Bath & Body Works Inc (BBWI) 2010 Q1 法說會逐字稿

Good morning. My name is Sarah, and I will be the conference Operator today.

At this time I would like to welcome everyone to Limited Brands first quarter 2010 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.

Now I would turn the call over to our moderator, Ms. Amie Preston, Vice President of Investor Relations. You may begin your conference.

Thanks Sarah. Good morning everyone and welcome to the Limited Brands first quarter earnings conference call for the period ending Saturday, May 1, 2010.

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 including any non-GAAP or adjusted financial reconciliation tables are available on our website, www.LimitedBrands.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 CFO, Sharen Turney, CEO Victoria's Secret, and Diane Neal, CEO Bath and Body Works are all joining us today. After 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, and now I'll turn the call over to Martyn Redgrave.

Thanks Amie and good morning everyone.

I'd like to start by saying that we are very pleased with our performance in the first quarter. Our comps increased 10% and our operating income nearly tripled. Our adjusted earnings per share of $0.25 significantly exceeded our initial expectations of $0.05 to $0.10 and last year's result of $0.01 per share. This strong performance was a result of our intense focus on execution, staying close to our customers, and increasing speed and agility.

Overall we continue to believe that the environment remains uncertain and challenging. Accordingly, as Stuart will explain more in more detail in a minute, we have, and we'll continue to manage inventory expenses and capital very conservatively. We will also continue to drive the business with an overriding focus on disciplined execution of retail fundamentals. Improving our ability to react with speed and agility to maximize our sales and profit opportunities yielded results and continues to be a critical priority for all of us. Our entire organization is aligned and focused on these key priorities. And while we've made progress, we see many more opportunities to improve in many areas. Our number one priority continues to be improving the results of our core US businesses. As you have seen, our operating income rate increase significantly in the first quarter, and this gives us confidence that we are on track towards our 15% operating income rate goal.

Before I turn it over to Stuart, I'd like to provide you with an update on our international businesses beginning with the La Senza business. We are continuing to take actions to improve results at La Senza. Last quarter we closed the underperforming La Senza Girl business. In the first quarter, we announced plans to relocate our creative and merchant leadership teams with the La Senza brand to Columbus, Ohio. We believe that this move will better connect the brand to enterprise resources and will support the team in building on the advances they have made, product, store experience and brand positioning. We are beginning to see improvement in the performance of the business driven by the previously mentioned advances and product store experience and brand positioning. We are also testing some changes in store design lay out and are yielding very encouraging early results.

In the first quarter, La Senza comps were up 3%. The merchandise margin rate increased significantly driven by a favorable foreign currency impact compared to last year as well as the improved assortment. As we've previously mentioned, La Senza purchases merchandise in US dollars. We also incurred severance cost of approximately $7 million related to the relocation of the business which resulted in significant buying and occupancy and SG&A expense deleverage. As a result of these costs, the La Senza operating loss increased in the quarter. In addition, we anticipate incurring additional cost in the second quarter that will approximate $0.01 per share.

Turning to our other businesses in Canada, we ended the quarter with thirty-six Bath and Body Works stores and four Pink stores. We continue to be very pleased with the performance of these stores. In August and September we will open four Canadian Victoria's Secret stores in the West Edmonton Mall in the Toronto area. In addition, we plan to open four more Pink stores and about twenty-five more Bath and Body Works stores across Canada this year.

In conjunction with the relocation of the La Senza business we also announced the establishment of Limited Brands Canada, which is responsible for the operations of all of our brands in Canada, and will be led by Joanne Nemeroff. Joe Ann will also continue as the President of La Senza, the brand.

We also announced a new franchise agreement in the first quarter. We will be partnering with MH Alshaya Company to open a handful of BBW stores in the Middle East later this year. We are building on 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,l we believe that we are just beginning to exploit the full potential of our brands internationally.

In closing, we are very pleased with the progress and performance of the business over the last couple of quarters. But we continue to see opportunity to improve, and we are focused on getting even better.

Thanks and now I'll turn it over to Stuart.

Thanks Martyn and good morning, everyone.

So, turning to our first quarter performance, our adjusted earnings per share increased to $0.25 a share from $0.01 last year. Our 2010 reported results was $0.34 per share. As detailed in our press release, this year's reported results include a pre-tax gain of $48.7 million or $0.09 per share related to a cash distribution from Express. All results discussed on this call exclude this significant item. To take you through the first quarter results in more detail, net sale were $1.932 billion versus $1.725 billion last year, and comps increased 10%. The gross margin rate increased 420 basis points to 35.9% driven roughly equally by an increase in the merchandise margin rate and buying and occupancy expense leverage.

