Bath & Body Works Inc (BBWI) 2009 Q1 法說會逐字稿

Good morning. My name is Barbara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Limited Brands first quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the call over to Amie Preston. Ms. Preston, you may begin your conference.

Thanks, Barbara. Good morning, and welcome to the Limited Brands first quarter earnings conference call for the period ending Saturday, May 2nd, 2009.

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 first quarter earnings release and related financial information are available on our website, Limitedbrands.com. This call is being taped, and can with be replayed by dialing 1-866-news-LTD, you can also listen to an audio replay from our Website.

Martyn Redgrave, EVP and Chief Administrative Officer, Stuart Burgdoefer, EVP and Chief Financial Officer, Sharen Turney, CEO Victoria's Secret, and Diane Neal, CEO Bath & Body Works, are all joining us today. 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, please limit yourself to one question. Thanks.

I will now turn the call over to Martyn.

Thanks Amie. Good morning, everyone. As you know on our last call in February, we acknowledged that this is a time when there really is an extraordinary uncertainty, and lack of visibility in the economy and in our businesses. The environment continues to be very challenging, although we are sensing that it is stabilizing. The overall first quarter comp result and promotional levels within our businesses were more or less in-line with our initial expectations, and we were able to deliver earnings upside versus our guidance, which Stuart will describe more fully in just a few minutes.

As we look ahead to the second quarter, we are continuing to manage the retail fundamentals of the business very conservatively. And we are not anticipating a change in overall trends in the environment or our business. Therefore, we remain laser focused on inventories, all expenses and capital spending, and expect to deliver strong free cash flow results, and to maintain a strong balance sheet. Stuart will take you through the details of our second quarter and full-year guidance in a minute, but essentially we are projecting a second quarter comp and operating income dollar year-over-year percentage decline, that is similar to our first quarter results.

Overall we continue to believe that we are in the right businesses, our brands lead their categories and offer high emotional content at accessible prices. As Sharen and Diane will further describe in a few minutes, we are aggressively focused on bringing compelling merchandise assortments, marketing, and store experiences to our customers, in order to maximize sales and margins. And we are continuing to be opportunistic in this difficult environment.

We continue to be on track with our technology initiatives, and the Victoria's Secret Direct's Distribution Center. And we plan to implement the last phase of our stores channel supply chain systems project at Victoria's Secret stores next month. As you may recall, we successfully completed the first phase of the Victoria's Secret stores implementation early last year, with the cutover of the new systems in our sourcing and production functions. We have also now implemented the new systems in our VS stores over the past eight weeks.

In June we will cut over the balance of the new systems and processes for our Victoria's Secret stores, merchandise planning and allocation, and our logistics functions. In connections with these implementations, we have pulled forward inventory deliveries into the distribution center and stores. With the early success of the sourcing and store level implementations, we have taken all reasonable steps, to insure that the balance of the implementation will be successful, understanding that any major implementation of this nature is disruptive to our business, and will require a period of stabilization.

We also continue to be very pleased with the performance of the six new BBW stores we opened in Canada in 2008, as well as the two additional stores opened so far this year. These stores continue to achieve about 2.5 times the average US store sales volume. We plan to open approximately 25 more BBW stores this year in Canada, as well as our first PINK stores. In addition, we are continuing our test at the Henri Bendel accessory stores, and we are planning to open six new locations this year.

Now before I turn it over to Stuart, I would like to make some comments about La Senza's first quarter performance. As you may know the Canadian retail market has also has also been very negatively impacted by the global economic crisis. Our first quarter results at La Senza were below our expectations. First quarter sales were $81 million, and comps were down 14%.

Operating income dollars and the operating income rate were both down significantly to last year. The most significant driver of La Senza's operating income rate decline, was a decline in the merchandise margin rate, which was negatively impacted by the weakening of the Canadian dollar, as La Senza purchases merchandise in US dollars. Additionally, SG&A expense delevered on the negative comp, although SG&A dollars were down to last year.

In March we named a new leader for La Senza, Joanne Nemeroff, a 30-year Canadian retail veteran, joined the business as President in April, and Joanne was most recently the Group Vice President at Aldo, and she will be working very closely with Martin Waters, the Head of our International business on our Canadian La Senza business. We have also appointed a team of functional experts from Limited Brands, that will be working with the counterparts at La Senza to drive operational improvements. We believe that the La Senza brand is strong, and we are confident that there is clear opportunity to improve the performance of the business.

Thanks, and I will now turn it over to Stuart.

