Bath & Body Works Inc (BBWI) 2009 Q3 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the Limited Brands third quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the call over to Amie Preston, Vice President Investor Relations. Please go ahead.

Thank you, Stephanie. Good morning, everyone, and welcome to the Limited Brands third quarter earnings conference call for the period ending Saturday, October 31, 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 third quarter earnings release and related financial information are available on our website, Limited Brands.com. This 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 Chief Administrative Officer, Stuart Burgdoefer, EVP and Chief Financial Officer, Sharen Turney, CEO Victoria's Secrets, and Diane Neal, CEO of Bath & Body Works are all joining us today. Stuart is in a different location than the rest of us. After our prepared comments we will be available to take your questions for as long as time permits so we can speak to as many of you as possible please limit yourself to one question. Thanks and I will now at any the call over to Martyn Redgrave.

Thanks, Amie, good morning, everyone. Although the third quarter as you all know is not a significant quarter to us from a profitability perspective, we are pleased with the progress that we made in each of our businesses versus spring. Which overall enabled us to exceed our initial earnings guidance and increase operating income by $17.7 million or 43% over last year. Coming into the fourth quarter and the all important holiday season the environment remains challenging and uncertain. So we are focused on what we can control. With this in mind we continue to plan conservatively and we are well-positioned to deliver the best holiday possible as a result of our disciplined management of inventory and expenses. Additionally our technology systems and the Victoria's Secret direct distribution center are all performing well. In light of this perspective, we have raised our full year earnings guidance to reflect our third quarter beat and a slightly improved view of fourth quarter opportunities. Stuart will of course provide more details on that in just a moment.

As we discussed in detail at our recent investor update meeting in Columbus, we continue to be focused on maximizing sales and profitability with an overriding emphasis on speed and execution. Our product assortments are compelling and include a significant number of new items for holiday. Before I turn it over to Stuart I'd like to provide you with an update on our international activities.

At our investor update meeting, Martin Waters outlined our six-point management agenda for pursuing growth outside the United States. The first three of which we are actively engaged in. I'm going to focus my remarks on those first three this morning. First is the effort to rebuild the profitability of the La Senza business both in its home market in Canada and internationally. In the third quarter La Senza's comps were down 3% in the core lingerie business. Total La Senza comps, which includes La Senza girl, were down 6%. The gross margin rate increased significantly primarily driven by favorable foreign currency impacts than compared to last year. As we have mentioned previously, La Senza purchases its merchandise in US dollars. Despite the negative comp, SG&A expense leveraged. Overall operating income dollars and the operating income rate increased significantly. Going forward we are very focused on improving the assortment, store operations and profitability of the core La Senza retail business in Canada. We also expect that these improvements will strengthen the performance of the La Senza international business.

The first step was bringing in new leadership for the business. As you know, Joanne Nemeroff, a very experienced Canadian retailer, took over as President in April. We also appointed a team of functional experts from Limited Brands to work with our counterparts at La Senza. Joanne and her team are testing changes in marketing and store layout, as well as a more focused assortment. These test stores have shown very encouraging results. Additionally we have made the decision to close the La Senza girl free-standing stores. La Senza girl has had a negative impact on La Senza's overall financial performance and is not aligned with our overall strategic focus on lingerie and personal care and beauty. We are in the processing of converting or closing the remaining 42 La Senza girl stores and we will incur the costs associated with this activity in the fourth quarter. Which we currently estimate will be about a $0.01 to $0.02 per share expense and that expense is included in our current guidance. So we are clearly engaged in a strategy to turn this business around and we are confident we will see improvement in Canada and this in turn will lead to a healthier business model for our partners around the world.

The second point on our international agenda is the expansion of our other businesses into Canada. This effort is well underway at BBW, where we will have 31 stores open by the end of November in Canada and we are planning to open approximately 30 to 40 more in 2010. These stores are delivering sales volumes about two and a half times the US average which is very encouraging. We also opened four PINK stores in Canada in the last few weeks and we are encouraged by the initial results. And finally we will open our first Canada Victoria's Secret flagship store and a couple of other additional flagship stores in the Spring of next year. As Martin Waters mentioned last month we believe we have an opportunity for an incremental $1 billion in sales in Canada overtime.

Now the third point on our agenda is the roll-out of our travel retail concept. As you may remember these are the small Victoria's Secret stores focused on beauty and Victoria's Secret brand and accessories. The stores are approximately 1,000 square foot in size and are operated by partners under a wholesale model. They are principally located in airports and tourist destinations. At the time of the update meeting we had four stores open in Brazil, Argentina, JFK and Dubai. Since that time we opened in Barbados and Mexico opens this week. These stores continue to deliver incredible early results with sales productivity levels in the thousands per square foot. We think this business model represents a significant growth opportunity and a great way to market our brand to a sophisticated customer base around the world. We also have three additional pathways to market for international growth where we are actually more in the thinking stage currently. So I'm not going to spend any more time on those initiatives this morning.

