Bath & Body Works Inc (BBWI) 2011 Q1 法說會逐字稿

Good morning. My name is Michelle and I will be your conference operator today. At this time I would like to welcome everyone to the Limited Brands first-quarter 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)

Ms. Amie Preston, Chief Investor Relations Officer, you may begin your conference.

Thanks, Michelle. Good morning, everyone, and welcome to Limited Brands first-quarter earnings conference call for the period ending Saturday, April 30, 2011. 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, LimitedBrands.com. Also available on our website is an investor presentation which we will be referring to during this call.

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.

Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO Victoria's Secret; Diane Neal, CEO Bath & Body Works; and Martyn Redgrave, EVP and Chief Administrative Officer, are all joining us today. After our prepared comments we will be available to take your questions for as long as time permits. So that we can speak with as many callers as possible, please limit yourself to one question.

Thanks and now I will turn the call over to Stuart.

Thanks, Amy, and good morning, everyone. We are pleased with our record first-quarter performance. Our adjusted earnings per share increased 60% to $0.40 per share versus $0.25 last year. Our reported result was $0.50 per share versus $0.34 last year.

Both this and last year's reported results include significant items as detailed in our press release. This year's reported first-quarter results include the following -- a pretax gain from the sale of Express shares of $86.4 million or $0.17 per share; a pretax, non-cash expense of $50 million or $0.10 per share related to the multi-year funding of our charitable foundation.

We plan to fund this commitment by contributing about one-third of our remaining investment in Express shares, which allows us to meet our commitment in a tax efficient manner. After this contribution we will continue to own approximately 5 million shares of Express stock.

Also excluded is an income tax benefit of $11 million, or $0.03 per share, related to the favorable resolution of certain income tax matters. The 2010 reported result includes a pretax gain of $48.7 million, or $0.09 per share, related to a cash distribution from Express.

All results discussed on this call exclude these significant items in both years.

Our first-quarter earnings per share of $0.40 per share significantly exceeded our beginning of the quarter expectations of between $0.26 and $0.31 per share. This upside was driven by the 15% comp increase versus our initial forecast of up 2% to 4%.

To take you through the first-quarter results as detailed on page 4 of the presentation, net sales were $2.217 billion versus $1.932 billion last year and comps increased 15%. The gross margin rate increased 200 basis points to 38%, primarily driven by leverage on buying and occupancy expense.

The merchandise margin rate increased slightly, despite a negative impact of about 80 basis points related to the increase in mass sales to Express and Limited stores which are recognized at 100% this year versus 75% last year. This accounting change, which occurred in the third quarter of 2010, will continue to have a negative impact on our consolidated merchandise margin rate in the second quarter.

SG&A dollars increased by $65.6 million, or 13%, and the SG&A rate improved by 40 basis points. Total expenses, including buying and occupancy, increased by 10%.

Three-quarters of our SG&A expense growth relates to investments that we made in store selling and marketing to support and drive sales growth. Store selling costs increased by 12% and leveraged as a percent of sales.

Marketing costs increased by about 20% and deleveraged slightly as we invested in the quarter in initiatives to drive sales, including media and in-store visual merchandising and marketing. The remaining increase in SG&A relates to growth in our home office expense across various categories, including investments related to our international business, merit increases, and incentive compensation.

Turning to operating income on page 5, total operating income increased by $81.8 million, or 44%, and 250 basis points as a percent of sales to $266.8 million or 12% of sales. By segment, the Victoria's Secret segment increased by $72.4 million or 340 basis points as a percent of sales to $239.7 million or 16.6% of sales.

Bath & Body Works increased by $16.5 million or 250 basis points as a percent of sales to $54.2 million or 11.3% of sales. And the other segment operating loss increased by $7 million to $21.7 million, driven primarily by an increase in certain -- $27.1 million, driven primarily by an increase in certain legal reserves.

Total non-operating expenses increased by $7.8 million as the loss of income from Express and Limited stores was partially offset by a decline in interest expense.

Turning to the balance sheet on page 6, retail inventories per square foot at cost and at the quarter down 5% versus last year and down 20% on a 2-year basis. Excluding an increase in the first quarter of 2009 related to the pull-forward of inventories associated with the Victoria's Secret systems implementation, inventory per square foot has decreased for 16 consecutive quarters.

As you know, we issued $1 billion of 10-year notes during the first quarter at an interest rate of 6.625%. We repurchased 16.7 million shares of stock in the first quarter for $590 million and we also just announced a new $500 million share repurchase program.

Turning to page 7 of the presentation for our forecast for 2011, we expect earnings per share between $0.38 and $0.43 in the second quarter. This forecast reflects a low to mid single-digit comp increase. We expect the second-quarter gross margin rate to increase and the SG&A rate to be roughly flat to last year.

We expect to end the second quarter with inventory per square foot roughly flat to up slightly to last year. For the full year we are projecting low to mid single-digit positive comps.

We continue to expect some impact from increasing cost pressures this fall and therefore our outlook does call for some decline in our merchandise margin rate in 2011. We believe that this decline will be more than offset by buying and occupancy leverage, so our forecast is for our 2011 gross margin rate to be up slightly to last year.

We expect the full-year SG&A expense rate to leverage slightly on total sales growth.

