Bath & Body Works Inc (BBWI) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Laurie, and I will be your conference operator today. At this time, I would like to everyone to the Limited Brands fourth quarter 2008 earnings conference call. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

At this time, it is my pleasure to turn the conference over to the Vice President of Investor Relations, Ms. Amie Preston. Please go ahead.

Thanks, Laurie, and good morning, everyone. Thank you for joining us. As matter of formality, I need to remind you that any forward-looking statements we may make today are subject to our Safe Harbor statements found in our SEC filings. Our fourth quarter earnings release and related financial information are available on our Website, limitedbrands.com. The call is being taped and can be replayed by dialing 1-866-NEWS-LTD. You can also listen to an audio replay from our Website.

Martyn Redgrave, EVP and CAO; Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO of Victoria's Secret; and Diane Neal, CEO at Bath & Body Works; are all joining us today. After our prepared comments, we'll be available to take your questions for as long as time permits. So that we can speak with as many callers as possible, please limit yourself to one question. Thanks. And now, I'll turn the call over to Martyn Redgrave.

Thanks, Amie, and good morning, everyone. First of all, let's acknowledge what all of our competitors have said or will be saying. This is a time when there's extraordinary uncertainty and lack of visibility in all of our businesses. In this unprecedented environment, we are choosing to take aggressive actions, while remaining confident, disciplined and also looking forward to the opportunities that will come. In the fourth quarter, although we anticipated that the environment would be challenging, the holiday time period was tougher than any of us had expected. Traffic levels declined versus previous trends and the environment was extremely competitive and promotional.

As a result, our sales and merchandise margins were below our initial expectations. And we continue to be focused on the conservative management of retail fundamentals. First of all, our inventories are clean, below our initial targeted levels, and down 34% per square foot on a two-year basis. Second, we continue to tightly control operating expenses. Over the last 18 months, we've taken actions to reduce our expense base by $150 million. And as noted in our press release this morning, we have taken further actions today by reducing our home office headcount by approximately 400 associates or roughly 10%.

We are also suspending pay increases for salaried associates and reducing other controllable expenses across the enterprise. We expect that these actions will result in annualized expense savings of between $200 and $250 million. Approximately $150 million of which will benefit 2009. Next, we continue to reduce capital expenditures. From a high of $749 million in 2007, to $479 million for 2008, and now, to a target of roughly $200 million in 2009.

We also are focusing on cash and liquidity. Free cash flow in 2008 was $475 million and we ended the year with $1.2 billion in cash. And finally, as we discussed in our press release, we also proactively renegotiated our covenants on our term loan and revolving credit facilities. Our banks have been great partners to us in that effort. We ended 2008 in compliance with all of our covenants and with significant cushion in our leverage and fixed charge financial covenants.

As we looked at 2009, we thought it was important to restructure our borrowing facilities to ensure flexibility in the event of a continued deterioration in the economic environment. This action, coupled with our substantial cash flow, strong existing liquidity and lack of near-term debt maturities, gives us great advantage as we continue to navigate through this very stormy and uncertain economy. Overall, we continue to believe that we're in the right businesses. Our brands lead their categories and offer high emotional content at accessible prices.

As Sharen as Diane will further describe in a few minutes, we're managing the operating aspects of the business very conservatively. While at the same time, we are aggressively focused on bringing compelling merchandise assortments, marketing and store experiences to our customers to maximize sales and margins. And we're continuing to be opportunistic in this difficult environment.

I'd also like to give you a few updates on other key initiatives. We continue to be on track with our technology initiatives and the Victoria's Secret direct distribution center. And we're planning to implement the last phase of our supply chain systems project at Victoria's Secret stores this summer. We also continue to be very pleased with our performance in the six new BBW stores that we opened in Canada. Over the past five months, since opening, these stores are achieving about 2.5 times the average US store sales volume. As a result, we plan to open approximately 20 more stores in Canada in 2009. In addition, we're continuing our test of the Henri Bendel accessory stores and are planning to open six new locations this year.

Now before I turn it over the Stuart, I'd like to make some comments on La Senza's fourth quarter performance. As you may know, the Canadian retail market has also been very negatively impacted by the global economic crisis. Our fourth quarter results at La Senza were below our expectations. Fourth quarter sales were $133.7 million, down 19%, and comps were down 10%. Although it had no impact on comps, foreign currency translation negatively impacted total sales by roughly $30 million. Operating income dollars and rate were both down significantly to last year, excluding the impact of the impairment charge, which Stewart will discuss shortly. And the most significant driver of La Senza's operating income decline was a decline in the merchandise margin rate, which was driven by higher promotional activity and the weakening of the Canadian dollar, as La Senza purchases merchandise in US dollars. Thanks and I'll now turn it over to Stuart.

Thanks, Martyn. And good morning, everyone. Turning to our fourth quarter performance. We reported earnings of $0.05 per year versus $1.10 last year. Both this and last year's results include significant items as detailed in our press release. I won't repeat last year's items but the following significant items, totaling $0.63 per share, are included in this year's results. First, a pretax, noncash impairment charge of $215 million, or $0.63 per share to reduce the value of La Senza goodwill and other intangible assets, in accordance with applicable accounting principles, specifically, SFAS 142. As you know, we acquired the La Senza business in January of 2007. As Martyn mentioned, the economic environment in Canada, similar to the US, has deteriorated significantly and negatively impacted La Senza's operating performance.