Thanks Martyn, and good morning everyone. So turning to our first quarter performance, we reported earnings of $0.01 per share, versus $0.11 last year, which excludes significant items of $0.18 per share in 2008, as described in our press release. All results discussed on this call exclude these 2008 significant items. As Martyn mentioned, our first quarter results significantly exceeded our guidance, for a loss of $0.07 to $0.12. We would generally attribute this upside to three factors. First our negative 7 comp result was at the higher end of our expectations, driven by better than expected results at Bath & Body Works.

Second, we realized some better than expected results related to physical inventories, at both Victoria's Secret and Bath & Body Works. And finally our focus on expenses yielded expense reductions in excess of our initial forecast. To take you through the first quarter results in more detail, net sales were $1.725 billion, versus $1.925 billion last year, and comps were down 7%. The gross margin rate decreased 150 basis points to 31.8%, driven by significant buying and occupancy expense deleverage, that was partially offset by an improvement in the merchandise margin rate.

Although the merchandise margin rate declined in all of our brands due to increased promotional activity, the overall rate benefited from the decline in lower margin rate Mast sales. Sales in the other segment which consists principally of Mast declined 27%.

SG&A dollars declined by $57.5 million, or 11%, and the SG&A rate decreased by 10 basis points, primarily driven by our expense reduction efforts, and to a lesser extent a decline in marketing. Total operating income decreased $35.2 million, or 35%, to 65.2 million. By segment, the Victoria's Secret segment decreased by 61.9 million to 87.2 million. Bath & Body Works increased by 9.5 million to 4 million, and the Other segment loss improved by 17.2 million to 26 million.

Interest expense in the first quarter totaled 61.7 million, and included one-time costs of approximately 10 million, related to our term loan and revolver amendments in the first quarter. Retail inventories per square foot at cost ended the quarter up 1% versus last year, and down 27% on a two-year basis, in-line with our expectations. As we have previously mentioned, our total inventory levels over the next few months, will be impacted by the full forward of receipts at Victoria's Secret stores, in advance of the implementation of new supply chain systems next month.

Excluding Victoria's Secret total inventory per square foot was down about 10%. Total inventory per square foot is projected to be down in the mid- to high-single digit range by the end of the second quarter. Capital expenditures in the first quarter were 51.2 million, and depreciation and amortization was 85.2 million.

Looking forward to the second quarter as Martyn said, the current environment is very challenging and uncertain, and we expect it to remain so. We are not anticipating any significant change in the trends of our business, and second quarter guidance reflects that. We are forecasting comps down in the high-single digit range, and a significant decline in the gross margin rate, a result of buying and occupancy expense deleverage, and a roughly flat merchandise margin rate. We expect that SG&A dollars will decline by a similar percentage as the first quarter, or roughly 10%. We are projecting second quarter earnings per share between $0.11 and $0.16.

Turning to fall as we think about the fall season, we think it is important to remind you that the third quarter is a very challenging quarter for us, as it is difficult to leverage fixed costs on our lower sales volume quarter. Moving to the full year, in this environment we continue to think a reasonable comp expectation ranges from down 5 to down 10%. We expect a sales decline at Victoria's Secret Direct of roughly 10%, and as sales decline at Mast of roughly 20%.

With respect to expenses, as we said on our last call, we are focused on a number of initiatives to reduce costs, in areas including home office, nonmerchandise spending, marketing, and other discretionary costs. We have made good progress, and we continue to expect these actions will result in an expense reduction of at least 150 million in 2009, 10 to 15% of which is related to buying and occupancy expenses, and the remainder to SG&A. 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 is weighted to the latter part of the year. We will also continue to recognize a sales mix benefit on the merchandise margin rate, as a result of the decline and lower margin Mast sales. So taking all of this into account our current view is that full-year gross margins will be about flat to last year, driven by buying and occupancy deleverage, offset by an improvement in merchandise margin.

We expect the full year SG&A expense rate to increase slightly from last year. We expect interest expense to be approximately 53 million per quarter for the remainder of the year, reflecting the increased interest rate of 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 lower yields given the lower interest rate environment, and our conservative investment posture.

Our tax rate will be approximately 38%, and weighted average shares will approximate 325 million. So assuming all of these inputs, we expect earnings per share for the full year to be between $0.67 and $0.87 per share. We continue to aggressively manage capital expenditures. We are projecting 2009 CapEx at about $200 million, down from 479 million in 2008, and 749 million in 2007.