So in summary we are aggressively building our existing base of profitable sales outside the United States. With our expansion plans in Canada and the early success we are seeing in other initiatives, we believe we are just beginning to exploit the full potential of our brands in this international space. Thanks and I will now turn it over to Stuart.

Thanks, Martyn, and good morning, everyone. Turning to our third quarter performance our adjusted earnings per share were $0.02 per share versus a $0.01 last year. Our reported 2009 result was $0.05 per share including an income tax benefit of $0.03 primarily due to the resolution of certain tax matters. All results discussed on this call exclude this income tax benefit. As Martyn, mentioned our third quarter result exceeded our August guidance for a loss between $0.07 and $0.12 per share. The upside was primarily driven by a better comp in merchandise margin result versus expectations particularly at Bath & Body Works.

To take you through the third quarter results in more detail. Net sales were $1.777 billion versus $1.842 billion last year and comps were down 2%. The gross margin rate increased 20 basis points to 31.7% driven by a merchandise margin rate improvement that was partially offset by buying and occupancy expense deleverage. Adjusting for the effective mast, our merchandise margin rate would have been roughly flat. SG&A dollars declined by $35.2 million or 7% and the SG&A rate improved by 90 basis points primarily driven by our expense reduction efforts and a reduction in marketing. Total operating income increased $17.7 million or 43% to $58.9 million. By segment, the Victoria's Secret segment decreased by $20.9 million to $53.9 million. Bath & Body Works increased by $44.5 million to $15.5 million. And the other segment operating loss increased by $5.9 million to $10.6 million. Total nonoperating expenses increased by $9.5 million or $0.02 per share driven by incremental interest expense that was partially offset by the recognition of our 25% interest in Express' third quarter net income. Retail inventories per foot at cost ended the quarter down 10% versus last year and down 20% on a two-year basis which was somewhat lower than our previous view. Capital expenditures in the third quarter were $63 million versus $133 million last year and depreciation and amortization was $88 million.

Turning to the fourth quarter, we are forecasting earnings per share between $0.71 and $0.86. This forecast reflects a comp decline in the low to mid single-digit range. The spread between comp sales and total sales will be different in Q4 versus recent quarters reflecting a much smaller decline in mast external sales, VS direct. and sales growth in Canada. We expect total Q4 sales to range from roughly flat to down low single digits. We anticipate that the gross margin rate will be up significantly to last year primarily driven by improvements in the merchandise margin rate in all of our significant businesses. We expect that SG&A dollars will be about flat to last year as we begin to lap cost initiatives from the previous year and have planned for some incentive compensation this year versus basically none last year. Before any discrete items our tax rate will be approximately 38% and weighted-average shares will approximate 330 million in the fourth quarter. We expect to ends the fourth quarter with inventory per square foot down in the mid single-digit range.

For the full year we anticipate a comp decline in the mid single digits. We expect a sales decline at Victoria's Secret direct at roughly 10% and a sales decline at mast of roughly 20%. Full year gross margins will be up slightly to less driven by an improvement in the merchandise margin rate partially offset by buying and occupancy deleverage. With respect to expenses, as we've 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 remain on track to deliver $175 million in cost savings this year. We expect the full year SG&A expense rate to be roughly flat to last year despite the negative comp. So assuming all of these inputs we expect adjusted EPS for the full year to be between $0.93 and $1.08 per share. This compares to our August guidance of $0.75 to $0.90 per share. The increase in our estimate reflects the third quarter beat and a better profit out come in the fourth quarter driven by a slightly improved view of comps given our third quarter perform. We continue to aggressively manage capital expenditures. We are projecting 2009 CapEx at about $225 million, down from $479 million in 2008, and $749 million in 2007.

Turning to liquidity. At our update meeting last month we increased our free cash flow projection for 2009 to between $500 million and $600 million and we expect to end the year with about $1.5 billion in cash. Our free cash flow and cash position along with the additional availability under our $1 billion revolving credit facility results in very strong liquidity, which is more than sufficient to funds our working capital, capital expenditures, dividends and any other foreseeable need. Thanks. Now I will turn the discussion over to Sharen.

Thank you, Stuart, and good morning, everyone. I'd like to talk about three things today. First, I will review our key incite from third quarter. Second, I'll review third quarter results. And, third, I'll spend a few moments talking about the fourth quarter and holiday.

