rather than trying to fight against it.

Okay.

Dorothy, thank you for your question.

Uh-huh.

Next question, please?

Mark Friedman, you may ask your question and please state your company name.

Merrill Lynch. Good morning everybody.

Grace, I was wondering if you could talk a little bit more about prestige fragrance, your analysis now of what happened and what you're doing to rectify that for the third quarter and the holiday season? Thanks.

Hi. This is Len. I'm going to take that one for the Beauty business rather than Grace, I hope you don't mind.

I think we see a general softness in the prestige fragrance market. We're not immune from that general softness in the marketplace and we're in the process of essentially repositioning the assortment.

At the same time, we do have the benefit of having recognized over the first six months of the year that Dream Angels Heavenly continues to report as the number one fragrance in the United States.

So we are continuing to hold our own vis-a-vis the competitive marketplace. Vis-a-vis the expectations we came into the year with, we're a bit disappointed.

Thanks, Mark. Next question, please.

Neely Tamminga, you may ask your question and please state your company name.

Great. Thank you. Can you hear me?

I guess my question is related more towards the sub-brand strategy for Grace. Give us a sense of where the price points are in Intimisimi and what are your plans for Chantel Thomass and beyond just kind of what you have going on with the Intimisimi that you mentioned.

We have a pretty vibrant sub-brand strategy principally driven on the backs of our core sub-brands, Body by Victoria, Angels and Very Sexy, which we're very pleased with our ability to continue to grow and penetrate the moderate to upper moderate basic and fashion market through those sub-brands.

PINK as a sub-brand strategy allows us specifically to target a young collegiate customer. We're obviously very pleased with the results in PINK.

Intimisimi is really in an expanded test form and we're very excited about it because it allows us to escalate the amount of fashion offering at slightly more accessible price points. And we believe there's evidence that that's drawing a wider customer base into the brand.

When you look at Chantel Thomass, that is specifically targeted as a designer offering for a limited number of stores, typically in upper income, high volume, low traffic environments where we feel we have an opportunity to trade up. We're very pleased with the results with Chantel Thomass and are continuing to expand and showcase that.

And we're simply testing some other designers along the way and you see that in a selected group of stores, but we're in a test mode.

So what I hope to represent to you is a portfolio of sub-brand strategies that is articulated to attract a wider client base, high to low accessible to upper price points in a diverse marketplace.

Thank you.

Thanks, Neely. Next question, please?

Thank you. Dana Telsey, you may ask your question and please state your company name.

Good morning. Bear Stearns.

Can you talk about the improved operating margins at Victoria's Secret? Can this acceleration continue and was the driver operational, was it sales-wise, what were the drivers there?

And inventory plans end of Q3, what's your targets? Thank you.

Dana, we're going to go to Mark Weikel for the question about VS.

Dana, I'll try to break this down into two basic areas, I think the first area is really sales related and margin, and the second is really ongoing expense improvement.

So the first piece, the way we're thinking about it is if we look at the second quarter, we started with strong bra performance so low double-digit comp improvement. Per that would be like the Very Sexy plunge convertible bra that did very well in May.

We followed that with a successful Sexy Little Things floor set that did very well for us. And we were also very pleased with our semi-annual sale and it really did two things for us.

One was the semi-annual sale was positive for us from a clearance perspective, but it also drove full ticket selling at the same time. After the semi-annual sale event, we had the national gift with purchase for PINK, which also met or exceeded expectations.

So those things added up, provided some top line comp growth and margin rate improvement.

Thanks, Mark, we're going to go to Ann Hailey for the--

I wanted to cover one other piece, Tom, just cause there is a specific question about operating or expense performance. I want to try to address that as well.

From an overarching standpoint, our mantra is really to try to find a more efficient, more effective expense performance just on an ongoing basis so we believe in continuous improvement and we would take advantage of different things that are offered to us. So from one perspective, if we have the opportunity to use the shared services of the center, we would do that and that provides us a more efficient and effective expense performance.

We also benefited from the store and field integration between beauty and lingerie. Now, although that was not our primary purpose for that, our primary purpose for that work was really all about providing a captivating single brand in-store experience for our customer, and also really about freeing up Victoria's Secret Beauty to focus their energies on an open market innovation model that led to a prestige full beauty brand.