SG&A expense increased by $26 million, or 5%, and the SG&A rate leverage by 160 basis points. The expense increase was driven by an increase in store selling cost and incentive compensation. Total operating income increased $119.8 million, or 580 basis points as a percent of sales, to $185 million or 9.6% of sales. By segment, the Victoria's Secret segment increased by $80 million, or 550 basis points as a percent of sales, to $167.3 million, or 13.2% of sales. Bath and Body Works increased by $33.8 million, or 780 basis points as a percent of sales, to $37.7 million, or 8.8% of sales. In the other segment, operating loss declined by $5.9 million to $20 million.

Total non-operating expenses decreased by $15 million driven by an increase in equity income from Express and Limited stores during the quarter. Our first quarter interest expense included $10 million in one-time incremental expense related to the termination of an interest rate hedge in association with the pay off of the remaining $200 million under our term loan.

Turning to the balance sheet. Retail inventories ended the quarter down 16% per foot at cost partially driven by the anniversary of the pull forward of Victoria's Secret inventory in connection -- in advance of their systems implementation last year.

Turning to our earnings outlook for the remainder of the year. Two events are impacting our results versus our previous guidance. First we issued $400 million of 7%, 10-year bonds in the first quarter. In May 2010, we used the proceeds from this offering to retire $133.6 million of our 6.125% 2012 maturities, and $266.4 million of our 5.25% 2014 maturities. We paid a premium to tender these bonds which will result in a second quarter charge of about $25 million, or $0.04 to $0.05 per share. This charge will be treated as a significant item, which will be adjusted out of our reported results, and is therefore not included in our earnings guidance. Incremental interest expense of roughly $2 million per quarter is also included in our guidance.

Second, Express completed an initial public offering in May 2010 in which we sold 1.28 million shares. The second quarter pre-tax gain related to the IPO of approximately $50 million, or $0.10 per share, will also be treated as a significant item and adjusted out of our result and is therefore not included in our guidance. We continue to own 16 million shares, or about 18%, of Express. Because our ownership percentage has falling 20%, we are evaluating whether to continue to account for our ownership in Express under the equity method, or move to the available for sale accounting method. At this point, our guidance reflects continuation of the equity method of accounting.

So turning to the second quarter. We are forecasting earnings per share between $0.27 and $0.32. This forecast reflects a comp increase of 2% to 4%. We remain comfortable with our May comp guidance of flat to up-low single digits. We are continuing to manage the business conservatively and with discipline. We expect that inventory levels will be down in the low to mid single digit range throughout the second quarter and we also intend to be much less promotional. For example, Victoria's Secret stores Memorial Day sale will be shorter and smaller this year. Victoria's Secret Direct's semi annual sale will be five days shorter, and Bath and Body Works semi annual sale will be 10 days shorter.

We anticipate that the gross margin rate will be up significantly to last year driven by an improvement in the merchandise margin rate. We expect that the SG&A rate will improve slightly. We expect total non-operating expense of approximately $50 million,n consisting principally of interest expense. Before any discreet items, our tax rate will be approximately 38% and weighted average shares will approximate 330 million in the second quarter.

For the full year, we are projecting a low single digit comp increase. Full year gross margins will be up to last year. We expect the full year SG&A expense rate to improve versus last year. We expect full year interest expense of about $215 million, down almost $25 million from last year as a result of our reduction in debt in 2009 and the repayment of our term loan this year. We are projecting total other income, including interest income of roughly $40 million. Assuming all of these inputs we expect earnings per share for the full year 2010 to be between $1.60 and $1.80 per share.

Our view of the balance of the year has not changed from our beginning of the year view. As we look at the calendarization of earnings in the fall season we want to remind you that our third quarter adjusted EPS results over the last three years has ranged from a loss of $0.01 to earnings of $0.02. As we previously noted, we incurred incremental expenses related to activities occurring in advance of the Christmas holiday and a low sales volume quarter. Additionally, the third quarter has a much lower merchandise margin rate than the first quarter,which has a similar sales volume driven by the higher percentage of [mad] sales. Accordingly we anticipate a result in line with, to a few cents above, last year's $0.02 per share results. We are projecting 2010 CapEx of $250 million to $300 million with roughly 70% of this spending on real estate and stores. We plan to open roughly 45 stores this year, mostly in Canada, and close roughly 70 stores. We'll end the year with total square footage roughly flat to last year, and the details of our 2010 store plans are included in the supplemental financial information package on our website. Our remaining CapEx spending relates to technology, distribution centers, and home office projects.

Turning to liquidity. We expect free cash flow in 2010 of between $500 million and $600 million. Our free cash flow and cash position along with the additional availability 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 news. In the first quarter, in continuation with our ongoing commitment to return value to shareholders, we paid a special dividend of $1 per share, or $325 million, and we authorized a $200 million share repurchase program.

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

Thank you, Stuart, and good morning, everyone.

We are pleased with the progress made in Victoria's Secret. Entering the first quarter, we purposely set out to balance optimism about our business with the benefit of managing the business conservatively. I believe our improved performance was largely due to three key things. First, our mantra continued to be focus, focus focus on our two key categories, bras and panties, which we delivered with a stronger fashion point of view and more color. Second, we stayed agile. We began the season with an improved inventory position and we focused on speed which allowed us to read and react quickly to winning items and make big bigger. And finally, we continue to bring it all together as a brand story well told to our customers across all channels. And just one example, after being -- after better coordinating the brand story and investing in improved field execution, we achieved record conversion rates in the first quarter.