Second, a pretax charge of $22.6 million or $0.04 per share to accrue for severance charges related to a home office headcount reduction of roughly 10%. And finally, a tax benefit of $15 million or $0.05 per share, primarily related to certain discrete, foreign and state income tax items. Excluding the above 2008 significant items and the 2007 significant items, totaling $0.16 per share, as detailed in our press release, our fourth quarter earnings per share were $0.68 versus $0.94 last year. All results discussed on this call exclude these significant items. Fourth quarter net sales were $2.991 billion, versus $3.228 billion last year and comps were down 10%.

The gross margin rate decreased 440 basis points, to 34.3%, driven roughly equally by a decline in the merchandise margin rate and buying and occupancy expense deleverage. Sharen and Diane with cover the drivers of the merchandise margin rate decline in more detail. SG&A dollars declined by $41.3 million or 6% and the SG&A rate increased by 30 basis points. Roughly 50% of the dollar improvement was the result of lower costs at Victoria's Secret direct, relating to technology and the distribution center. Total operating income decreased $182.9 million to $390.7 million.

By segment, the Victoria's Secret segment decreased by $96.8 million to $213.4 million. Bath & Body Works decreased by $85.9 million to $209.4 million. And the other segment operating loss was roughly flat at $32.1 million, as the decline in mass operating income was offset by expense favorability. Retail inventories per square foot at cost, ended the quarter down 8% versus last year, and down 34% on a two-year basis. For the full year 2008, earnings per share were $1.05 versus $1.21 last year, excluding significant items of $0.40 per share in 2008 and $0.68 per share in 2007.

Fiscal year 2008 sales were $9.043 billion, compared to $10.086 billion last year, and comps were down 9%. The gross margin rate declined 110 basis points to 33.2%. And the SG&A rate improved by 50 basis points. Total operating income decreased $143.5 million to $717.5 million. By segment, the Victoria's Secret segment decreased by $50.8 million to $619.8 million. Bath & Body Works decreased by $85.7 million to $215.5 million. And 2007 apparel operating income of $19.6 million was eliminated in connection with the disposition of those businesses. And the other segment operating loss decreased by $12.7 million to a loss of $117.8 million. Capital expenditures in 2008 were $479 million. And depreciation and amortization was $343 million.

So looking forward to 2009, as Martyn said, the current environment is very challenging and uncertain and we expect it to remain so. Having said that, we believe it is important to share with you our perspectives on how we are managing the business, as well as a range of possible financial outcomes. Emphasizing that our visibility to economic and consumer trends is limited, particularly, in the all-important fourth quarter. The most important thing that I'd like to stress is that we are managing the financial aspects of the business, including inventory, expenses, capital expenditures, cash and liquidity, on a very conservative basis. In this environment, we think a reasonable comp expectation ranges from down 5% to down 10% for the full year. We expect a similar decline in sales at Victoria's Secret direct. Finally, we expect mass sales to decline between 15% and 20% as customers reduce inventory in their orders.

Our merchandise margin rate is difficult to forecast. Although inventories are well controlled and we are planning them conservatively, we expect that the environment will remain very promotional and customers are reluctant to pay full price. We will stay very flexible and responsive to traffic trends and we will adjust our promotional plans accordingly. We are also pursuing opportunities to reduce our cost of merchandise. The benefit of which will be weighted to the latter part of the year.

Taking all of this in to account, our current view is that full-year gross margins will be down to last year. Driven by buying and occupancy deleverage, partially offset by an improvement in merchandise margin rate. With respect to expenses, we are focused on a number of initiatives to reduce costs, in areas including home office, non-merchandise spending, marketing and other discretionary costs. As Martyn mentioned, we expect these actions will result in an expense reduction of approximately $150 million in 2009. We anticipate that 2009 depreciation and amortization expense will approximate $320 million.

Interest expense will be approximately $60 million in the first quarter, reflecting the increase in the amended term loan interest rate and a portion of other fees and costs that are not amortized over the life of the facilities. We expect interest expense to be approximately $52 million per quarter for the remainder of the year, reflecting the increased interest rate in the amended term loan and the amortized portion of other fees and costs. Interest income will be about $15 million lower than 2008, driven by very low yields, given market rates and our conservative investment posture. Our tax rate will be approximately 38%. And weighted average shares will approximate 324 million. So assuming all of these inputs, we expect earnings per share to be between $0.60 and $0.85 per share.

So turning to the first quarter specifically, it is more difficult to leverage fixed costs on the lower sales base. We expect that first quarter comps will be down in the high single digit range, based on a challenging environment. Our February comps are currently tracking down mid to high single digits. We expect that gross margins will be down significantly, driven primarily by a decline in merchandise margins in our business and buying and occupancy deleverage on the negative comps. We expect SG&A deleverage in the first quarter on the negative comp, as the benefit of our expense reductions is weighted to the back half of the year. So, assuming these inputs for the first quarter, we expect to lose between $0.07 and $0.12.

We will continue to proactively manage inventory levels for 2009. With receipts for the first half of the year down between 10% and 12%. And inventory levels down in the high single digits at the end of the second quarter. Our monthly inventory levels for March, April and May will be impacted by the pull-forward of first half receipts for Victoria's Secret stores, in connection with our systems implementation this summer.