As you know, approximately 70% of total 2009 capital spending will be focused on real estate, reflecting investments in key US centers, and significant growth for BBW in Canada. In the US total square footage is expected to be about flat, while square footage is Canada is expected to grow by 5%, for a total company square footage growth of about 1%. More specifically in 2009 we plan to open 61 new stores, 28 in the US, and 33 in Canada, down from 145 new stores in 2008. In terms of store reconstructions, we are planning 53 reconstructions in 2009, down from 153 reconstructions in 2008.

Turning to liquidity, we ended last year with $1.2 billion cash, and 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, result 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. We do not anticipate having to borrow under our additional 1 billion in available credit facilities in 2009.

So thanks, and now I will turn the discussion over to Sharen.

Thank you, Stuart. Good morning, everyone. In the first quarter, sales for our total segment including La Senza, decreased 10% to $1.125 billion. Comp sales were down 10%. The total segment operating income decreased 61.9 million, or 410 basis points, to 87.2 million.

Turning to performance by channel. Victoria's Secret store comp declined by 9%, and total sales decreased 4% to 726.8 million. In terms of category performance, PINK continues to show the strongest performance, with significant growth in bra and panties. In addition, Beauty also had a good quarter with several new product launches, exceeding our expectation, including Naturally by Victoria's Secret and Noir. We were pleased with our bra launches during the quarter, despite the positive response to new products, we did not drive dollar growth in bras. Although, total bra unit sales were up slightly year-over-year.

As anticipated, the environment was very challenging, and we responded with targeted promotions, to drive traffic and maximize merchandise margin dollars. As a result, the merchandise margin rate in the quarter was down to last year. Buying and occupancy expense delevered on a negative 9% comp. Despite a negative comp result, the SG&A expense rate was flat, a result of disciplined expense management. Operating income dollars and rate were both down significantly to last year.

Now let's review performance at Direct. Sales for our web and catalog business was $317.4 million, down 17% to last year. The decline versus last year is more prominent in our clothing category. We have increased promotion to improve the trend of the business, and as a result, our demand trend improved over each month out of the quarter. Consequently, there was a decline in the merchandise margin rate. Despite a meaningful reduction in expense dollars, the buying and occupancy and SG&A rate delevered on lower sales volumes. Operating income dollars and rates were down significantly to last year.

Looking ahead to the second quarter, across all channels we are focused on speed, staying close to our customers, and reading and reacting to trends within the business, as quickly as possible to maximize our opportunities. We know that the customer is responding to fashion and there will be an increased level of fashion within the business, throughout the remainder of the year. We are very excited about our upcoming bra launches, and exciting new choices in panties and coupled sleepwear.

Here is a preview of what you will see over the next quarter. In stores right now is a new BioFit 7-way convertible. We will launch VS undies, the ultimate in comfort and everyday sexy. We will leverage our dominance in the push-up bra category, with the launch of new PINK, and Very Sexy push-up styles. Beauty has launched Parfum Montaigne, Vertical, a men's fragrance, and Beauty Rush Pool Party. Beauty will also be introducing new scents for Secret Gardens and Naturally. Beauty will introduce Sexy Back and Anti-Bac for VS in our Best Garden scent.

Our goal is to have a compelling assortment across all product categories. Based on our review of our current assortment, we know that we have an opportunity to attract additional customers to our brand, through an expansion of product positions and at opening price points, which is particularly relevant in the present environment. We are addressing this and additional offerings this summer.

So in summary, I would like to leave you with three key initiatives we are focused on. First, the disciplined conservative management of retail fundamentals, including inventory and expenses. Second, increasing the level of newness in fashion, with emotional content, across all categories of the business, testing new products, and reading and responding to the speed to capitalize on opportunities. Our team is aligned and agile, working with efficiency and speed, and finally, driving incremental business by offering a compelling fashion assortment, across all price points, including an expanded offering at opening price points.

Thank you, and I will turn it over to Diane.

Thank you, Sharen, and good morning. At Bath & Body Works we are encouraged by the results of the first quarter, but recognize that we continue to operate in a difficult retail economic environment. Some of the successes of the first quarter that I want to highlight, include our restaged Signature Collection, which was featured in floor sets throughout the quarter, which delivered strong results. Additionally we successfully introduced a new fragrance for this collection, Butterfly Flower, which met our expectations.