So let's move to review by channel. In Victoria's Secret stores, our comps for the quarter were up 12% and total sales increased 14% to $828 million. All results were driven by improvement in all three business units, lingerie, Pink and beauty. In lingerie, customers responded to the constant newness and fashion we are providing through the Miraculous Bra, the improved Body by Victoria collection, Cotton Bra and the Naked Collection. Pink delivered very strong performance driven by our expanded bra and apparel offerings and our beauty business exceeded our expectation with solid growth across key categories driven by adding freshness in fragrance and body care through several new product introductions. The first quarter merchandise margin rate was up to last year as the strength of our assortment and improved inventory management contributed to increased full price selling.

Buying and occupancy expense leverage significantly on the positive 12% comp. The SG&A expense rate also leveraged. Our result of our continued focus on discipline, expense management. All of which led to operating income dollars and rate, both being up significantly to last year at Victoria's Secret stores. In fact, Victoria's Secret stores operating income dollars more than doubled from last year's results.

Now let's review performance at Direct. First quarter sales increased 10% to $350.2 million driven by broad based strength across the assortment, including intimates, knit clothing and swim. The merchandise margin rate was up significantly to last year on the strength of our assortment which allowed us to reduce promotional activity. We achieved significant expense leverage and operating income dollars nearly doubled and the rate was up significantly to last year at Victoria's Secret Direct.

Looking ahead to the second quarter, we will continue the discipline that served us well in Q1. Our focus will continue to be on our core category, bras and panties, and on delivering strong must-have assortments in both. And we will continue to emphasize a culture of speed and agility. That includes managing inventory with discipline and testing fast, but thoroughly so we can read and react quickly to winners with little lag time.

Again we are pleased with our progress so far, but we know there is more to do. In the quarter and the year ahead, I see us executing the fundamentals with even more discipline, simplicity and speed, and we will continue to work to get even closer to our customer to enable us to drive ongoing improvements in the customer experience and in Victoria's Secret financial performance.

Thank you now I'll turn it over to Diane.

Thank you Sharen. Good morning.

At Bath and Body Works we are very pleased with the results of our first quarter. We were able to deliver sales growth and significant operating income growth by maintaining focus on our three key categories. Our signature collection product line, the antibacterial business, and our home fragrance assortment. All which continued delivered improved results versus last year.

Signature collection sales growth is driven by the launches of new fragrances, PS I love You Too, Sweet Pea Forever, Moonlight Magic, Orange Sapphire and our new summer Vanillas collection. The antibacterial business, which was restaged in January 2010, continued it's strong growth trajectory driven by growth in both of our soap and hand sanitizer categories. Our home fragrance sales were up to last year and continue to be driven by strong [counter] performance, as well as the introduction of new forms in our diffuser category. Transactions were up versus last year driven by growth in traffic while maintaining our high conversion rate. Customers also spent more per transaction versus last year.

So with that back drop, let me take you through the financial results for the quarter. Bath and Body Works first quarter comps were up 7%. Total sales for the quarter were $430 million, up 7% or $28 million versus last year. For the quarter, our operating income was $37.7 million, up $33.8 million to the first quarter of last year.

Operating income as a percentage of sales was 8.8%. In the quarter, and up significantly to last year. Operating income was driven by the positive sales comp, improvements in merchandise margin rate, and expense decreases. Both buying and occupancy and SG&A leveraged in the first quarter. The active management of inventory allowed us to be less promotional versus last year and finished the quarter with inventory levels down. This is our 12th consecutive quarter with inventories down year-over-year while our in-stock position continues to improve. The Bath and Body Works Direct channel delivered strong sales growth and we continue to view the direct channel as both a revenue generator, and a marketing vehicle for our brand and collection of sub-brands.

So with that in mind, I'd like to give you a preview of what our customers can expect in the second quarter. We will continue to introduce newness innovation in both form and fragrance. Our signature collection body lotion, which is our largest form, launched in an all new form launched in an all new improved formula. We will also launch Deep Aqua, which is a new signature collection fragrance, and we'll launch an all new signature collection men's line in four fragrances. For the antibacterial business we will also launch new seasonal fragrances in soaps and sanitizers.

As Stuart mentioned, our June semi-annual sales theme will begin in mid June and will be 10 days shorter than our sales of last year. We estimate that this will negatively impact the second quarter comps by three points to five points. The sale has been shortened due to better inventory management in seasonal and core items. In addition to our focused on product and fragrance launches, we will continue to manage expenses and inventory conservatively.

We are cautiously optimistic about our second quarter, but are excited about the assortment and the visual appeal of our shop. We will continue to drive results by offering newness, responding to business trends and testing new product and promotional strategies to drive traffic and gain share. And with that I will turn the discussion back over to Amie.