Let's begin with the third quarter. In the third quarter we continue to manage inventory and expenses conservatively. Third quarter comps met our expectations and we saw trends improve from spring. I believe some of that improvement is a result of applying what we learned last season. You may remember that I shared during our last call that the Victoria's Secret management team was committed to improving three areas in the third quarter. Bra launch support, improved assortment with white colors and better balance across goode, better, best price points. Looking back I am pleased by improvements in all three areas. First, we are supporting bra launches with a more robust inventory position. As a result the launch of the new Body by Victoria collection in August was one of our best efforts in terms of both units and dollars over the launch period. Second, in late September we began landing better fashion in much boat brighter colors, including across many of our best price points. Finally we have worked to do create more balance in our good, better, best pricing by introducing new products at opening price points. We launched a PINK where everywhere bra at two for $32 and a new T-shirt bra collection at $29.50 in September. Both have been strong performers. I am encouraged by our progress but I also remain focused on improving both topline and margin dollars in the fourth quarter.

Let me now walk through the third quarter numbers for the segment and by channel. Sales in the third quarter for our total segment, which includes La Senza, decreased 3% to $1.078 billion. Comps to our sales were down four. Total operating income decreased $20.9 million to $63.9 million. Turning to performance by channel. Victoria's Secret store comps declined by 4% and total sales were flat to last year at $730.2 million. Total bra sales including PINK, were up low single digits to last year, panties were down low single digits to last year, beauty sales were flat driven by both knew launches and the strength of the core offerings. Our merchandise margin rate declined in the quarter as we used some targeted promotions in August and September to drive traffic and manage inventory. In October when we returned to less promotional activity, our merchandise margin rate improved significantly over the prior two months. Buying and occupancy expense was essentially flat but delevered on the negative 4% comp. Despite the negative comp results we levered SG&A expenses as a result of our focus on expense. Operating income dollars in Victoria's Secret stores were both down to last year.

Now to Victoria's Secret direct. Direct sales declined 8% from $269 million to $249 million. Demand for intimate apparel was up low single digits offset by decline in clothing which continues to be softer than we would like. Margin was slightly favorable to last year driven by lower cost of goods, partially offset by an increase in promotional offers versus last year. Buying and occupancy costs were basically flat but delevered on the sales decline. Operating income dollars and rate were both down to last year.

Let's move now to the fourth quarter. I want to talk about Q4 in terms of preparation, financial discipline, newness and speed across both our channels. First and foremost we are prepared. We have turned customer hindsight from last holiday and this spring into incite that will drive sales. We believe those incites have led to a fashion right assortment. We are planning to be less promotional in the fourth quarter. Obviously that may negatively affect comps, but because of the strength of the assortment overall I expect we will improve profitability. But we also have several contingency promotions we can execute very quickly should we decide we need them. In terms of marketing, we have a strong black friday plan and the fashion show will air on December 1 is being supported by an online runway model search that is generating national attention and viewership, the Black Eyed Peas will be the musical entertainment which we expect will increase tune in as well.

Inventory and expenses are well controlled. Inventories are clean and aligned with sales expectation. We have been steadily taking cost out of the business and we will continue to find ways to operate more efficiently. We are bringing a tremendous amount of newness into the assortment. That includes a website update on 12/4 and an all new floor set we added to holiday which is landing in stores on 12/15. By category we feel we have a very strong product offering. In bras, the Miraculous launch has been a success and we expect that momentum to continue through December. In panties we have newness in the lacy and cotton selection. Early selling in casual sleepwear is very encouraging but that has been somewhat offset by slower selling in glamour. We've been pleased with the beauty. Recent trends are positive and we believe that momentum will continue in holiday. We have added newness throughout the beauty assortment. In the core offerings we have seasonal newness in the form of Holiday Garden. We have also new fragrances including Heavenly Enchanted, Velvet, and Love Rocks. We have are we are well-positioned in the PINK assortment with [blings], hoodies and fleece, all the thing that the PINK girl has told us she wants more of. We continue to make progress in PINK bras which we expect will be well-received this season. Also because our collegiate collection was highly giftable last holiday we've expanded the assortment into about 300 more stores and added 30 more schools.