Our home fragrance sales were up significantly to last year, driven by strong candle and diffuser performance. The antibacterial business posted gains over last year, aided by sales of our pocket bac hand sanitizer. Hand sanitizer sales improved with the outbreak of the H1N1 flu, and our product is differentiated by our broad assortment of fragrances.

Finally our financial results benefited from continued focus on expense and inventory management. The successes however were tempered with the economic realities of the first quarter. First we continue to operate in a heavily promotional retail environment, and additionally we witnessed soft traffic in our stores, and saw that our customers spent less per transaction than last year.

So with that context, I would like to take you through our financial results. Bath & Body Works first quarter sales comps were above expectations at a negative 3%. Total sales for the quarter were 403 million, up 1%, or 3 million to last year. The 4% spread between comp performance and total growth was driven by new store sales and growth in our e-commerce business.

For the quarter, our operating income was 4 million, up 10 million to the first quarter of last year. The last time Bath & Body Works generated a profit in the first quarter was in 2006. The results were driven by successful expense management, as SG&A expenses were $13 million below last year, and leveraged significantly. Gross margin rate was down to last year, primarily due to a decline in merchandise margin rate, caused by increased promotional activity. Fixed occupancy expense in the negative comp environment also contributed to the decline. Finally, the active management of inventory allowed us to finish the quarter with inventory levels that were down to last year. This is the eighth consecutive quarter that inventories have been down year-over-year. At the same time, our in-stock position continues to improve.

I now want to give you a brief preview of what our customers can expect in the second quarter. We have just come out of Mother's Day theme, and are presently introducing the newest fragrance in our Signature Collection, which is White Citrus, we also expanded our product portfolio by launching foaming hand soaps in our aromatherapy line, introduced foaming shower gels in our Top five fragrances of our Signature Collection, and developed a new light shade collection in our True Spa brand called Naked. Additionally in our home fragrance category, we will introduce our newly repackaged Wildflower Collection, expand on our successful Caribbean Salsa fragrance, and increase our presence in the odor elimination category.

Outside of all the newness, our other priorities are maintaining focus and growth strategies around our core brands, Signature Collection, our home fragrance, and Anti-bac categories. Optimizing our segmentation strategy through tiered assortments, continuing to manage our expenses and inventory levels, and executing a successful Semi-Annual sale, the timing of which is the same as last year. So despite the constraints on consumer spending, I want to reiterate that we will continue to drive our results, by offering newness, responding to business trends, testing new products and promotional strategies, that will drive traffic and gain share.

With that, I will turn the discussion back over to Amie.

Thanks Diane. That concludes our prepared comments. At this time, we would be happy to take any questions you might have. Again, as a reminder, in the interest of time and considerations to others, please limit yourself to one question.

Barbara, I will turn it back over to you.

Thank you. (Operator Instructions). Your first question comes from the line of Kimberly Greenberger of Citigroup.

Great. Thank you. Good morning. Martyn you said something in your prepared remarks about sensing the economy is stabilizing. I am wondering if you could share with us what the things you are looking at, and if it is something that you are seeing on a brand by brand basis, maybe Diane and Sharen could talk as well?

Sure, Kimberly. Again we are all, I think reading and watching all of the developments in the economy, and all seeing pretty much the same kind of metrics and indicators. I think some of the things we are looking at is the relative stabilization, in other words, the decline is lessening in intensity. In the housing market, the relative recovery, and the consumer confidence index, and the relative stabilization of the financial markets, and I say it all in the relative sense, because it is relative to the pace of decline that we have been experiencing over the past six months. And so the signs that things are stabilizing in that sense are there.

In terms of our comp store sales growth and other things, you have got the numbers. So if that stabilizing or not, it is hard to say. We, as we have signaled in terms of our planning looking forward, we are continuing to look at things very conservatively, positioning all elements of the business in a very conservative posture. And continuing to look for other leverage in the other parts of our business, in terms of cost savings, inventory, capital, et cetera, to maintain a very strong position as we navigate our way through the economy, and the retail environment that we are competing in.

Thanks, Martyn. Next question?

Comes from the line of Michelle Clark of Morgan Stanley.

Yes. Good morning. Thank you. My question relates to gross margin. If you can give us a sense of what the gross margin rate would have been, X the favorability of seasonal inventory at both VS and BBW, and secondly, what the gross margin rate would have been, X the decline in lower margin Mast sales? Thank you.

Thanks, Michelle. We can give you a little context there, and we will go to Stuart.

Good morning Michelle. In terms of isolating those effects, or adjusting for those effects. Merchandise margins would have been down, I talk about the two businesses together, between 150 and 200 basis points for the quarter.