Thanks, Diane. That concludes our prepared comments. Before we take your questions, just a reminder, please limit yourself to one question so that we can get to as many people as possible.

Thanks and now I'll turn the call back over to Sarah to take your questions.

(Operator Instructions) Your first question comes from Lorraine Maikis, Banc of America. Your line is now open.

Thank you. Good morning. Just wondering how we should think about SG&A dollars as we move through the year? Were there any incentive comp accruals? Or any other items that we should take into account as we model our 2Q, 3Q and 4Q?

Thanks, Lorraine. We'll go to Stuart for that question.

Yes, what I would say, Lorraine, is that on a full year basis as we've indicated to you, we expect to have slight leverage, modest leverage on a whole year basis. With respect to incentive comp accruals, there was some negative impact in the first quarter based on the strength of our results versus what we were lapping from a year ago. And in the back half of the year with respect to IC as we mentioned on the year end call, we did have significant payouts a year ago based on the strength of the fall performance last year. But, again on an overall basis, expecting leverage in SG&A -- slight leverage in SG&A full year basis.

Thank you.

Sure.

Next question?

Your next question comes from Brian Tunick, JPMorgan. Your line is now open.

Thanks. Good morning. I guess my question is -- not to take the first quarter out-margin at BBW and run that through, but it looks like you could get to that 16%, 17% level this year at BBW. And I was just wondering, I know your longer 15% out-margin target for the overall Company, but is there thing that prevents BBW from getting beyond the 17% margin goal you've stated?

Thanks Brian. We'll go to Stuart.

Brian, as we've talked about previously, what we are looking for and what we think is appropriate for both of the big segments, that is Victoria's and Bath and Body, is operating margin in that 17% to 18% range for the Company to deliver 15%. Bath and body has the potential to be in that range this year, but the balance point is always for all of the businesses, Bath and Body and Victoria's, reinvesting in the business to make sure that we deliver a good, healthy, long term result.

Thanks. Next question?

Your next question comes from Todd Slater of Lazard Capital Markets. Your line is now open.

Thank you. My question is for Sharen and Diane. You both executed very well and you both delivered in a big way. And I know your mantra is to do even better. What are the specific areas in which you think you can do even better? And Sharen, what are the benefits you are seeing, if any, from SAP from that implementation? And Stuart, have you baked any of that SAP benefit into your guidance? Thanks.

Thanks Todd. So we'll start with Diane about where you think you can continue to get better.

Well, I think if we look at our big three categories -- our signature, antibacterial soap business, and home fragrance -- we still have, I think, upside and long-term growth for those categories with not only new fragrance introductions, but we have gotten great response to all the formula upgrades that we have. We have more formula upgrades coming in the fall season, as well as a whole new fashion assortment in some of our home fragrance areas. So, we feel actually there's -- that three categories themselves offer continue upside growth.

Thanks Diane, Sharen?

So Todd -- I'll take the technology question first and then I'll get into the opportunities. We are very pleased with the implementation that we did last year. It went very smoothly. And we installed a new platform with minimal distraction to the business, which was our goal. And we are seeing the benefits, and I think those benefits will grow over time. But also, I just want to remind us -- all of us, that the systems are an enabler, but they don't determine performance. And the merchandise decisions and retail execution, do. And we believe our focus and discipline in those areas really are yielding the results that we need.

When I think about the opportunity at Victoria's Secret is that we have really increased our speed to market over -- in the spring season really allowing us to keep open to buy and flexibility. And reading and reacting and making big bigger, and I think that we are just at the beginning of our speed initiative, which I think will only enhance our performance not only from a sales perspective, but also from a profit perspective.

The other thing in terms of how we are delivering fashion and actually this year we will be adding a whole new fashion delivery in the month of June. That is very key.

And then the last point I would make is that as we think about our key broad is that this year we have had a better balance between our bra launches and getting true incrementality of the bra launches and doing more than one thing at a time to really capture a broader customer. And so we are very pleased with that, but still have much more to do around that key initiative.

That's great. Thanks, Sharen. Next question?

Your next question comes from Janet Kloppenburg of JJK Research. Your line is now open.

Hi everybody and congratulations on a great quarter. I was wondering if Sharen and Diane would address any sourcing pressures that they are looking at in the back half of 2010 and into 2011, and if that could result in some higher pricing going forward? Thanks.

Hi, it's Sharen. I think that you may be referring to anything from a cotton -- you keep reading about cotton prices going up, we were aggressive and really identifying that with our sourcing partners and really took the position. So I think in the back half you will not see any increases in our prices. What that means for 2011 is yet to be seen. But right now we do not see any significant increase in pricing in our sourcing and I think that we are very well positioned, and that is really through our great partnerships that we have.

But Sharen, will that allow to you maintain the value equation you now have in place and perhaps the customers looking for more value because your promotional activity is declining?