But we did, we are achieving the economies that we expected out of that as well. And then we had some normal quarterly change in real estate deals that are pretty typical.

Thanks.

Sorry to cut you off there.

That's okay.

Dana, we're going to go to Ann Hailey now for the inventory question.

Thank you.

Hi, Dana. You're going to see the same kind of discipline in trends in the third quarter that you've seen so far this year with, we should be roughly, the difference being a little less needing to have incremental investment in new products at Victoria's Secret and Bath & Body Works. So we should be up low single-digits on a cost of goods per square foot basis.

Thank you.

Thanks. Next question, please? Thank you. Jeff Black, you may ask your question and please state your company name.

Thank you. Lehman Brothers.

A question on Bath & Body. Over what time frame are we going to continue to make significant investments that would weigh on the SG&A line and how should we think about the operating margin as we move into '06 and '07 for Bath & Body Works? Thanks.

We'll go to Tom Fitzgerald for that, Jeff.

Yeah. Thanks, Jeff.

As we've said historically, just for context, we believe our low to mid 20% operating margins that we had before were unsustainably high and overly reliant on the very profitable daily beauty rituals line. Over the past couple years beings we've seen merchandise margins decline really due to three things, one was adding new higher quality product lines with very attractive margins but lower than our daily beauty rituals line.

Second was increasing our sale periods as a percentage of the business as we made those periods more volcanic as we describe it. And lastly, really remixing the business to have a higher seasonal component to create more of a seasonal cadence to our business.

Going forward, we believe the days of merchandise declines are coming to an end. Merchandise margin declines are coming to an end as merch margins should be flat to up very slightly in the future.

And that's really due to a couple things, one, the new products that I mentioned that we've brought in, and are bringing in to market, are somewhat lower in margin in their initial phase of their life cycle as we drive trial and sample those lines. And then after the introductory period, those margins are above the shop average, which helps offset the continued mixed shift out of daily beauty rituals.

Additionally, the sale period increases will not be as disproportionate as they have been in the past, and therefore, will not put as much pressure on the merchandise margins of the business.

So that, coupled with our comp growth expectations, really line us up to perform in line with the expectations of the enterprise given our role in the portfolio.

Thanks, Tom. Next question?

Barbara Wyckoff, you may ask your question and please state your company name.

Hi. Buckingham Research Group.

I have a question for Grace. Can you talk about Victoria's Secret's market share and give us some more insight into the great results on the IPEX bra, where does it go from here? Is this something that you're going to be having on a day in, day out basis with new levels of sub-brands on top of what you already have?

Yeah, Barb. We do track ourselves against some typical share of market growth rates and we believe we've continued to see growth in share of market in both the bra and panty category through the spring season.

The final results for the second quarter are not in. But generally, our comp rate in those, particularly in bras, outperform the industry.

Our go forward strategy continues to be focused on bringing new and innovative technology and fashion in bras at an aggressive rate to the marketplace. It's very much a piece of the third and fourth quarter strategy and we have launches lined up at this point in prototype test mode through wear testing through in-store testing into really '06 and concepts on the table for late '06 and into '07.

So we work very far out in terms of focusing on this category and feel committed to the strategy.

Thank you.

Thank you, Barbara. Next question, please?

Kimberly Greenberger, you may ask your question and please state your company name.

Great. Thank you. Citigroup.

My question is for Grace. Grace, can you talk about your strategy with sleepwear in the Victoria's Secret division and just give us a context in terms of how that business had performed maybe a year or two ago and what your plans are to revamp that business on a go-forward basis?

And then just lastly, if I could, if you could talk about the inventory of denim and knits at Express and whether or not the increase in comps that you're seeing in those two categories here in the fall is commensurate with your inventory investment or if sales are exceeding inventory investment or trailing it? That would be great. Thanks.

It's a two part question. Let's go to Grace first.

Okay. In terms of the sleepwear question and what was it two or three years ago, it was largely very traditional and somewhat out of our target customer look and aesthetic. Based on that, we decided to begin to move to reposition the category in a more brand-right way.

Whenever we try to do those things, there's always the balance of short-term versus long-term performance. And what I can comment on is in terms of getting a younger attitude of sleepwear in place, I think we've been very successful, specifically in terms of addressing the young attitude collegiate target customer through PINK.