Thanks, Stuart. Next question?

Comes from the line of John Morris of BMO Capital Markets.

Thanks. Good morning. Congratulations on finishing the quarter on a much better note. My question, I think really is for both Sharen and Diane. If we can look ahead out towards Holiday, with respect to your approach to marketing this year, marketing is defined both in terms of external to the customer, as well as your promotional positioning compared to last year.

What are your thoughts, what is your philosophy, the difference in approach this year versus last year, with that marketing strategy? Particularly as taken into account, the observation that you all have been pulling back on external marketing spending, and needing to be a little bit more promotional. So what are your thoughts for Q4 and Holiday? Thanks.

Thanks John. We will go to Diane first.

Hi John, it is Diane. We don't do any external marketing as you probably know at Bath & Body Works. How we are planning our promotional strategy for Q4 is basically the same as last year in total. We have got some more targeting traffic driving ideas, which obviously I wouldn't share, but I think overall we are planning basic flat to OI. But I can also say that our marketing in-store in-window is significantly different last year, much more animated than you have seen in Bath & Body Works in quite a while.

Thanks, Diane. Sharen?

We are very selective and purposed when looking at our marketing, and although our marketing dollars will be down roughly around 6% in the fall season, we have targeted very strong bra launches. We have actually taken the marketing dollars out where we got little return. We are continuing to test our promotions, before we implement them and roll them.

We will continue adding the emotional content for the brand. We are using more surprise and delight, an example of that would be as we gave away at Godiva on Valentine's Day. You will see more of that coming from us, as well as within our PINK category. You will see us in terms of our marketing, playing in PINK where the customer is, such as online marketing, as well as Facebook. We still do have robust television plans to support our launch. So I think that we are very set up to be successful in the fall season.

Thanks, Sharen. Next question please.

Lorainne Hutchinson of Bank of America.

Thank you. Good morning. I was hoping to get a little bit more color on the Victoria's Secret margin decline, and any specific strategies that you have at the Victoria's Secret business, to try to stabilize that operating margin going forward?

Thanks Lorraine, we will go to Sharen for that.

Maybe I can provide some overview, and then Sharen could deal with the merchandise margins specifically. As you know, the key driver to improve the operating margin for our Limited Brands in total, and Bath & Body and VS is really two or three things. One to improve merchandise margins over time, and again Sharen can address that more specifically.

The other is to get back to a pattern of low to mid-single comp growth, which will provide leverage of expenses. And the third key thing will be the ongoing management of our expense structure to continue to take cost out of the business, that is the general plan, to get to what we believe is an appropriate target of 15% operating margin over time. That will be a multi-year effort, as you would understand. But the biggest driver of decline in the margin in the business, and the biggest opportunity going forward, is in merchandise margin, and probably Sharen can elaborate on that a bit.

Yes, as we go forward our financial plan for the year is very conservative, and we are working to remain flexible in our inventory position, as well as our ability to check it. So rigorous inventory management, as we also are testing more before we roll big programs. This will enable us to have cleaner, and also leverage our markdowns. And we believe that by having this conservatism, that this will serve us well in whatever shift occurs in the economy.

Thanks. Next question, please?

From the line of Jeff Black of Barclays Capital.

Hey, Sharen, just to continue on that line of thinking, is it safe to say that you were more promotional than you set out to be though in the quarter, and in what categories did that happen? When you talk about the opening price points, is it that that customer or underwear just won't buy at full price? If that is case have you tested the opening price points, and how much of the assortment is that going to hit? Thanks.

There are probably two questions in there. The first question was were we more promotional than we had anticipated. As we came out of the fall season, we were heavy in inventory, although it was very healthy inventory, and we did add a promotion, to make sure that we could balance that inventory in the March timeframe. As we think about our expanding our offering in opening price points, we believe it will garner us a new customer. What we are focused on is really segmenting the business, and meeting the product and price needs of all of the segments in the Victoria's Secret customer. And PINK will have a more aggressive approach in the bra category.

The core category we dominate within that market share, and we believe there is a strategic opportunity where PINK sits, and where our core business sits. Total, we are not seeing -- all of our bra launches have been very successful, and we have not seen price resistance within those bra categories. Having said that, we still believe there is an opportunity to gain market share by addressing this good, better, best strategy.

Thanks, Sharen. Next question.

Your next question comes from the line of Stacy Pak of SP Research.