We continue to aggressively manage capital expenditures. As Martyn mentioned, we are projecting 2009 CapEx at about $200 million, down from $479 million in '08 and $749 million in '07. Approximately 70% of total 2009 capital spending will be focused on real estate, reflecting investments in key US centers and significant growth for Bath & Body Works in Canada. In the US, total square footage is expected to grow by 1%, while square footage in Canada is expected to grow by 3%. More specifically, in 2009, we plan to open 50 new stores, 23 of which will be in the US and 27 in Canada, which is down from 145 new stores opened in 2008. In terms of store reconstructions, we are planning 44 reconstructions in 2009, primarily in the United States, down from 153 reconstructions in 2008.

Turning to liquidity. We ended the year with $1.2 billion in cash. And we expect to generate between $350 million and $450 million in free cash flow in 2009. Our free cash flow and cash position, along with the additional $1 billion available under our revolving credit facility, results in very strong liquidity, which is more than sufficient to fund our working capital, capital expenditures, dividends and any other foreseeable needs. We have substantial cushion under our renegotiated term loan and revolver financial covenants. And we have no debt maturities until 2012.

The 8-K filing of the amendment and our additional information package, available from our Website, details the new financial covenants. The amendment allows us the flexibility to continue to pay our dividend at the current level. We do not anticipate having to borrow under our additional $1 billion in available credit facilities in 2009. Thanks. And now, I'll turn the discussion over to Sharen.

Thank you, Stuart. And good morning, everyone. In the fourth quarter, sales for our total segments, including La Senza, decreased 4% to $1.767 billion. Comp store sales were down 10%. Total segment operating income decreased $96.8 million, or 470 basis points, to $213.4 million, primarily driven by a decline at the Victoria's Secret stores.

Turning to performance by channel, Victoria's Secret stores comp declined by 10%. And total sales decreased 5% to $1.185 billion. Comp store sales for the quarter were below expectation, Pink Friday, our version of Black Friday, was a record sales day for us. But as all of retail experienced, traffic fell significantly in the first few weeks of December. Overall, the customer was more responsive to promotions. We saw this in increased CRM redemption rates and high balance of promotional sales. We responded by pulling up our bra sales and our semi-annual sale and implementing target to merchant across the store. This helped us appropriately manage inventories to target levels. But as a result, merchandise margin rates in the quarter were significantly lower than planned.

Buying and occupancy, and SG&A expenses delevered on the negative 10% comp. Operating income dollars and rates were down significantly to last year. During the holiday, customers responded well to newness and product that was special or was different shaded to either color and/or embellishment. We saw this in our positive response to Pink's big heart theme, which was colorful and fresh. We continue to be pleased by the strength in the Pink sub-brand, compared to the rest of the brand and competitors.

Bra sales were up in the quarter, aid by the pre-Christmas bra sale. Our launches met our expectations and fashion bras, in particular, were strong. However, we continued to experience weakness in beauty. In part to the macro environment but also due to a lack of newness in our beauty pipeline, which we have discussed on previous calls. Although we did see some individual successes with our new sleepwear line, overall results were disappointing.

Now, let's review performance at direct. Sales for our Web and catalog business were $449.2 million, up 4%. This was below expectation, as we were lapping last year's issues with our distribution center. Demand, as measured by total orders received, was well below the spring trend and was negatively impacted by the pull-back in catalog circulation in the third quarter of 2008. We responded to the softness in demand with aggressive promotions to drive sales and clear through inventory. Consequently, there was a significant decline in the gross margin rate, which adversely affected operating income rate and in turn, operating income dollars. The sales softness and promotional activity, more than offset the profit improvement we had initially anticipated from lapping the DC issues in 2007. The new distribution center continues to meet shipping and accuracy milestones and supported several record days in the holiday time period. We still have work to do to achieve our productivity targets but significant progress has been made.

Looking ahead to this first quarter. We are anticipating a continuation of the current consumer trends and therefore, are preparing our business accordingly. Based on current sales projections, we are preparing contingencies and specific actions, continue to match inventory levels to projected sales declines. We are also continuing to tighten and control expenses. At the same time, we are focused on leveraging the strength of the brand through newness, compelling in-store presentation, customer service and best-in-class marketing.

We will continue to differentiate ourselves by offering sophisticated, feminine and sexy products and providing our customers with an unmatched store experience. We are continuing to tell her a brand story that is regularly refreshed with innovative merchandise. In late January and early February, we featured vintage Victoria, which focused classic Victoria's Secret sexy, feminine lingerie. And beauty introduced Noir, a new fragrance just in time for Valentine's Day. This month, in bras, we also introduced the new Body Bare line at the entry price point of $29.50. This is a beautiful everyday line that will introduce even more women to our most celebrated products, our bras.

Last week, we launched to all stores our swimwear collection, which we tested in 350 stores last year. In beauty, we introduced a new Pink body care line. For the remainder of the spring season, we are building on our insights from holiday, with a calendar that emphasizes constant newness, with regular floor set refreshing. Specifically, the season will be anchored by three major bra launches and supplemented by fragrance and body care launches, as well as fashion and seasonal themed floor sets.