It will allow us to keep our same value, absolutely. You know I, I -- our promotional activity is absolutely, we have not had any promotional activity in terms of sales or anything this -- in the first quarter. And I think that what we have every day is a great value proposition in terms of the quality of our product, the fact that we instituted a good/better/best pricing strategy as we entered into 2010 and that's working very well for us, and we see nothing that is going to get in our way to be able to continue to deliver on that.

Thanks Sharen. Diane?

And Janet, at Bath and body works we don't anticipate any cost increases throughout the remainder of 2010.

Great. Thanks Janet. Next question?

Your next question comes from Michelle Tan of Goldman Sachs. Your line is now open.

Great, thanks. Sharen, I was wondering if you can talk about the Naked launch, what you would do differently in the future? And then any color on any of the upcoming launches, or type of launches, that you are thinking about for the back half?

The Naked launch exceeded our expectation and we were very pleased with the Naked launch. The other thing that we were pleased with the Naked launch is, because it's an unlined bra, we not only did well with the Naked launch, at the same time we also saw increment in terms of our push-up category. So we were very pleased with the performance.

We have a very strong line up of launches coming forward at, not only the back half of second quarter, but also as we go into the fall season.

Thanks, Sharen. Next question?

Your next question comes from Jeff Stein of Soleil Securities. Your line is now open.

Question for Stuart. Stuart, it sounds to me like a lot of the improvements that you guys have made in terms of EBIT margin so far has come from better execution. So I'm wondering if you can just talk about the flow through in each of your core business and how that has changed? In other words, a dollar of incremental sales slowed through at X cents on the dollar one, two years ago now it flows through at Y. What would that relationship be today versus a couple of years ago?

Maybe the way to overview that, that is a good question, is when the business -- and I'm going to be plain spoken and simple about it, simplistic about it, but I think it makes the main points. When our business is not doing well, in some combination from the economy and our own execution, and our comps are negative, the flow through on sales change is going to be, going to be pretty, pretty significant. In terms of how that looks. A normal flow through in the business would be in terms of a dollar of increased sales. Normally we'd see $0.30 to $0.40 of operating income flow through.

What we've had in the fourth quarter particularly, and this first quarter, is we've had extraordinary flow through. And particularly in this first quarter we had sales growth, obviously. We had very substantial merchandise margin rate improvement and then we got leverage on the buying and occupancy line and on the expense line as we continue to manage expenses pretty well. But this flow through is extraordinary. And the product of a lot of good, hard work. Over time as we lap better results, we'll get to that more normal flow through of 30% to 40%. And again, that is to the operating income line.

Would you characterize the first quarter flow through rate as probably a rate that would not be sustainable?

Absolutely. When I say extraordinary, I mean extraordinary. So, I frankly, in my time in this business and in some others, I've never seen flow throughs quite like this before in a very positive sense. And again it's the product of everybody on this call and lots of other people working really hard to drive a good top line, to do all the things we are doing to improve merchandise margins, and also managing expenses in a tough-minded, disciplined way.

Thank you.

Sure.

Thanks, Jeff. Next question?

Your next question comes from Jennifer Black from Jennifer Black & Associates. Your line is now open.

Thank you. Congratulations. My question is for Sharen. I wonder if you could talk about VSX and Shapewear? And are you making any changes to your catalog circulation? Thank you.

We launched the Shapewear category this spring season in a pretty full blown way in about, in about 60 stores to get a test read. We were very pleased. And really had been, reacting with speed to be able to actually put that product in even more stores. So what that test allowed us to do is really test broad, now refocused into the real winners. And we are going to continue to expand that as we go into the fall season. So we are very excited about that.

Our VSX business that right now is comping about 42% in the stores that it was in this year versus last year. So we still feel good about this category, and I think that as we think about our continued disciplined focus on the bra and panty category through 2010, hopefully we'll see even more opportunity in VSX as we go through 2011.

And catalog circulation.

Catalog circulation there is no change. And in fact, we are actually going to be publishing a new Pink catalog, Exclusive Pink catalog back to school time frame, but the catalog circulation is not changing.

Thank you very much.

Thanks Jennifer. Next question?

Your next question comes from John Morris with BMO Capital Markets. Your line is now open.

Thanks. Good morning. Let me add my congratulations to everyone. Diane and Sharen, if you each look ahead to fall and holiday, where do you see the opportunity in the merchandise assortment to last year? Can you give us a couple of specific highlights of where that opportunity might be? And Martyn, on La Senza, is it possible to bring that brand to the US at some point? If so, when could that be? Thanks.

Thanks, John, we'll start with Diane.

Well, John, I probably can't give you some specifics on what we've got going forward in the fall and holiday season for many reasons, but we have in our big three key categories, we continue to have more newness than last year and continue to learn this spring season. And as Sharen mentioned we are also working on the speed model. So the learnings that we have now we are implementing into third and fourth quarter for this year.