Thanks. I guess sort of the same type of question for both Sharen and Diane. Sharen, it looks to me with the sort of expansion of the opening price point, that the VS business is going to continue to suffer some comp pressure, unless you can get the traffic up to offset. But I am wondering, how we should be thinking about the average price going forward, and how much traffic needs to be up to offset that pressure.

And Diane, if you could address Signature, it looks to me like you are not really realizing the ticketed price. And that margins are probably down because of the promotion. So I am wondering how you sort of feel about being able to address that ticketed price on signature going forward, and if you could address traffic in BBW, that would be great. Thanks.

Thanks, Stacy. Diane, you want to go first?

Sure. As far as Signature and the ticketed price, we actually have everyday buy-ins, and have had for the history of this brand. Last year we were 'Buy Three, Get One Free' on an everyday basis. We tested some additional buying strategies, because as we got into the fall season of last year, we realized that that ticket as an average sale was probably too high. We tested some additional promotional strategies this spring, which has actually been helping to drive business.

But you will hear our margins for Signature slightly down, but it is really because of clearing the old packaged products in February, as well as the fact that our even though our distribution of CRM is pretty flat to last year, we are getting a higher response this year, which is adding to our additional promotional margin decline. And other pieces about traffic, traffic is down at Bath & Body Works, and we continue to try to find ways whether it be through promotional strategies, window marketing, and in-store, to really drive traffic.

Thanks, Diane. Sharen.

In terms of the AURs, you are not going to see a significant decline in our overall AUR. As we build this strategy, we are building not only the opening price point, but also the upper tier price point. We are getting paid for the fashion, when we have the right fashion we are getting paid. So I don't think you are going see a big significant difference within our AUR strategy.

And as Diane had talked about, traffic has been down, and we know that when we launch a bra we drive traffic, when we know when we have targeted strategic activities and promotions, we drive traffic. So these are the things that we will continue to balance as we go through second quarter, as well as into fall.

Thanks, Sharen. Next question, please.

Comes from the line of Randy Konik of Jefferies.

Hey. I guess a question for Stuart. Regarding the cash flow, can you talk a little bit about how we should be thinking about go-forward working capital, given where the inventory has been starting to shake out on the last few quarters on a year-over-year basis? And if you think about reiterating your free cash flow guidance for the year, can you help us understand how you would be thinking about free cash flow, just over not just this year over the next couple of years? Do you think this is more of a sustainable level of free cash flow going forward? Thanks.

Great. Thanks Randy. I will take the second of your two questions first, because at the end of the day in many ways it is the more substantial thing that we are managing towards. So on free cash flow for 2009, we remain very comfortable with the guidance that we put out at the beginning of the year, which is free cash flow of 350 million to 450 million. And then even beyond '09, our view, and the history of the business with the exception of a couple of years, is such that this business should generate 400 million plus of free cash flow every year, and we as a management team are very intent on accomplishing that.

With respect to inventory and working capital assumptions in 2009, Randy, there aren't what I would call aggressive assumptions, or overly optimistic assumptions embedded in my view of the 350 to 450 of free cash flow. With that said, with respect to inventory, we are going to be managing receipts and levels down in fall, in the mid-single, negative mid-single range for fall. Thanks.

Thanks, Stuart. Next question?

It comes from the line of Jeff Stein of Soleil Securities.

Guys, you have built up a pretty wide level of variability in the second quarter outlook, and I am wondering, how much of that reflects, perhaps some cushion with respect to the supply chain systems conversion?

I wouldn't say that there is a lot of cushion explicitly for that. We have some expense contingency, that is more in the fall period in Q3. What the range reflects, is the uncertain environment that we are all familiar with. So starting with the sales and comp assumption, through to obviously, in a lot of interest to you and to us, what level of promotion will be required, to maximize margin dollars and flow inventory appropriately. That is really the driver of the range that we have.

Got it. Thanks.

Next question, please?

Comes from the line of Dana Telsey of Telsey Advisory Group.

Good morning. Can you talk about the opening price point product at Victoria's Secret, how do you think about the IMU of that product, versus the rest of the assortment? How much of your assortment will it account for, and then just lastly on Mast, impact this quarter and expectations going forward? Thank you.

Thanks, Dana. Sharen?

In terms of the opening price point and in terms of some of the bras, as we think about our 2 for 40 strategy, and go forward, you will not see any difference in the IMUs, than what you see in the business. So we are able to engineer this from a costing perspective, as well as partner with our vendor base. I would say that through this strategy, a little more than 80% will be at the normal IMUs that Victoria's Secret achieved. There is probably 20% that may be a little lower than that.