We have been very careful in directing our sleepwear assortments that are targeted toward the mid 20s to mid 30 customer and we've been very penurious in terms of our open to buy allocation and we're still continuing to test forward to try and find what the right [unlap] block is.

We have had some success in terms of our romantic sleepwear. We have been testing with LDS for a new casual sleepwear area and we're really not going to open up the open it buy in that category until we see the strong customer break through.

So we think that's right to do in terms of balancing our top line and bottom line growth.

Thanks, Grace. We're going to go to Paul Raffin for the Express inventory question.

Hi, Kimberly.

It's really a tale of two stories here in the denim and knit categories. Within denim on the women's side, our inventory investment, which was significantly ahead of last year, obviously you can see that in our stores, has not performed on the sales side quite to our expectations, so there is a little bit of a disconnect on the inventory to sales relationships.

We came out of the box extremely hot in the July week three and four period, seeing almost triple-digit increases versus prior year and we resumed a natural sales curve as we head into August typical of prior back-to-school periods, frankly, as the rest of them all joined a heavily promotional kind of strategy in the category. So while we are getting growth, we're not getting it to the extent that we had hoped for given the inventory investment.

It's exactly the reverse on the men's side. We continue to see the inventory investment in men's pay off and there's a little bit more symmetry there between again, inventory and sales.

In the knit businesses in both women's and men's, we are just frankly thrilled with sales increases that far outstrip the inventory investments. And those hot businesses are two of the features that we are chasing quite heavily as we head into the next 60 to 90 days and setting ourselves up for holiday.

So we are thrilled with fashion talk responsiveness and attribute it to getting fashion right and prices more accessible.

Great. Thanks.

Thanks, Kimberly. Next question?

Stacy Pak, you may ask your question and please state your company name.

Hi. Thanks. It's Prudential.

I was hoping you could give a little more color on the August business by division. Obviously, we hear Express, but is, how are the other divisions doing? And is the Express softness, you know, is it across the country? Was it, you know, pretty much the first two weeks or did it slow down the last?

And given the concerns about traffic, I thought you had about 6 million more, you know, units of direct mail for Express in August. So maybe you could talk about what you're going to do to jump start that business, you know, what sort of, I mean are there more promotions coming or how do you get the traffic in there? What's the plan?

Stacy, thanks. We'll divide that question in two. Paul Raffin's going to take the question about direct mail and Express.

Yes, Stacy. We had a very significant mail program both July portion that was directed to the best customer file, as well as in August, very aggressive mail drop that embraced lapsed and prospect customers. Both programs, I'm happy to say, have performed exactly to the plans.

And where we're seeing communication strategies in the form of direct mail, when we reach out to all segments of our customer base, they are coming into the store, they are responding. In fact, some of our ADS rates are up to what the plan had initially detailed. So we're encouraged by that.

I think the clear challenge is the walk-by traffic, getting that across the lease line and getting the conversion rates that's a lot healthier.

Paul and Stacy, this is Ken.

Also to add on your question about regional performance or what we are we seeing across the country, we're seeing our strongest areas in the Northeast, the West Coast, the Southwest and the most southern part of the Southeast, i.e., Florida, and our weakest areas right now are in the Midwest and upper Midwest. So actually, a pretty interesting range or variability of performance.

And part of the question about what you really do to jump start the traffic and then just the other two divisions, how are they doing in August? Is there no slowdown there?

Yeah, I'll circle back on that.

We have, as a result of some of the success in segmenting the file with different offers, we've seen which offers are more strongly responded to. We have altered our September direct mail campaign accordingly so we'll continue to see traffic driving success with, you know, through the mail program.

In addition, FPOS, as we head actually toward this weekend, we are responding with more attractive promotions that we think, that we have tested. In fact, we've been aggressively testing a series of programs rejiggering projection and promotional cadence. And we have seen some that produce some significant lift factors which we're in now putting into the box as of this weekend.

And Stacy, to complete your question, we'll go back to Ann Hailey for August.

Hi, Stacy.

Hi.

The August difference between what we got a couple weeks ago is, as clearly described by both Paul and Ken, driven by the issues at Express and our other brands are pretty much on trajectory.

Great. Thank you.

Thank you.

Todd Slater, you may ask your question and please state your company name.