Finally in apparel and direct we are excited about the fashion newness in sweaters, activewear, dresses and denim, categories where we have seen a positive trend. I believe we are prepared, well-positioned and have abundant newness in the assortment. And all of that will continue to be enabled by improvements in speed and agility. To close, we have planned conservatively. We feel positive about the assortment and are cautiously optimistic about performance in the fourth quarter. Thank you and now 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 third quarter, but recognize that we continue to operate in a difficult retail environment. We have continued to focus on our three key categories, our Signature Collection product line, the Antibact business and our Home Fragrance assortment, which all continue to deliver improved results versus last year. Signature Collection had two fragrance launchings in the third quarter. PS I Love You, which met our expectations and we are very encouraged by the performance of Twilight Woods, which launched at the end of the third quarter. The Antibact business posted gains over last year driven by growth in both our soap and pocket bag hand sanitizer categories. Hand sanitizer sales improved with the growing concerns over H1N1 outbreak and our product is differentiated by a broad assortment of fragrances. Our Home Fragrance sales were up to last year driven by strong candle and diffuser performance along with a successful launch of the new Scent Bug which is a passive oil diffuser. Our conversion was up significantly to last year helping to partially offset traffic declines. Additionally the retail environment continues to be heavily promotional and our customers are increasingly responsive to our promotional vehicles.

So with that backdrop let me take you through the financial results for the quarter. Bath & Body Works third quarter comps were up 2%. Total sales for the quarter were $439 million, up 3% or $15 million versus last year. For the quarter, our operating income was $16 million which was up $45 million to the third quarter of last year. This was our first profitable third quarter since 2002. Operating income was driven by the positive sales comp, improvements in merchandise margin rate and expense decreases in buying and occupancy and SG&A. Both buying and occupancy and SG&A expense leveraged significantly in the third quarter. Gross margin rate was up significantly versus last year due to a significant increase in merchandise margin rate which is up to last year driven by our cost reduction efforts and better inventory management. This impact was partially offset by promotional activity that was used to drive traffic. Although circulation of our direct mail promotional activity was flat to last year, we saw an increase in a number of people redeeming the promotions. The active management of inventory allowed to us finish the quarter with inventory levels down to last year. This is our tenth consecutive quarter with inventories down year over year while our in stock positions continue to improve. The Bath & Body Works direct channel continues to have strong growth as well. We continue to view the direct channel as both a revenue generator and marketing vehicle for our brand and collection of sub brands.

I now want to give you a preview of what our customers can expect in the fourth quarter and beyond. At the beginning of the fourth quarter we started our more traditional holiday theme with front of shop focus on our holiday gift, home fragrance and toiletry collections. Throughout the November and December holiday theme, the shop will be focused on compelling core products, great seasonal gifts and animated windows that bring an element of fun and whimsy to the shop. The holiday theme has newness layered throughout, including our Twilight Woods, the newest Signature Collection fragrance, will be featured throughout the shop. New fragrances in our holiday traditions collection including vanilla fig and pear vanilla. The relaunch of the holiday temptations collection, which was based on our past success, was new fragrances nutcracker sweets, I love licorice, spice ginger snap and return of the popular twisted peppermint. In Home Fragrance, we have our new holiday figural candles and our new cent, fireside. In the January we will be restaging our Antibact product line. The restage will include all new soap formulas and our gel, foaming and moisturizing form as well as new formulas in hand sanitizers. We are updating our iconic diamond bottle shape and adding new graphics that are consistent with the restage Signature Collection product line. In addition to our focus on holiday and the Antibact restage, our other priorities remain maintaining focus and growth strategies around Signature Collections, Home Fragrance, and Antibact, continuing to manage our expense and inventory levels, and also executing a successful semi-annual sale.

We are optimistic about our holiday assortment and the visual appeal of our stores. However, traffic across the fleet continues to be down to last year. As a result, we have a cautious outlook on the fourth quarter. Despite the softness in consumer spending, I want to reiterate that we will continue to drive results by offering newness, responding to the business trends and testing new products and promotional strategies to drive traffic and gain share. With that, I will turn the discussion back over to Amie.

Thanks, Diane. That concludes our prepared comments and at this time, we would be 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. Stephanie?

(Operator Instructions). Your first question come from the line of Brian Tunick with JPMorgan.

Thanks, good morning, a question I guess for Diane. As we think about the restage you just talked about on the Antibact and compare that to the restage of Signature, which obviously had very negative margin implications, can you maybe talk about what the Company is going to do for this new restage that's not going to have such an impact on the gross margins this time?

Well, first of all the Signature restage didn't impact margins all that negatively. But the --

We meant on the clearance side when you were clearing out the old product.

Okay. The margins are still pretty high on that product when we cleared the Signature and the Antibact category we have based on the success that we have in this category through holiday, we are going to be entering the semi-annual sale with a lot less inventory in Antibact than we did in the Signature Collection and I feel very confident that we are going to move through this in a very profitable way.

Next question, please.

Next question comes from the line of Tom Filandro with SIG.