Let me review some examples for the first quarter. In March, we will anniversary last year's BioFit launch with a bra we call "the perfect one" a bra with perfectly placed padding that conforms to her body. Also, in March, we'll be launching a new body care line we call Naturally Victoria's Secret. This line uses natural ingredients that offer high-quality skin care benefits, with a beautiful light scent. This will be followed up in April by the launch of the Dream Angels push-up bra. The Dream Angels launch will be supplemented by the introduction of a new beauty fragrance that suggests the sexy, cozy feel of our intimate products.

In the direct channel, we are experiencing softness in the face of a highly promotion external environment. We're responding by leveraging the store channel intimate apparel initiative, Swimwear, alone, has more than 500 styles from which to choose online. In apparel, we are driving a quality initiative and offering new and exciting products in all of our categories. These are the examples of activities this spring that will deliver great products and newness to our customers.

In closing, early indications are that the environment will remain very difficult but our brand is in a unique position. We have worked hard to build a deep emotional connection to our customers. We continue to be one of the most recognized and most desired brands in the world and that connection is our best incentive. So while we may selectively use promotions to drive traffic, we will not do so indiscriminately or in ways that are inconsistent with the Victoria's Secret brand proposition. We see every launch as an opportunity for upside. When products are successful, we will chase those opportunities. Further, we will broaden and extend them by identifying adjacencies and leveraging opportunities across, both the stores and direct channel. Above all, we will continue to leverage our strength, which is the unparalleled emotion position of the brand. Thank you. And I'll turn it over to Diane.

Thank you, Sharen. And good morning. As we discussed in our monthly sales calls, the economic climate presented challenges during holiday but we've also had a number of positive results and learned valuable lessons during the fourth quarter. Black Friday was the biggest day ever for Bath & Body Works. Our customers responded favorably to the newness in our assortment and our in-store experience. The signature collection restage launched in 400 stores and in the eastern half of the United States and rolled nationwide earlier this month. This preliminary launch helped us to test and learn and to roll out the remaining 1,200 stores successfully. And finally, January comps were stronger than expected, driven by our successful semi-annual sale.

Despite some positive news, we faced major challenges. The most significant was traffic. It was below expectations and required us to be more promotional than we had planned. Additionally, we saw that our customers spent less in each transaction than last year.

At this time, I would like to take you through the fourth quarter financial results. Bath & Body Works fourth quarter comps were below expectations at a negative 11%. The comp performance was primarily the result of softness in store traffic and lower sales per transaction. Total sales for the quarter were $997 million, down 8%, or $83 million to last year. The 3% spread between comp and decline in total sales decline represents sales from new stores and growth of our e-commerce business. For the quarter, operating income versus last year, declined $86 million to $209 million, driven primarily by sales and gross margin declines, as well as buying and occupancy increases over last year.

Gross margin rates decreased significantly versus last year, caused primarily by merchandise margin rates. Fixed occupancy expense, combined with negative comp sales, also contributed to the lower gross margin rate. The significant decline in merchandise margin rate to last year was caused by the increased promotional activity, aimed at driving transactions, in clearing seasonal inventory, through the very difficult holiday season. Although circulation of our direct mail promotional activity was in line with last year's levels, we did see an increase in the number of customer redemptions utilizing this vehicle.

SG&A expense dollars were down to last year, driven by our tight focus on expense management. Our SG&A rate's deleverage was the result of the fixed component of our cost structure in a negative comp environment. The active management of inventory throughout the season allowed us to finish the year with inventory levels that were down to last year. During the quarter, performance of our e-commerce business met our expectations. We continue to view the direct channel as both a revenue and profit generator, as well as a marketing vehicle for the Bath & Body Works brand and our collection of sub-brands.

So in light of the of the difficult economic conditions, we will continue to actively control discretionary spending and aggressively manage inventory levels to mitigate any top line softness. Additionally, we are focused on executing our spring priority, which are first and foremost, the nationwide relaunch of our significant collection, which happened on February 9. This relaunch has improved the perception of this brand through more sophisticated packaging, interesting formulas and new and improved in-store marketing and navigation. Second, we are capitalizing on the success of our segmentation test that we ran in the fall, by rolling out our home fragrance and signature collection segmentation, to over 500 stores. The rollout, which occurred last week in an initiative at large, allows us to leverage our system capabilities and to store inventories to drive store and SKU productivity, as well as drive top line and margin growth.

And third, it's about newness. Our customers have been and are responding to newness. In addition to the new signature collection, we are launching over 10 additional collections, fragrances and/or forms across our sub-brands throughout the spring season. With those as our priorities for spring, we continue to focus on our signature collection restage during the first quarter with a major fragrance launch in March. And many creative ways to drive trial and repeats across the selection, focusing on new forms and formulas. Despite the difficulty in and constraints on consumer spending, we remain positioned to read and react and capitalize on the opportunities as they arise. And with that, I will turn the discussion back over to Amie. Thanks, Diane. At this time, we're happy to take any questions you might have. Again, as a reminder, in the interest of time and consideration to others, please limit yourself to one question. And Laurie, I'll turn it back over to you.

Thank you very much. (Operator instructions). Our first question comes from Dana Telsey, with Telsey Advisory Group.

Good morning, everyone. And certainly a challenging environment, taking good steps to wade your way through. Can you talk a little bit about the real estate side of the business? What are you seeing for both businesses in terms of renegotiation of existing leases? And potentially, is there store closings that would be evaluated too? And then, when you talk about margins for both businesses and the promotional level, how are you planning price points and the impact on gross margin? Thank you.