Thank you. Lazard. Good morning.

Just to follow-on on the promotional strategy which seems like a shift at Express in that originally it was, or at least the last incarnation it was going to be a full priced strategy in season with quarterly sales sort of like, you know, the following of Victoria's Secret and BBW model, now is because Express returning to a more promotional in season model much the way it used to be, sort of how are you looking at the promotional strategy going forward?

Todd, thanks. We're going to go to Ken Stevens for that response.

Hi, Todd.

I don't think we're going back to where we were, however, we clearly have a need to drive customers back into the stores that we lost as a result of our projection and our strategy last year. And if you think about an approach that includes promotion, that's just one element of the mix.

And what I'd like to do is just lay out a couple of things that we're doing that we think combined with a smart in-season periodic pulsing of promotional programs will make a difference.

First of all, better balance of wear-to-work and casual lifestyle that really does what our customers are telling us she wants us to do. And if you go into the stores today, for example, where we have just reset the floor in the past weekend, you'll see a much better balance of casual, wear-to-work, denim, and a much more sort of, I would call contemporary mix of product on the floor.

The second thing is in fact what you might call a reduction in average price points. And that we're achieving through a combination of things including having a greater percentage of entry price points in key volume-driving categories like knits, like denim, sweaters, et cetera.

Third, one of the things that Paul alluded to that we have been very successful with is continuing to flow in on a much more frequent basis newness in sexier fashion tops that are compliments to the fashion basics in bottoms. I'd say a tighter and more clarity in color in the assortment.

And if you think about those things and then having maybe what you might consider be more powerful periodic transaction drivers and this is all based on testing that we're currently doing and then flowing into the full country, that appears to be a strategy that is beginning to get some traction.

But once again, just to keep in mind, we lost so many customers last year that it's very clear to us that you lose them a lot faster than you get them back.

Great. Thanks.

Thanks, Ken. Thanks, Todd. Next question, please?

Brian Tunick you may ask your question and please state your company name.

Yes. Good morning. JP Morgan.

I guess for Grace, if you could just maybe share for us the breakdown of transaction growth versus ticket at the stores? And then, I guess where do you see the price point resistance and what do you hear from your customer research on that front as well? Thanks very much.

Hey, Brian, we're going to split that question between Grace and Mark Weikel.

I'll answer the question on price and it's very brief. We just really haven't hit the wall on price. We don't see any evidence of any resistance to our price positioning. I'm going to flip over to Mark.

For the spring season for us, our transaction level was flat with last year, and our average unit retail is up about 5% for spring.

Thanks. Thanks, Brian. Next question?

Jeff Stein, you may ask your question and please state your company name.

KeyBanc Capital Markets.

Getting back to Express for a moment, in July you guys were running a $20 off promotion on your denim and I'm wondering as you move deeper into the fall, how are you ever going to get back to regular price given the fact that you've started off below expectations to begin with? That's the first part.

Secondly, as I walk the stores, it just seems to me like you've just totally flip flopped again and last year you focused on wear-to-work and really kind of fired your young customer and now it's almost as if you're doing completely the opposite, going after that young customer and completely overlooking that wear-to-work customer.

Jeff, we're going it start with Paul Raffin on that question.

Yeah, Jeff, a great question.

Clearly, we have a history of success in being able to promote denim periodically and then go back to regular price and fulfill our expectations as far as plan. In fact, all through the course of the spring season while we were building our denim inventory, we were posting increases of over 50% with some significant numbers and that was not against an insignificant base.

So we think our customer will obviously we'll sell a lot of units during the promotional period. As we studied them all, the $20 off promotion has worked clearly in the early phases of it, a lot of competitors are now naming price and the prices are very low.

So the increase from the competition has affected the promo. But as we head into the September, October, November period, our expectations is that denim will continue to perform at regular price with clearly a plan that reflects less unit velocity, looking toward, outward toward December, the idea of the denim promo is something that clearly is in our sights.

What we feel there's an advantage on and I agree with your assessment that our stores, until about four days ago, looked too unit dimensional in terms of denim casual kind of floor set. We have reset that. It is a much more integrated set so that wear-to-work and jeanswear casual join each other.