Great. And stores on Mast?

Dana. Good morning, the Mast effect is really, particularly in the first quarter, is really an effect on rate, as we have called out. So it is benefiting the overall company merchandise margin rate, due to the greater than Company decline in those sales in the first quarter, about 27% down.

With that said, the Mast activities did not have a significant impact on operating income in the quarter, in terms of year-on-year dollar change. And that was really due to while sales were down, they were able to drive a better profit rate obviously within the business to make up for that decline, through expense management and just other better margin in their business. That performance in Q1 I would expect to continue through the balance of the year.

Thanks, Stuart. Next question.

From the line of Laura Champine of Cowen and Company.

Good morning. Just looking at your recent historical comp performance, and your guidance for the rest of this year, it concerns me that maybe you are losing market share. So could you share with us how you measure market share, and think about your declines relative to the rest of your comparable companies?

Okay. We are going to go to Sharen for that first.

As we measure market share, there are a couple of things that we utilize. We have some internal data that we utilize, as well as MPD. As we came out of 2008, our market share had actually increased in 2008, especially within the bra category. Also in my earlier remarks, when I talked about that although dollars were down in bras, our units were up in bras in the first quarter.

And really speaking to counterparts and also in the market, we are thinking we did better within the bra category than our competition. Most of the competition that we were able to get information about, actually saw bigger declines in their intimate apparel business, than in some other categories. This market share is something that we totally watch, and I still believe that as we get better about segmenting our business, and making sure that we have clear segments like PINK, and filling the void that we believe we have between PINK and core, we will continue to see market share growth at Victoria's Secret.

Thanks, Sharen. Diane.

In most of our categories, we still are the leader as far as market share. The one category that we are probably have not been the leader is in candles, and we are gaining share this season, just based on what we have done with our candle assortment and strategy. But what we look at really for the body care business, most of it is really in mass is our biggest competitor, and we still feel that we offer such a differentiated experience through our in-store promotional connection, and also our fragrance assortment, that it really is not as much of a competitive issue.

Thanks Diane. Next question.

Comes from line of Paul Lejuez of Credit Suisse.

Hi, thanks guys. Can you remind us what percentage of our BBW and Victoria stores are mall versus off-mall, and if you are seeing any difference in the performance one versus the other? Also wondering where are the majority of the closings in each on those brands?

Okay. We will go to Diane first.

Mall is about two-thirds, to one-third off-mall.

And closings, where your store closings are coming from?

About equal for mall and off-mall.

Between Secret, 80% is mall, 20% off-mall. We are not seeing any really big swings between the performance mall versus off-mall. And our closings are probably more mall than off-mall.

Thanks. Does that do it for you Paul? Hopefully. Okay. Next question?

Is from the line of [Ted] Slater of Lazard Capital Markets.

Hey guys. Todd Slater. That is a first. Real quick, are you guys still thinking about a La Senza opportunity in the US, and does BBW success in it's first foreign foray, give you any greater confidence or inclination to pursue other international opportunities more aggressively, and for Sharen, any plans to gain more share with the modern 25-year old target customer? Thanks.

Thanks Todd. We will go to Martyn first.

Good morning, Todd. I think the way I characterize our current view of the world outside of the United States is clearly Canada is our primary focus. As I have described in the prepared remarks, we are very focused on La Senza Canada, with new leadership, new focus, (inaudible) attention to the brand, the assortment, the positioning of that business, and it's performance from our point of view is a #1 priority for us.

BBW Canada is very encouraging to us, and it is a big operational focus for us to expand there, and continue to enjoy the success we are enjoying. The introduction of PINK and Victoria's Secret in Canada, as I didn't mention Victoria's Secret, because those are stores that are scheduled for the spring of '10, is another major organizational focus for us.

We are trying to make sure that as we do these things, we do not distract our US brands, or demand of them too much attention to this effort. So it is a SWAT team environment to try to get these brands up and running outside of the United States. In terms of bringing La Senza to the United States, that remains a curiosity to us, and something that we are thinking about and looking at, but again I would go back to my priorities, in that order of sequence, we will get to La Senza United States lower on the priority list.

And the other thing I would mention quickly, is we are also launching a new concept in travel retail stores under the Victoria's Secret brand in the next couple of months, something I did not mention, six pilot stores in different airport locations around the world, that will also I think give us some clues about Victoria's Secret outside of the United States.