Thanks, Dana, we're going to go to Martyn for the first part of that, the real estate question.

Dana, yes, it's an interesting situation on the real estate front. Because we are such a strong presence in the mall and we are a very successful part of that presence, we're approaching our conversations with landlords in a very respectful and confidential way. And really leading with our emphasis on strengthening our relationship with the landlords, rather than simply asking them for concessions. Obviously, when we have lease renewals or repositioning within the mall going on, we are looking for the right kind of market rate on those lease renewals. But we are not seeking to do more than that at this stage of our discussions with our landlords.

Thanks, Martyn. And now, for the question on price points, we'll go to Sharen and Diane.

At Bath & Body Works, we've actually done a lot of testing throughout the fourth quarter and continue to test a lot of different buy-ins into most of our collections. Our AUR's are basically flat to last year. But as I mentioned earlier, our overall ABS, or average basket, is actually below last year. So we're selling fewer units but the AUR's are pretty well flat.

At Victoria's Secret, as we see the deterioration of traffic within the malls, we are positioned to take action with promotions, if necessary. We have a very conservative plan within our gross margin strategy. We are not looking to over promote Victoria's Secret but actually pulse throughout the weekend, very specific targeted promotions. For example, we have one that started this week, with Pink giving away a free flipflop with a purchase. So it's all strategized. It's within the budget and we will only pull the trigger if necessary.

Thank you.

Next question, please.

Our next question comes from Brian Tunick with J.P. Morgan.

Thanks. Good morning/ I was wondering if Sharen, Diane, maybe could just talk about, why they think, maybe, February, the month is trending significantly better than your original expectations? And then maybe Stuart, on the free cash flow guidance, other than inventories, what are the other buckets of working capital improvements? Thanks very much.

Diane?

Sure. At Bath & Body Works, we actually -- our signature collection, as you all know, is a very big -- a large part of our business, and it's actually selling better than we had expected at the beginning of the month. As well as our home fragrance business, it's actually trending better than we had expected. So we're pleased with those initial results.

At Victoria's Secret, we came in with the Valentine's Day, where we actually did a Godiva gift with purchase, which exceeded our expectations. We have more newness in beauty. We already have two launch in this year. Going in to the spring season, we have many more -- the pipeline is full in beauty, which we're getting good results from that. Our Pink collegiate line, as well as Pink business, has been strong and continues to be. As well in Victoria's Secret, the bra business remains healthy.

Thanks. And we'll go to Stuart for the question about working capital and free cash flow.

Brian on '09 free cash flow assumptions, we did not make any aggressive assumptions with respect to additional improvements in payables or things on the liability side of the balance sheet. There will be some modest decline in receivables related to the Mast business to third-party customers, and obviously, some improvement in -- or source of cash from inventory. The key thing is really the reduction in CapEx year year-on-year versus '08.

Thanks, Stuart. Next question, please?

Our next question comes from Kimberly Greenberger with Citigroup.

Great. Thank you. I was hoping that you could help us, Stuart, with how to think about SG&A dollars here in the first half of the year? And when you expect, on a run-rate basis, to get the full benefit from the SG&A cost-cutting efforts that you've undertaken?

Sure. As we outlined in an overall sense, we believe that the benefit of our SG&A or expense reductions to be on an annualized basis between $200 and $250 million. And we expect to get $150 million of that in '09. Implicit in your question is your understanding, which is the case, that some of that -- or I should say the $150 million does skew more so to the latter half of the year, than the first half. With that said, as Martyn outlined in the introductory comments and as you would tell from the release, the most significant home office action is being implemented currently. We won't get a full benefit of that in the first quarter but we'll largely get that in Q2 through Q4. So, there is some back-end weighting it to. In terms of getting more specific than that, I'd rather kind of keep it at that level.

Stuart, would a 3% to 4% potential decline in dollars be a reasonable range for us to assume?

Are you asking on a full-year basis?

Just Q1 and Q2.

Hang on a second, Kimberly, and we'll check that for you.

Great, thanks, Amie.

It would be reasonable to assume, that on a total dollar basis, that the reduction would be between 5% and 10%.

And that's for the full year, Stuart or --?

That's for the first quarter. And again, that's Limited Brands, Inc. total dollars.

Wonderful, thanks, and good luck here.

Our next question will come from Jennifer Black with Jennifer Black and Associates.

Good morning. I wondered if you could talk about La Senza, how you think about it today and how has it changed since you acquired it? And then, this is a question for Sharen. Can you talk about the how the test of Pink swimwear is doing and swimwear as a category? Thank you very much.

Thanks, Jennifer. We're going to go to Martyn first for the La Senza question.

Yes, Jennifer, obviously, we've owned the business now for a couple of years in Canada. We bought the business for strategic reasons. It was really our first entree in to the rest of the world space, as you know. And we think we have learned a lot from that entree. And obviously, the rest of the world learning, in dealing with our international franchise business that we also acquired with La Senza, has been very helpful to us in starting to think about how to take our brands, the other brands, to the rest of the world. It's also served as a very important platform for the successful introduction now of BBW to Canada and our planned introduction in 2009 of Pink. And we're also working on finding the right kind of flagship sites for the introduction of Victoria's Secret to Canada. So, it's a very strong operating platform and learning platform for those expansions into Canada.