We think it presents a highly differentiated point of view versus other competitors who tend to focus on one side of that equation versus the other. And clearly, we will have an advantage as the editor franchise which continues to be a productive piece of our business in selling over 6 million units of pants which are some of the best fitting in America perform as we head toward the fall season.

So we're encouraged that we are learning from, how to balance this projection better as we head to fall, we clearly want to optimize it.

Thank you.

Thanks. Operator, it's almost 9:00 but we'd like to take a couple more quick questions if we can.

Okay. Janet Kloppenburg, you may ask your question and please state your company name.

Hi. Janet Kloppenburg, JJK Research.

Just on Express, I was wondering if you could talk a little about lead times. I know you said that you'd be getting the product assortments repositioned over the next 60 days or so. I'm wondering if you actually can get them repositioned to where you want them to be so quickly, and if you could sort of elaborate on what products you will be bringing in and what you might be eliminating?

And also if you could just comment on the overall inventory levels at Express? How they are versus plan and how they might be at the end of the third quarter? Thanks.

Thank you, Janet. We're going to go out to Ken for that answer.

Actually, Tom, if you don't mind, I'm going to throw the lead times to Paul and then I'll address the inventory side.

Okay.

Great.

Yes, as far as the speed factor, you know, quite frankly, the enterprise has always, and Express specifically, has always had a long history of being a fast fashion brand that can respond to consumer trend. We clearly got off of that methodology as we bought a lot of Italian piece goods, [stocked] it with the wear-to-work initiative a year ago, sustainable, seasonal basics that were more classic in orientation that we can buy longer and take long inventory positions on would in fact mitigate risk.

We clearly learned that that's not the case. We are back on our game, a game that we in fact invented many years ago, and we can virtually change inventory complexion within a 45 to 60 day time frame when it comes to fast fashion, sexy tops that our customer's responding to right now.

Our teams of people all around the world are extremely able and agile at doing that and it's one of the corrective actions that we think is really going to bear fruit as we go forward.

And Janet, in terms of inventory level.

Thank you.

We started the second quarter up the last year kind of in the mid single-digits but actually came in below last year in July. And as we look out in the third quarter, our average monthly inventory, and this continues to be and stated as cost per foot basis, even to last year for August and slightly up but not significantly in September and October.

But higher than the current comp trend?

Sorry. I didn't catch that.

The inventory levels per square foot are running at levels higher than the current comp store sales trend.

In the last couple of weeks, right.

Right.

Thanks, Janet.

Okay. Thank you.

We have time for one last question Operator.

Thank you. Our final question comes from Richard Jaffee. You may ask your question and please state your company name.

Oh, thanks very much. On a more positive note, could we talk about the accessories opportunity and the investment you're making in management and how we should see that rolling out on a divisional basis near-term and obviously for the fourth quarter?

Richard, thanks. We're going to go to Len Schlesinger for that answer.

Hi, Richard.

As you know, we signaled to the broader marketplace and to our investors with the hiring of Ed Bucciarelli. We were prepared to make a much more substantive commitment to the accessories category as part of the assortments in all of our retail brands.

Ed's now currently on [boarding] and spending the bulk his time getting his arms around the issues at Henri Bendel, but is just beginning the process of meeting with all of the brand leaders over the next several months to get clarity about their history in accessories, their current plans in accessories and also to assess the talent, broader talent that we have in the organization in this area.

We expect over the next several months that he, along with Jay Margolis and myself and Marie [Reyo] of Limited Design Services will figure out from our own perspective what the optimal organization and strategic approach is to going forward in this space.

What we're very clear about, however, is as the brands evolve and as the brands develop accessories have the capacity to be an important part of the assortment in all of them. We have accessories playing a significant role in GWPs and PWPs already. That's number one.

And number two, we expect more accessories to be a much more substantive part of the Henri Bendel assortment going forward and a significant part of the PINK expanded solution set initiatives that are going on so we'll be spending most of our time over the next several months in that. And then getting the organizational line and then you'll begin to see activity in '06.

Len, thanks. That concludes our call this morning.

I wanted to remind everyone that we'll be hosting our investor update meeting here in Columbus November 7th and 8th and you'll be receiving information on that some time later in September. Thanks again for your continued interest in Limited Brands.

Thank you. This concludes today's conference call. Thank you for your participation. You may disconnect at this time.