Hi, thanks, I'm going to ask this question I don't know if I will get a definitive answer, but we are hearing from many out there that it's been challenging last half of October, early November. I was wondering if you could give a sense what have you're seeing. Then also, Martyn, maybe you can give us a better understanding on how we should think about modeling that $1 billion of incremental volume coming out of the international expansions. And by the way, great quarter and a great call this morning.

Thanks, Tom. I am going to address the first part of your question. We are not commenting on any November trends on the call today due to the significance really of the Thanksgiving day weekend to November results. I'm glad you had that other question there for Martyn so I will turn it over to you for that, Martyn.

Good morning, Tom. Yes, the only thing I would add is to reiterate what we did say in my remarks, which is to say the environment remains challenging and uncertain and I would characterize it as fluctuating. But I agree with Amie that with what we call pink Friday coming up next week, we want to make sure that we stick to the guns on not providing more information at this stage.

In terms of the international business, when I was commenting on the $1 billion was mainly talking about Canada. Therefore, I was mainly talking about company owned operations of our La Senza, BBW, now PINK and with VS flagships coming next year. So I would model that, if I was to answer your question, in terms of the $1 billion as a company owned store based operation kind of P&L. Beyond that, the travel retail concept that we are testing and seeing very great early results on is a wholesaling model which has a different revenue to operating income kind of profitability characteristic. We are recording the wholesale revenues on sale to the partners and then recording profit on that. So that's the way I would think about it. But the $1 billion was specifically for Canada company owned ops.

Thank you very much and best of luck during the holiday.

Thanks Tom. Next question.

Your next question comes from the line of Michelle Clark with Morgan Stanley.

Hi, good morning. We were just wondering for the midpoint of the comparable store sales guidance for fourth quarter implies about a 250 basis points deceleration in your two year comp trend. Why is it a little more negative, your outlook.

Thanks, Michelle. I think we will go to Stuart for that question.

Sure, good morning, Michele. We looked at it a number of ways as would you expect us to and the thing that I would add to kind of the obvious is we have also looked at sequential builds. And what I mean by that is the relationship between Q4 sales, Q3 sales and other kind of prior periods on a sequential basis. And when we look at it in that way what we've seen is a pattern over a number of years that the fourth quarter is becoming less significant in relation to the third quarter. So we've not only looked at it on a multiyear comp basis but also on a build basis and particularly when we look at it sequentially that's really has influenced where we ended up on our comp view.

Thank you.

You're welcome.

Your next question comes from Todd Slater with Lazard.

Hi, let me add my congratulations. It's actually Jennifer for Todd. A question on apparel. You have, you sold Limited and Express and you're closing La Senza girl. How should we think about apparel at Victoria's Secret direct? What are your plans for that? A clarification for Diane. How much was traffic down in the third quarter? Comp store up two but I think you said traffic was down and how should we assume a similar trends for Q4, thank.

We will go to Sharen first for the question about apparel.

Even with our recent disappointing trends in clothing we are still one of the leading online clothing retailers in the world. And our clothing customers spend significantly more than the nonclothing customer and our customer file for the clothing category is very large. Finally many of the categories that we stand for in clothing also relate back to somewhat to the master brand in terms of our bra top and knit top business, our active business that we do have.

Thanks, Sharen, and Diane for traffic.

Traffic is basically down to the mall traffic, slightly worse than the mall traffic. And we see our traffic get more in line with the mall on holiday type promotional weekends. How it goes into the fourth quarter I'm not sure but we are still anticipating to be slightly worse than mall.

Next question.

Next question comes from the line of Paul Lejuez with Credit Suisse.

Thanks. Even if you back up, forgetting about the first few weeks of November, how are you anticipating the quarter to play out, maybe by brand by month just from a big picture perspective, stronger up front or towards the end and maybe if you can remind us of just how your promotional calendar might tie into that?

Amie, you want me to put a little color on that.

Yes, maybe a little bit of general that would be great.

The comment I would make is that with would expect November and December on a relative basis to be a little stronger than January as we are trying to lessen the degree of promotional activity in January. So we would see a lower relative comp in January vis-a-vis November and December. So that's probably the big picture view that I'd pass along.

Okay. And we'll go to Sharen and Diane for just maybe a little bit of color about promotional timing or calendar.

In Bath & Body Works or promotional calendar versus last year up through Christmas is about flat. Our goal is every week to manage this business and we already started pulling back on summary [reduntive] e-mails that we had last year. We are looking at it week by week to make sure we are maximizing everything that we can through holiday. Our January semi-annual sale is a little bit shorter than last year so we anticipate January to be down a little bit as a result of that.