So as we think about it, we think from a strategic point of view, it is everything that we wanted it to be. Its operating performance in 2009 has been disappointing -- in 2008, has been disappointing. But relatively speaking and given the retail market in Canada, similar to the experience that we've been having in the United States. The fact that we have an investment that we made two years ago and are taking essentially a 35% markdown in that investment today is very similar, in my opinion, to what most other companies that acquired something in the last two years are having to do. 35% being about the same "markdown" in the overall stock market in the United States, at least in the last three or four months. So from that point of view, it's a noncash charge, we recognize what it is. But it doesn't change our commitment to La Senza or the operating business that we have in Canada or the opportunity to expand further into Canada.

Thanks, Martyn. And Sharen for swimwear.

Yes, Jennifer as you know, we tested the swim at 350 stores last year. And for the Victoria's Secret store size, the swim is meeting our expectations. And as -- on the Pink, it's slightly below our expectations. But as we go into and people start ramping up for spring break, the true test will be how we come through that.

Great. How many stores are you testing the Pink swimwear in?

It's in all stores.

It is? Okay. Thank you very much. Good luck.

Thanks, Jennifer.

Our next question comes from Paul Lejuez with Credit Suisse.

Hi, guys, since the fourth quarter, such a large percentage of your year's operating earnings, can you maybe share with us how you are thinking about the fourth quarter this year? I understand visibility is limited. But just wondering what is factored in to your guidance for fourth quarter? And then also, your cash balance, I think came in higher than you had planed, despite missing fourth quarter. Just wondering how that happened?

Thanks, Paul. We'll go to Stuart.

So, Paul, and I really would -- in terms of trying to help you with an understanding of the fourth quarter and how we're thinking about it, I really would reference back to the full-year guidance parameters because we think those are largely applicable. I obviously, understand the math affect in the first quarter and the differential between that and the year guidance. But in terms of magnitude and breadth of range, the parameters we've laid out for the full year largely apply to the fourth quarter, recognizing that there's some level of improvement assumed, just given the math of the first quarter. With respect to the cash outcome, we had been tracking in the range of -- we've consistently viewed that we would end the year with more than $1 billion in cash, and we did. And really, the variation is just in the actualization of working capital accounts and other balance sheet accounts that drive operating cash flow. Very focused on driving the cash flow and pleased with the results.

Okay. Great. Thanks, and good luck.

Thank you.

Our next question comes from Stacy Pak with SP Research.

Hi, thanks. Given what you've said about comps today, can you just -- it sounds like it's -- the above plan is coming from the BBW side. But can you help us think a little bit more about the Q1 guidance by division, given what's happening here February and restate signature and swim and all of that? And then, can you also give us a little clarification on the potential merchandise margin increase in '09?

So Stacy, I'm going to take the first part of that question. I don't think, necessarily, we meant to imply that BBW was necessarily beating their expectation by more than VS. I think both businesses are ahead of our initial expectations for February. For the first quarter, in terms of our overall comp guidance, BBW and VS are pretty close. I'd say roughly about the same. And then for merchandise margin rate for the full year, we'll go to Stuart.

And then also the Q1, just kind of guidance was the other piece.

Q1 guidance on what?

By division. Just some sense -- you're guiding to -- down 7% to 12%. And so, I just wanted to get some sense of where most of that was coming from?

Well, we're not going to get further in terms of breaking it out by segment in terms of operating income, so -- I don't think we can go there. But Stuart can help with merchandise margins.

With respect to merchandise margins, the -- on a full-year basis, we're going to get benefits, fundamentally, from three things. One, we are working to reduce our cost of goods. And the benefit of that would be realized principally in the back of the year. As you would understand, through timing and its turnover through the balance sheet into the P&L as it's sold. And then the second key thing to understand, as you think about full-year merchandise margin rate, is the relative size of VS, BBW and separately Mast. Meaning, that as Mast sales decline at a greater rate than Victoria's Secret or Bath & Body Works, that provides a favorable, overall mix shift to LBI, or Limited Brands, Inc. merchandise margin rates. And then, also in the back half of the year, we believe we'll get some merchandise margin rate benefit, as we continue to closely match inventory flow with the rate of sales.

And is there any overall number you'll commit to?

In terms of the merchandise margin rate, specifically, no.

Okay. Thank you.

Thanks, Stacy. Next question?

We'll go next to Richard Jaffe with Stifel Nicolaus.

Thanks, very much, guys. Just a couple of follow-up questions. Did the resizing of stores, we should anticipate that there's some opportunity there over time, as you said very discretely with your landlords, but is that an objective to shrink some of the footprint of Victoria's Secret stores?

So, we'll start with that with Martyn.

Yes, I -- we're not focused, necessarily, on shrinking the footprint of the Victoria's Secret stores. Across our system, the profitability of the Victoria's Secret stores, store-by-store, remains very robust. We are obviously looking to take full advantage of the current market conditions in a partnership, if you will, with the landlords. And we will leverage the numerous lease expirations or kickout rights or other things that we have available to us, to consistently reposition the store base mall-by-mall. But it's not driven necessarily, by an overall focus on reducing the footprint. We're also looking at co-tenancy and other issues and we will be very competitive. But again, the direction and the focus that we have is to be a good partner to our landlords in that process.

Okay. Just a quick follow on, financial issue. Given your focus on liquidity, what should we assume about buybacks for 2009? And similarly, given your discipline and your very lean inventories, is there a point that you anticipate where you've under inventoried stores, particularly the SKU-intensive Victoria's Secret business?