As we think about fall and holiday, number one, we are excited about where we are headed from a product launch compared to last year as we have that in work in progress right as we speak. When I think about Q3, we will have no sale. Last year in September we had a big sale. We are looking at being full price. We are looking at turning faster. We are looking at continuing to focus on the bra and panty category. We are looking at to continue the leverage of bringing the brand story to life into the store so that as we continue to drive traffic, get better execution, also continue to hopefully to see the end of -- the record conversion.

We will be entering the third quarter balancing the conservatism with optimism as we are getting very good traction in the business today with the macro economics being what they are. We want to keep as much agility as that we can, so that we can read and react. And I think that we are getting paid for those results by being conservative in the first quarter and we will continue that same thinking and discipline as we go into the third and fourth quarters. But we are very excited about the products.

Thanks Sharen. Martyn?

John, on La Senza, I think a couple of some messages are really the first thing to come to mind to me. So, as you have seen in my remarks we are making a lot of changes with our La Senza management team, our La Senza business, our La Senza brand.

So the first key message is the changes we are making are indicative of the fact that we are declaring that La Senza is a core brand to us. Our worldwide basis. Our first priority is Canada and the positioning of the brand and the assortment in Canada and managing our way through the transitions that we are making with management team. Our second priority for La Senza is repositioning of the international franchise system of La Senza, which you may recall is 400 stores distributed through 40 countries around the world. And management team is very focused on how to re-engage with our international franchisees in a very positive and growth oriented way. Beyond that, all kinds of things are possible, but we don't have any current plans or time lines attached to other ideas.

Thanks.

Thank John. Next question?

Your next question comes from Kimberly Greenberger of Citigroup. Your line is now open.

Great. Thanks. Good morning. And I'll let my congratulations as well. I was wondering, Sharen, if you could update us on your speed initiative? I think you had mentioned a goal of getting 40% to 50% of the key items at Victoria's Secret onto a six-week reorder for lead time. Are -- Where are you in that process? And ultimately, how fast do you think you can get in terms of the core everyday product at Victoria's Secret?

Right now, Kim, we are continuing to work to get better. And we have reduced our lead times about 50%. Today, we do have a robust basics program which we're constantly flowing goods, and as I mentioned in my opening remarks is that, within the speed initiative, we've made great progress. And I don't want to take anything away from the progress, but we are at the beginning of the beginning. And I think that there is a lot more for us to do in terms of how -- the basic piece is easy because that is just a constant flow, reorder, in and out and get it through the distribution center, and our inventory availability and storage has gone up.

Where we even want to get faster is in our ability around the fashion. As you know, fashion is where you have, where you take your biggest risk. And I think that the ability for us now to have tested all the fall color already and have a great indicator of what colors are working and then being able to read and react to those and get those in within eight weeks. And I think there's even more opportunity to continue to compress the lead times.

So we are at the beginning of the beginning of the journey. We are learning a lot and we are going to continue to challenge ourselves to even get faster.

Great. Thanks.

Thanks Sharen. Next question?

Your next question comes from Barbara Wyckoff of Jesup & Lamont. Your line is now open.

Oh, hi, everyone. Congrats on good progress. I have a question for Sharen and for Diane. Sharen, with the success of the Nakeds collection and the Pink bras, how do you see the opportunity for this younger layer -- to add this younger layer to your core product mix? That's for -- and then for Diane, with all the focus on the three categories, other businesses have been, like Aromatherapy, and Bigelow, have been lacking in innovation and newness. Do you have any plans to tweak these categories as well?

So Barbara, hi, it's Sharen.

Hi.

I'll take the first one. Is that we've been very pleased with our Pink assortment and the reaction that we've been getting. We also believe that the total Victoria's Secret positioning has gotten younger. We have now just recently launched Pout, which we do believe is actually a different kind of fit, which it, it's really comes off of Victoria and we changed that to the name Pout. It really fits in between Pink and the kind of the core bras of where we are. So I think between Pink, between Pout, and then just the general assortment becoming younger in Victoria's Secret, we are well positioned for that -- for every young customer.

Great, thank you.

And Barbara, as far as Bath and Body Works, we -- tweak is probably the right word. We continue to add newness to things like Aromatherapy and Bigelow, in fact we are restaging the entire lip category in Bigelow in the summer, which is the majority of the Bigelow business for us. But -- So we are adding newness to these categories, but certainly not the same kind of focus as the big three.

Okay, great. Thanks.

Thanks, Barbara. Next question?

Your next question comes from Michelle Clark from Morgan Stanley. Your line is now open.

Thank you and good morning. A question on your second quarter comp guidance of 2% to 4%, implying a notable slowdown versus up 10% in the first quarter despite easier compares. Just wondering if there's anything you are seeing out there? Or is it just the degree of conservatism? And then, Sharen, if you can just give us the hit to the second quarter comp from the shorter VS semi-annual sale? Thank you.

So, we are going to go to Stuart for that.