For Victoria's Secret the biggest shift that we do have is our semi-annual sale will shift from December into January. We will have less promotional activity on the floor because we have much less clearance and red line merchandise this year versus last year because of our controlled inventories. We have a lot more freshness and then we will have, we will continue to have our bogo event, but the timing will be different by weeks on the bogo event.

Just to clarify that's the bra sale.

By one get one free.

Your next question comes from the line of Kimberly Greenberger with Citigroup.

Great, thank you, good morning. I was hoping that Sharen could talk about the balancing between trying to pull back on some of the promotions to improve the profitability and the negative impact that that may have on sales. If you could just step back and give us, not the holiday outlook, but longer term what are your goals for the brand. Would you like to get back to more full price or everyday pricing posture and do you think that there is a sort of four quarters of pressure potentially on the topline as you pull back on some of those promos.

Well, any time that -- it's really about a balance and when you think about balancing it you're balancing the impact on the brand, the impact from volume, margin, also the customer and inventory. So when you think about that that's what you're balancing. As we enter the fourth quarter we feel like that we have the right product to actually service to keep the customers and keep that customer file growing which we had seen the customer files growing with us. We have our inventory managed.

Therefore, we do believe that through these exercises that we will see an improvement in margin. As we -- it's unknown to us, as we enter into the spring season we will be going against a lot of promotion, but we think based upon the strength of the assortment and the things that we've learned the ability to test, read and react with speed and agility, that we can come closer to the comps with improved profit.

Thanks, Sharen. Next question, please.

Your next question comes from the line of Lorraine Hutchinson with Banc of America.

Good morning. I was hoping to get a little bit more detail on some of the lower price point products at Victoria's Secret and how those have performed. I guess just curious, are you seeing a new customer come in? Is the existing customer trading down? And then over the longer term, how do you think the lower price points will affect your sales productivity at Victoria's Secret?

We have been encouraged by what we are seeing with the three programs and there's only three real programs in the opening price point today. What we are seeing is that they are bringing in a new customer. It is something that we are watching very closely. There is a big difference in terms of the offering at the opening price point versus our best price point in terms of the fashion that we bring in, in terms of the technology, and obviously all of our launch bras have been over the $40 price point.

We believe that this gives us an opportunity, especially within the PINK space, to continue to own the customer from her first purchase throughout her, throughout her young lifestyle. We are very optimistic with the strategy. We are watching it closely. Our expectation it will bring in new customers and not trade down existing customers.

Thanks, Sharen. Next question, please.

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

Hi, thanks, Stuart, can you clarify what you said about gross margin in Q3? What did you say the impact from mast was and could you tell us what the occupancy impact was? And another clarification is the fourth quarter comp guidance, if you could tell us the VS versus BBW. And my question really is on the gross margin in Q4. You're coming up against I think at least three years of gross margin declines. I know you're guiding it up significantly, but can you tell us what kind of opportunity you see from the cost side in gross margin from better inventory management in gross margin and from recapturing markdowns. Thanks.

Yes, Stacy, so the Q4 question I got, can you restate your question with respect to the third quarter again, please.

Yes, just the third quarter, what did you say the impact on gross margin was from mast and from occupancy? I don't think you said occupancy and I think I missed mast. And the other clarification was your fourth quarter comp guidance, you are saying down low to mid. Where is BBW and VS in that?

With respect to the third quarter, the mast effect was about 150 basis points and if we removed that effect merchandise margin in aggregate would be roughly flat. And then with respect to buying and occupancy there was meaningful deleverage in the quarter due to the negative comp. So that's Q3.

With respect to Q4, as I highlighted in the comments and for the reasons that you outlined in your question we are expecting meaningful merchandise margin improvement apart from the mast mix effect that we've scene for the last several quarters. So significant merchandise margin rate improvement in all of our significant businesses in Q4. I'm not going to get overly specific in quantifying that for reasons including the actual result will be a function of a lot things, including the environment and a lot of factors including those that Sharen outlined. So we do expect meaningful merchandise margin rate improvement in Q4 due to the inventory management, the cost reductions, all those things that you outlined in the your question.

Could you tell us if cost would be down more in the five to seven.

It's still in that range, Stacy. Still in that range.

The comp rate down for Q4 guidance?

Yes, we don't break it down by brands. So in aggregate down, the comp down low to mid single in total.

All right. Thanks.

Thanks. Next question please.

Your next question comes from the line of John Morris with Bank of Montreal.

Thanks, good morning, congratulations on the quarter. A question for Sharen and one for Diane. Sharen, you mentioned sleepwear at Victoria's Secret casual versus glamour performance. Can you highlight what you are seeing, what's behind the strength in casual versus some of the weakness or the offset in glamour. And give us a little bit of a sneak preview about the opportunity for the spring season across really all classifications so we can kind of understand there and look forward. And my question for Diane, regarding the restage of Antibact, will you be changing the initial price points there and have you actually been doing testing on the restaging and what have you seen from that? Thanks.