So, in terms of share repurchase activity, what we're focused on right now is cash and liquidity. So we do have a small amount remaining authorized under a prior program but we're focused on cash and liquidity at this point. And that's what we would convey to you. And with respect to inventory, inventory levels per foot are at their lowest level in five years for Limited Brands, Inc. And we have reduced them consistently for 19 or 20 months now. With that said, we are very focused on providing good experiences for our customers and realize that we need to be in stock to do that. So we work very hard to strike that balance in the right way. But to your point, one can't just reduce inventory without limitation.

And I'll pipe in. This is Sharen for Victoria's Secret. One of the things that we have strategically done as we've gone in to the spring season this year, is try to narrow down the amount of SKU's and styles that we are carrying. We really have focused on the few that produce the many. What are our top 10, 20, 30, 40 styles? To make sure that we are in inventory in our best-selling items, as well as to make sure that we are positioned for speed to be able to read it to react. An example of that would have been last year as we launched the BioFit bra, we were able to come back within 90 days, and actually relaunch that. We have taken that same discipline this year. I'm sure there will be always something that beats our expectations that will be low in inventory. But I think with the focus on the [few distributions of the many], the focus on making sure that we can chase inventories, I think that we'll be in a good position and a conservative position as we go through these economic times.

And at Bath & Body Works, I'll just add some things on inventory as well. We are focused on our three major categories, which are our fastest turning categories. And every single week, we reforecast. And specifically, since signature is exceeding our expectations, we reforecast every single form and fragrance on a weekly basis, to the 12-week turnaround time, so we can get back into stock. And then secondly, our balance by store, thanks to our in-site system rollout, has never been better. Our top deciles that are in-stocks are the same as our bottom decile stores and we're carrying a lot less inventory in the back room, so it's on the floor. So, we feel very confident about the direction that we're going.

Thank you.

Thanks, Richard, next question?

Our next question comes from Todd Slater with Lazard.

Thanks very much. I was wondering if you could just update us on the state of your international strategy, excluding Canada, in light of the global climate. I'm assuming your '09 guidance has $0 contribution from international? And then secondly, I'm trying to reconcile the 5% to 10% better comp in February and your first quarter earnings guidance reduction. I'm just wondering if you're expecting a big deceleration in March and April? Or you are planning promotional activity to accelerate substantially? Maybe you could just help us reconcile that. Thanks.

We'll go to Martyn for the international question.

Todd, I'd be disappointed if you didn't ask. So, thank you for bringing it up. First and foremost, I think as you've heard a couple of times now, our emphasis is on Canada, both sides of business, the BBW as well as our expansion of VS and Pink into Canada. We see great opportunity there, it's a Company owned base. And we think that can be a significant contributor to profitability in the next two to three years. The rest of the world is in crisis, as you know. So, in all of our conversations with potential partners, whether joint venture or franchisees, we've kind of hit the pause button in light of the economic crisis, over the last three or four months. However, with the new year, we've renewed a number of those conversations. And we're now aggressively moving against a couple of parts of the world, where I'm fairly optimistic that we will find the right answer for a partnership or a franchise arrangement with key partners. And so we are not retreating from the rest of the world agenda. But we are being very realistic about the rest of the world economy and the ability of potential partners to move forward with us. So stay tuned. It's taking us longer than we had hoped but we remain very committed to the rest of the world and finding the right way to take care of it.

Thanks, Martyn. And we'll go to Stuart for the question on the first quarter.

So, probably just three or four things to convey there. One, our February comp result, to date, is running a little better than -- or somewhat better than our expectation at the beginning of the month. With that said, the February result is pretty consistent with our view for the quarter. And we've obviously have just finished up our guidance numbers in the last few days. So, that would be the first point I would make. The second point is, we do have a tough comparison at Victoria's Secret in March overlapping the BioFit launch. The third thing I would mention, is that there is a lot of pressure in merchandise margin in this environment and we see pressure in merchandise margin, particularly in the first quarter. And then, two other things just to mention quickly. As we outlined, there's pressure in interest expense, uniquely in the first quarter, with the recognition of some upfront fees related to amendment. And lastly, our portion of earnings from our interest in Express and Limited, we expect unfavorability there, as well, in the first quarter and for the full year.

Thank you.

Yes.

Thanks. Next question.

We'll take our next question from Lorraine Maikis with Bank of America -- Merrill Lynch.

Hi, good morning. It's Rick Patel, in for Lorraine. Could you provide some more color on the performance of the Bath & Body Works restaged product? Has the sell-throughs gone well on a unit basis? And has that been drawing in new customers or is it just your most loyal customers that are coming back for it?

Well, as I mentioned earlier, it is beating our expectation. And it's really kind of across most of the forms and fragrances. Especially, as we have kind of remarketed and remerchandised by fragrance family, has really created some new interest. And also, the way we have remerchandised the walls. We tested so many things in the fourth quarter. And I think the wall navigation is much easier for the customer to understand. And everything that I'm hearing on different surveys that are taken, we are getting a younger customer based on some of these fragrances that we have launched. And I think we're getting more of our old customers to come back in.

Thank you.

Thanks, Diane. Next question.

Our next question comes from Laura Champine with Cowen.