So with respect to our comp guidance for the second quarter, just to reiterate three or four points that are most on our mind. The first is that we are lapping significant promotion from last year. And as mentioned already and through the call we intend to be much less promotional in Q2. Then the last thing I would say is we continue to manage this business very conservatively and with discipline. And so those are really the key messages around how we see comps for Q2. Much less promotional, managing with conservatism and discipline.

And then, Michelle, we -- actually the Victoria's Secret semi-annual sale is not shorter. It is, it is online. The Direct business.

The Victoria's Secret Direct is being shortened by five days, and honestly, I honestly believe that because we pulled back on all the promotion, that we would have created some pent up demand. And I believe that we will be flat to last year even shortening the sale.

Great. Thank you.

Thanks. Next question?

Your next question comes from Dana Telsey of Telsey Advisory Group. Your line is now open.

Good morning and congratulations. Lately, top line stability improvement certainly has been the trend. How is the AUR trending? And do you see -- and how do you see it moving forward given the speed in fashion that's involved in both businesses? And just lastly, you've had good successful launches at Victoria's Secret, whether it's Miraculous, whether it's the Nakeds. What's being done differently to get these types of results than perhaps in the past? Thank you.

Well, hi, it's Sharen. I can take, I can take the first one. The -- our AUR is basically flat as we continue to balance the mix of the business, balance the good/better/best pricing. So we have great growth between the balance, between units and AUR. So we are very pleased with that.

When I think about what we are doing differently from a launch perspective, is that we have been able to unlock how to get more incrementality from the total business as we go into launch. So the fact that we are bringing in bras, the Miraculous is, you know, two cup sizes, and so what we are seeing is is that bringing in that bra also lifts Very Sexy. Why would it lift Very Sexy pushup? Because if someone doesn't want that kind of lift, they have a great option in pushup. The same thing with Naked. It's a lightly lined bra.

So we are adding diversity within the assortment that helps us to continue to get more incrementality to the total business.

And Dana, AUR at Bath and Body Works is down slightly to last year, but that is mainly due to mix. As we have more of our business done in our top three categories, AURs are lower than as we lookout our performance brands, or even the third party brand of business that we exited last year. But our EDS is up slightly as a result.

Great.

Thank you.

Thanks Diane. Next question?

Your next question comes from Erika Maschmeyer of Robert W. Baird. Your line is now open..

Good morning and congratulations. You have done a great job of paying down debt. What is your goal or end game here? Can you remind us of your philosophy? And then,also, could you update on inventory turns by brand? And what inning you think you're in for Bath and Body Works versus Victoria's Secret? I know you've recognized benefits, particularly at Bath and Body, in terms of lowering inventory and increasing in-stocks.

Thanks, Erika. We'll go to Stuart for both of those.

So with respect to debt and our philosophy on capital structure, the first thing I would say is we are very comfortable with our level to balance sheet debt and our total debt. As we commented on, we have reduced it about $400 million over the last six months or so.

In our -- we are not seeking, per se, an investment grade rating. What's important to us is that we have appropriate cash and liquidity, which we do. That we have flexibility, which we do. This business generates a lot of cash flow. We are comfortable with our balance sheet debt. The maturity profile, we've improved a lot over the last 18 months or so, so it's a very good maturity profile. We are very comfortable with our capital structure situation.

With respect to inventory turns, we are not going to go into the details of that by business, but what I can tell is that we have been improving turn in all of our major businesses over the last 12 to 18 months. It's a key focus for us, but we are not going to go into the details of that by brand.

Okay, thanks so much.

You're welcome.

Thanks. Next question?

Your next question comes from Howard Tubin of RBC Capital Markets. Your line is now open.

Thanks. Just maybe one question for you, Martyn. Can you update us on your plans and thoughts for the Victoria's Secret business outside of, outside of North America?

Sure. I, I -- As I mentioned in my remarks, Howard, we are planning to open our first Victoria's Secret full flagship stores in Canada in the late summer time frame, four stores in Canada. That really is the test and validation for us of our ability to deliver the Victoria's Secret full flagship, full store brand to a foreign country, and that's the next major step in our development of Victoria's Secret outside of the United States. Beyond that, we have not announced any specific plans, and I think as we did with BBW, we used Canada as our test bed or -- for BBW and started that process a couple of years ago now, and as we move forward we'll be looking for opportunities on a worldwide basis for Victoria's Secret. But taking a very cautious and careful approach.

The other thing we are continuing to work on is the T&T concept -- what we call T&T, which is travel and tourism, which is under the Victoria's Secret brand name, but as we described on previous calls, is a hybrid accessories, beauty, and limited intimate apparel assortment distributed through airport retail locations as well as a couple of department store shop-in-shop kind of locations. And we are continuing to see very positive results from that piloted learning experience and looking to continue to expand that in the balancing of the year.

Thanks, Martyn. Next question.

Your next question comes from Neely Tamminga of Piper Jaffray. Your line is now open.