The first question in terms of casual sleepwear, our casual sleepwear is really targeting at the gifting category and as the, we always test, go out with an early test which we were very encouraged by and were able to read and react into that. Both in the direct channel and the store channel, the casual holiday sleepwear is exceeding our expectation. The glamour sleepwear is a category last year which we took very heavy mark downs in and will not anniversary some of those promotions. This year we have narrowed the assortment. We have focused on the key items and therefore we should be much more profitable, but we are not anniversarying those heavy promotions. As I think about looking forward into the spring, obviously we remain focused on our big key categories, the bra business, the panty business and the beauty business. And those we believe will be well-positioned in the spring season to go forward with in terms of growth.

Diane.

As far as the Antibact restage, we actually did extensive testing this spring for packaging and formulas which informed the restage, so we o are going into it feeling pretty confident that we have got the right formula. As far as price points, they remain the same.

Thanks.

Your next question coming from the line of Laura Champine with Cowen.

Good morning. We were a little surprised by the decision to shut La Senza girl. Can you talk a little bit about what led to that and how that may or may not change your opinion of the market there for La Senza proper and also for Victoria's Secret in Canada?

Sure, we will go to Martyn for that question, Laura.

Laura, yes, I think that frankly since the time of the acquisition we had had the thought that the La Senza girl business would probably not be a go forward business for us as it has not been in the United States. As you know in spinning off Limited Too or tween brands, we have strategically decided that we are not in the girls business and so we've been looking at that business closely over the last two years as we've owned La Senza and discussing it with the La Senza management team. Its performance has been disappointing. It's a distraction frankly versus the core lingerie, personal care, and beauty strategy that we are now pursuing with La Senza and as a result of that we've made the decision to exit the business.

The other opportunity frankly that presented itself to us, is that with our very solid success in the BBW openings and the PINK openings now and our expectation for VS, we see so much other opportunity to stay focused on in Canada that we are using that opportunity to frankly minimize the cost of getting out of the La Senza girl stores because of our new relationships with the landlords in Canada and our ability to convert some of the La Senza girl stores to BBWs, PINK stores or actually convert them over to La Senza lingerie stores.

Got it.

Thanks.

Really no impact on your assessment of the Canada market at all or the viability of either of your other concepts there.

No, just the opposite. I think it's a matter of focus for us. We want to focus on our core brands and full distribution of those brands in Canada and the girl business is just not a go forward brand for us.

Got it. Thank you.

Your next question comes from the line of Marni Shapiro with The Retail Tracker.

Hi and good luck for holidays. If I don't remember to say that at the end. I had a quick PINK apparel question just going on this apparel conversation that's been ongoing. You've dabbled now in denim, you have some of the collegiate stuff in there, which is a little more loungy. My two questions are, how and what is your thinking about PINK, as far as apparel, true apparel not loungewear is concerned, and can you talk about price points on your PINK lounge and apparel as you've lowered some of your price points on bras and some of the items in core Victoria are you seeing a discrepancy or is the pricing of PINK, which is a premium, still working for you?

The first question is future of PINK apparel. We are not going, focused on PINK apparel. We are focused on the bra, panty and lounge business and that will be the core focus, not only for PINK, but also for the collegiate licensing programs that we do have. We do have a good, better, best strategy within our loungewear today which we will continue to balance that.

We have seen both into the spectrum performing very well in PINK whether it's all the [bling] hoodies and fleece bottoms, which are at the best price points, continue to be some of our best sellers. We will continue with the strategies that we do have in place in the loungewear categories around good, better, best.

Thanks.

Your next question comes from the line of Richard Jaffe were with Stifel Nicolaus.

Thanks very much. A question about Bath & Body Works and the opportunity to take that success and penetrate the web or use the Internet more effectively to drive sales to stores and store sales to the web and create some synergies here. I was wondering if there's any initiatives we should look for in the next 12 months and what you think is the opportunity there.

We currently use the web to drive traffic to the stores through e-mail blasts and different promotional activities plus our customer relationship marketing that we send out is directed to the web as well. So we work back and forth. Spending much more time with them, figuring out strategies to grow both channels.

I guess the numbers aren't large for the Internet or, in terms of my inbox, I was wondering if there's a way to light a fire under that or anything different we should look for in the next 12 months.

You must not be buying enough because we actually do send out quite a few e-mails, but I have to get your e-mail address because we actually do sends out quite a bit every week.