Thanks, Martyn. Todd could you repeat your question for Sharen?

I got it. The question was are we targeting more of the modern 25-year-old customer. Yes, we are focused on the 22 to 25-year-olds, and I believe that this is an opportunity for us. We will have our first introductory offer coming in this summer. I think that it is in targeting this customer, there is a different body type, which gives us a narrower, which gives us an opportunity, and we have done a lot of work around understanding that. And so we will be testing this within about 250 stores this summer, with the ability to get to all stores by Holiday.

Great. Thanks, Sharen. Next question, please.

From the line of Marni Shapiro of Retail Tracker.

Hey, guys. Thanks for taking my call under the wire here. You guys have been pretty quiet about Direct in the Q&A. I will throw a couple of questions there. If you could just update us on site traffic trends and click through, and things like that, and where you have seen the real hot spots where people are buying? If you can also talk a little bit about your thoughts for fall and Holiday, because obviously last year was very tough for this area. And it seems that for many other retailers, the direct channel has been very strong. So as you plan for the back half against last year, how are you thinking about it?

Great. Thanks Marni. Sharen.

Direct has not performed to my expectations, and here is what we are doing about it. First of all, we are appropriately balancing and leveraging the catalog and the internet. And we are refocused on the fundamentals of the direct business operation, including the discipline around our catalog circulation. We will recommit to having the right product at the right time.

For an example, we have had softness in apparel, and I believe there are internal and external factors that contribute to that. Externally as you know, we face significantly more competition in the clothing business, and our competition is being dramatically promotional. And internally, we have had misses in several categories in our assortment and color choices.

So we are correcting the assortment and color misses for the summer and fall months, and we are addressing the overall opportunity, I believe we will see this trend change. When we think about the traffic, our traffic has been up on the Website, where we have seen weaknesses in conversion, and I believe that goes back to some of the assortment issues and misses that we have. We did have a conservative fall season last year, in terms of performance. We are going into fall conservative, but with the ability to take advantage of any uptick that we see within this business.

Thanks, Sharen. Next question?

Comes from the line of Brian Tunick of JPMorgan.

Hi. Thanks. Maybe Sharen first, can you talk about the positive mix shift, I guess if Victoria's Secret Beauty is improving here, maybe give us an idea of maybe the delta in the gross margins between Beauty and the core lingerie business, and then maybe Stuart, on the average unit costing side you talked about, which division do you think has the most opportunity in the second half? Thank you.

Thanks Brian. We will go to Sharen first.

Sure. Our strategy as we entered the spring season in Beauty, was to ramp up the newness. And we actually had about 60% of the assortments were new, and also within our core assortment, like Secret Garden, we added newness in terms of fragrances. Our hit rate this spring season on the newness has been the best it has been in years. So we had a very successful launch with Noir, which is a fragrance that we came out with around Valentine's Day, we had a very successful launch with Naturally, we sit above with Secret Gardens, we had a good seasonal fragrance launch with the Heavenly Collection. So we are very optimistic about Beauty.

The question that you had in terms of margins, can you repeat the question on the margin that you wanted?

Brian, there is going to be, I think I recall, you were curious about the mix benefit on Beauty. Beauty is growing, we are having a better sales outcome than the business in total, to your point, that will provide some mix benefit, we are going to be careful about how specific we get on category margin rates. But your intuition is correct, that the Beauty margin rate is higher than the total.

Stuart, the question on average unit costs?

Brian, with respect to cost of goods reductions, and how that breaks by segment or division, and it is not coincident, it just happens to be the outcome, because we have worked this in detail, as we have discussed. The benefit is actually pretty similar across intimate apparel, clothing, and personal care, and Beauty categories. There is some difference, but I wouldn't describe that difference as material. Each segment or business will benefit meaningfully in the back half of the year as we have talked about, and the magnitude of those benefits, in terms of percent reduction is similar.

Thanks Stuart. I think we have time for one last question.

And that would be from the line of Howard Tubin of RBC Capital Markets.

Thanks guys. Sharen, in terms of the new opening price point business, is this going to come in the form of new sub-brands, or will it be line extensions to existing, some brands in the stores?

It will come in many different places, #1 there will be more of a focus for PINK, it will come in terms of a new sub-brand that is launching this summer. As well as it will be line extensions within in some of our other separates.

Great. Thanks Sharen. Thanks everybody for joining us this morning, and thank you for your continuing interest in Limited Brands.

This does conclude today's conference call, you may now disconnect.