Oh, great. Good morning. Thanks for the, the ad here. And, hello, Diane, I just wanted a question for you. You've had project insight, I think, longer than the VS division. Just wondering how some of the toolbox to read and react that Sharen often talks about and I think is a good step in the right direction, what you guys have been able to already affect and do and what the potential path can be for VS down the road, too, using those tools?

I'm not quite sure the inside tools is what really gets you in the read and react in the speed knowledge. It's more the head set of the organization, and us testing and learning from that agenda, and it's really about the actions and discipline and execution that we have versus really using a systems tool.

Great. Thanks Diane. Next question?

Your next question comes from Marni Shapiro of The Retail Tracker. Your line is now open.

Hello guys. Congratulations. Sharen, I saw Pout and I thought it looked great. I was curious more about Pink. How it fits in next to Pink. Will you really keep it on a separate agenda, different on the floor? And then also on Pink, you have done a good job of taking some of the promotions from Victoria's Secret, the two [from] bras, the mix and match tees and tanks, and bringing them to Pink, but you continue to overlay that with a free flip-flop and things to that effect.. So, can you just talk about how you plan to strategies going forward? Because is seems like you pulled some parts from Victoria to Pink, but kept the Pink stuff there.

Well, we didn't pull anything from Victoria's Secret into Pink. So, I think that what we are looking at from the Pink perspective in that positioning -- and it really is targeting to that 19 year old collegiate girl. So it can also go down in age as well. And so when we think about the two for $32, is that you have to buy both, you know, two bras that come together. It's almost if you think about it as your first bra. In terms of Pout. It's a total different positioning than Pink. It's really a lifestyle. It's more European in feeling, and it has a different fit aesthetic than what Pink has.

And will you continue to layer on the two-for promotions and keep the original Pink ones, like the flip-flops?

Well, I think that if you are talking about the, the GWPs is really a total Pink and it's really a surprise and delight. So, then when you think about wanting a piece of the Pink brand, we give away -- come in and make a purchase and get a free dog. So we have pulsed those things in an out as really a surprise and delight, and we will continue to do that.

Okay, great. That makes sense. Thank you guys.

Thanks. Operator, I think we have time for maybe more two more questions.

Thank you. Your next question comes from Jeff Black of Barclays Capital. Your line is now open.

Thanks. A question for Stuart and just how you are running the business here, and I know you've said you were very promotional last year. But, does the guidance really say anything about what you are seeing with traffic now, first? Second, do you think you have the ability to chase into trends if you see some better sales trends as we saw in 1Q with comps, well north of what you guided to? And third, as we look at the back half, is there anything, or I guess what would change your thinking on how you inventory the business and what might move you to a more aggressive posture this year, if at all.

There's a lot wrapped up in that question. But, the four or five points that I would make, that aren't just from my perspective, it's the perspective of the team that's running the business, is there is some uncertainty in the environment, but you shouldn't interpret our guidance as some new view of that. As we commented on, we remain comfortable with our May comp guidance of flat to low single digit, would be a point to reiterate. Another point to reiterate is, again, affecting those numbers is doing a lot less promotional this year than we did a year ago.

And maybe two more points. We continue to manage this business in a conservative way. It's really paid dividends for us over the last 18 months to 24 months. We talked earlier in this call about flow through. You get that great flow through when you manage the business conservatively. And looping back to a part of your question, we are able to chase goods. Both Sharen and Diane have commented previously, and again today, about their focus along with the sourcing part of the organization and working with our sourcing partners about continuing to work hard, to reduce lead times, and have more agility, have more open to buy, and that allows us to read and react and chase in shorter periods of time and we certainly have done that through the fall of last year and again this quarter.

So I think those are our key headsets, if you will, or points of view as it relates to the sales line and things around that for the balance of the year.

Great. Thanks. Good luck.

Thank you.

Thanks. And last question, Operator.

Your last question comes from Roxanne Meyer of UBS. Your line is now open.

Oh great, thanks. Let me add my congratulations. My question is relating to Victoria's Secret Direct. How do you see the opportunity to grow the business, I guess in part keeping in mind how far apparel has come versus last year? What categories are currently underpenetrated online? And when do you think you will begin to grow Victoria's Secret Direct internationally knowing that it does take time to build up that infrastructure, but perhaps that might be the best opportunity? Thanks.

Great. Thank you. There are a couple of categories that we are underpenetrated in. The two, the two are -- which are our priorities right now online are Pink as well as Beauty. So those are the two big categories that we are underpenetrated on that tie back to the brand that we have big opportunity. As I told you earlier we are starting a Pink catalog as we go into the fall season.

Today in the Direct business, we do about $200 million internationally without really doing anything different. We do believe that there is an international opportunity, but as the team really is looking at all of our international strategies, the direct piece will be part of that, so there will be forward more news -- looking forward to more news on that subject later.

Great. Thanks Sharen.

So we thank all of you for is joining us this morning and we thank you for your continuing interest in Limited Brands. Thanks.

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