I'm certainly not buying enough to move the needle. I apologize.

Get on that, Richard.

Thank you very much.

Next question.

Your next question comes from the line of Michelle Tan with Goldman Sachs.

Great, thanks. I was wondering if you could ballpark for us what a key bra launch generally represents roughly as a percentage of sales or units of inventory and you mentioned you were pleased with the launch of Miraculous. We've been hearing good things about it as well. I was wondering if there were specific ways that you can take the successes there and expand them to more of the future launches and bigger piece of the assortment in general. Thanks.

So the first part of the question was how big can a launch bra be, there will be a range so I will just talk to you kind of in units. The range in units can be on a lower launch around 75,000 units a week to a high launch of up to 220,000 units a week. So the range in terms of as you are in the launch week, those bras will be a higher penetration to the total bra business and then over time settles back down. It could be during the launch week about 30% of the bra business but then it usually settles down to be about 8% to 10%.

Then Miraculous go forward.

Miraculous go forward, it has exceeded our expectation. As we think about the Miraculous we are expanding it into different fabrications, different trends. We see this is is a huge opportunity as we have gotten so much hits in terms of calling it the Bombshell and we believe that this bra will continue through holiday, which we've been able to go in and work with our manufacturers to even get more goods in for December. So we do think the whole Miraculous Bombshell franchise will be with us and something we will continuing to maximize through the holiday as well as through next year.

Operator, I think so we have time for a couple more.

Your next question comes from the line of Kim Galle from Pioneer.

Hi, thanks for taking my question. Does your Q4 guidance encompass or contemplate an increase in operating income at Victoria's Secret?

This is Sharen, yes, it does.

Can you perhaps quantify that in any way?

Kim, we can't unfortunately. We don't typically get into specific guidance by brand in terms of our earnings outlook.

Okay. But do you expect the operating profit to be up for Q4?

We do.

Terrific. Thank you.

Okay, thanks. One last question, operator.

Your last question comes from the line of Jennifer Black with Jennifer Black and Associates.

Good morning, let me add my congratulations. Sharen, the questions are for you. I wondered if, because you are going to have less inventory at Victoria's Secret, I wonder if you are going to fill in with special make up and I wondered about the semi-annual sale and what position will you be in to chase and then you've done a great job expanding (inaudible) and I wondered if there was room to (inaudible). Thank you.

Jennifer, I'm sorry, you are breaking up a little bit and I don't think we caught all of your question, would you mind trying to repeat it.

Can you hear me now.

It's not clear.

Give it a shot. We will listen closely.

Can you hear me now? Sorry.

Go ahead.

Okay. At Victoria's Secret, did you hear my question about the special make up, what percent will be special make up because I would think it would be higher because you have less clearance for the semi-annual sale and are you in a position to chase. We will start there.

Within our -- the special make up, if you're referring to that we do have Heidi Klum, that we have in for the fourth quarter, we also had restaged and relaunched our very sexy make up which has exceeded our expectation and we are chasing back into those goods. Also within the make up collection we have our would beauty rush which we have expanded our presentation. I feel very good about where we are. It's still a smaller percent to the total in the beauty business. But it is something that we definitely has exceeded our expectation. I think that you asked me something about semi-annual sale?

Well, what I'm asking is the percent of special made up goods or for the semi-annual sale.

No, there's basically no -- the only thing that we will have special for semi-annual sale in beauty would be any of our old fragrances our old classics that people have wanted that we will come back into for semi-annual sale only. So that is a small percentage of what semi-annual sale will be but we do have some of our old tried and true classics that do come back for semi-annual sale.

What I was referring to, I'm sorry, I wasn't clear was the apparel, was sleepwear and bras and sometimes you special made up goods for the sales to fill in.

No, we don't, actually, we actually don't in the intimate apparel category. We do not do special cuts for semi-annual sale and we do not have any plans in our strategy to start that practice.

Okay. And then lastly, the lacy collection, great job expanding it. Is there room to grow there as well?

Yes, and in fact for the holiday season you will see even more expanded styles and colors within the lacy program. As I talked about in my opening remarks, that is a category that we are really making big bigger for this holiday. We have it in the windows as we go into the holiday season as well as in our holiday rotation we will have a commercial round the lacy. So we are continuing to play upon that strength in lacy for holiday.

Thank you.

That concludes our call today. We would like to thank everyone again for your interest and wish everybody a great Thanksgiving holiday. Just a note. I am in New York today, but I will be returning phone calls so if you get my voicemail just leave me a message and I will get back to you as soon as I can. Thanks and we'll talk to you soon.

Thank you. This concludes today's conference call. You may now disconnect.