[Inaudible] standing in for Laura. Could you give us a little bit more color on your capital structure and plans going forward. Just looking at your restrictions and your covenants, given you've been buying back stock for a long time now, it looks like it's going to be restricted, given some of the covenants. Do you favor dividends over share repurchases going forward or can you give some color there?

Sure. So, the first thing I would say is, at the end of the day, we feel pretty good about our capital structure. So, we feel good about the actions that we took. And we feel good about the amendments that we've announced and recently renegotiated. And feel particularly solid with respect to cash, liquidity, etc. With respect to your question about dividend vis a vis share repurchases or other uses of cash. The dividend is very important to our shareholders. And as we've outlined, we have the flexibility to continue that dividend.

Thanks Stuart. Next question.

We'll go next to Michelle Clark with Morgan Stanley.

Good morning, thank you. The question is on the other segment line. Can you just detail for us what specifically happened there during the quarter, from an operating margin standpoint? And how we should be thinking about that line item for 2009? Thank you.

Sure. Thanks, Michelle. We're going to go to Stuart for that question.

Just one second. In terms of the other segment, we had some decline in Mast profitability, offset by expense favorability. That would really be the key thing to understand about the fourth quarter. And as it relates to the other segment going forward, give me one second on that. For the full year '09, we would expect the other segment to be -- to have a somewhat lower net loss, fundamentally, by expense favorability. Somewhat offset by, again, a decline in Mast profitability.

Thanks, Stuart. Next question.

The next question comes from Jeff Stein with Soleil Securities.

Good morning, everyone. Two quickies. First of all, Stuart, you mentioned for first quarter, SG&A is expected to be down 5% to 10%. I'm wondering if you could give us some indication for the full year, where you see that line item?

Jeff, just real quickly. I think we said for the full year, we expect SG&A expense to be down by $150 million.

Down by $150 million in dollars?

Yes.

Okay, very good. Thank you. And secondly, on the systems rollout at Victoria's Secret, several years ago when you implemented the Back & Body Works rollout, there were some issues. And I'm wondering, what your learning was from that experience? And are you confident that you could complete the rollout without similar mishaps?

Thanks, Jeff. We're going to go to Martyn for that question.

Yes, Jeff, you're absolutely right that when we implemented the supply chain systems at BBW in 2006, we did experience a lot of stabilization issues. As Diane mentioned in one of her earlier comments, we do feel that those systems are now paying back, in terms of efficiency, speed and costs, and in stock positions in the store at BBW. We are planning to implement another phase of those same systems at Victoria's Secret stores this summer. An important difference in the approach that we've taken to this implementation for the Victoria's Secret stores, is that we implemented the sourcing and production part of the systems in 2008. So the Mast industries business, which is basically manufacturing flow to DC, distribution center floor, has already been implemented. We didn't talk a lot about that but that was a major global implementation that took place in March/April of 2008.

And it is now -- has been up and running for the past eight, nine months. And is working well, in terms of that part of the business. So, what we will be implementing for the Victoria's Secret stores business is basically the distribution center to the store floor, if you will. Just trying to kind of keep it in the supply chain terminology. These are also systems, from a technology point of view, that are the same as those that have been running now for the past 2.5 years in our businesses. So, we're not actually implementing any new technology. We are obviously, moving the Victoria's Secret stores organization onto that technology. And there is a major change in the way they will be going business to utilize there new tools. So, we do expect that there will be a stabilization period after the cut-over, if you will, in the summer. But we are confident that that stabilization period will be more manageable and less disruptive than it was for BBW.

Okay. And one additional question, the gross margin pressure that you expect to see in the first quarter, is any of it related to the restage at Bath & Body Works and potentially some inventory markdowns to clear old product?

It's Diane. I'll answer that question. Actually, we have been clearing the old product, starting in December and through our semi-annual sale in January. So, we're actually in a really good position today.

Thank you. Thanks. And operator, I think we can squeeze in just one more question.

Thank you. We'll take today's final question from Janet Kloppenburg with JJK Research.

Hi, everyone. I had a question for Sharen on the $29.99 bra event and if that had been sourced at margins that were acceptable to the brand? And if we could see more of that kind of activity, with maybe some lower opening price points? And for Diane, on the signature collection. I think you said it's performing well, the redo. I'm wondering what upgrades we could see in that line through fiscal '09? Thanks.

On the $29.50 bra, it's an introductory price point. We do have good margins. It's not at our optimal margin, right, at that price point. It is a great everyday bra. We are actually looking at all of our good, better, best pyramid across in use and fashion. And so, I think that we're going to be very strategic in terms of how we approach this.

And you'll be able to source -- with the lower sourcing costs that Stuart talked about in the back half, we may see some shopper prices but also good margins as we move into the back half?

You will definitely see improved costs. And where we see more promotional shopper price points, again, it's going to be strategic, depending on the bra. But we will have a good, better, best strategy.

Great. Thanks so much.

And this is Diane. In the signature collection, we have two major fragrance launches coming this spring, as well as a more youthful capsule within the signature brand itself. We are also introducing a new shower gel form this spring, as well as we are upgrading two of our key form formulas in the fall season.

Thanks, Diane. I'd like to thank everyone for joining us this morning and for your continuing interest in Limited Brands. Bye.

Thank you very much, ladies and gentlemen for joining today's Limited Brands conference call. This concludes your conference. You may now disconnect.