Non-operating expenses are projected at about $65 million per quarter, consisting principally of interest expense. This forecast is about $17 million higher than our previous guidance, driven by the new notes.

Before any discrete items our tax rate will be approximately 38%. We are forecasting weighted average shares of about 318 million in the second quarter and the full year, which assumes that we will complete the share repurchase program near the end of the year.

Assuming all of these inputs, we expect earnings per share for the full year 2011 to be between $2.25 and $2.45 per share. We are now projecting 2011 CapEx of about $400 million to $425 million.

As detailed on page 8 of the presentation, we plan to open roughly 40 stores this year and close roughly 50 stores. We will end the year with total square footage roughly flat to last year.

Turning to liquidity, we expect free cash flow in 2011 of about $650 million and we remain committed to returning excess cash to shareholders through a combination of share repurchases and dividends. Our free cash flow and cash position, along with the additional availability under our revolving credit facility, resulted in very strong liquidity, which is more than sufficient to fund our working capital, capital expenditures, dividends, and any other foreseeable needs.

Thanks and now I will turn the discussion over to Sharen.

Thank you, Stuart, and good morning, everyone. Victoria's Secret earned record operating profit in the first quarter. We are pleased with this result and I will begin my comments this morning by discussing what we believe have been the key drivers of our success. I will follow this with a review of first-quarter financial results and will then briefly discuss how we are thinking about the second quarter.

So let's begin with what we have been doing to deliver our results. We continue to stay very focused on our core categories, bras and panties, coupled with a culture that emphasizes getting faster and more agile every day. We have remained purposeful in our balanced approach between managing the business with optimism and staying conservative on our inventory and expense plans.

And we are carefully bringing all of our work together in a well-told brand story across channels. We are telling that story through innovative products, steady newness, the right fashion, and excellent in-store and online execution.

Our customer connection has been critical to our success. We work every day to stay close to her and deliver an emotional and positive experience with every interaction. An example of our connectivity and our brand strength is our Facebook presence where we are at the top specialty retailer. In fact, in March our Victoria's Secret and PINK pages where the two most liked pages of all retailers, something we are very proud of.

Finally, at the very core of our success are the people who make it happen each and every day. We have a seasoned and dedicated leadership team across all of our key functions. Our leaders have been in place and working together now for a number of years and I feel very good about our talent from design to merchandising, stores, operations, marketing, and really across the business, both in the home office and in the field.

Now turning to our financial performance. Our first-quarter results are detailed on page 9 of your presentation materials. In the Victoria's Secret stores channel first-quarter comps and total sales were up 19% versus last year with total sales increasing to $986.6 million. This result was driven by strength across the assortment with fewer in-store promotions and on inventory levels that were significantly below our sales growth.

Our lingerie business demonstrated balanced growth with bras, panties, and sleepwear all performing well. We had a successful Valentine's Day weekend and offered customers newness throughout the quarter. This included new styles and fashion in many areas of the business, including the Incredible, Gorgeous, and Dream Angels bra collections as well as our innovative Incredible panties and Miraculous swimwear.

PINK delivered another a very strong performance with growth across the assortment driven by both base business and strong customer response to PINK's ongoing newness. We introduced a number of new PINK bras in Q1 and we are pleased with the progress and opportunities we see in this category.

Our beauty business also performed well in the first quarter. Customers loved our fragrance and other new product introductions, and we continue to improve the beauty business integration and coordination with the balance of the store. We began this last fall with the co-launch of beauty and lingerie products through the Bombshell bra and fragrance launches and continued this in first quarter with the Incredible and Dream Angels launches.

As with prior quarters, in-store execution has been a key contributor to our sales growth and we again achieved record customer conversion for the quarter.

First-quarter merchandise margin dollars were up significantly on roughly flat margin rate. Additionally, first-quarter growth and operating margin both improved significantly and, combined with our top line, drove our operating profit up nearly 50% versus last year.

Now let's review direct performance. First-quarter sales increased 5% to $369 million. The top line was driven by strength in bras, PINK, swim, and dresses, but that strength was partially offset by softness in other parts of the apparel business.

Sales growth was also negatively affected by a very intentional strategy to reduce the number of days we were on promotion and to carry far less clearance inventory into this season. The gross margin rate increased significantly, driven by this strategy to reduce promotional and clearance selling as well as the strength the assortment enabling us to drive significantly more business at regular price.

Additionally, total expense leveraged so operating income dollars increased nearly 25% and the operating income rate was up significantly to last year.

Looking ahead to the second quarter, we will continue to do more of what works. We will focus on providing customer fresh innovative products with high emotional content. We will stay balanced in our approach, executing with discipline, simplicity, and speed. And we will be thoughtful in our inventory and expense plans, investing in customer-impacting initiatives that drive sustained results.

In closing, we are pleased with our performance but see opportunities for improvement. Above all else, we will stay close to our customer and work to drive sustained profitable growth as our top priority.

Thanks and now I will turn the discussion over to Diane.

Thank you, Sharen, and good morning. As I am sure most of you have already heard by now, since we made the announcement on Tuesday, that I have decided to return to San Francisco which will require me to leave my role as CEO of Bath & Body Works.

As you can all imagine, this has been a very difficult decision. I have an amazing team, we have great momentum in the business, and we have accomplished so much over the last four years. However, my personal life has been on the West Coast and, in an effort to create more balance, I have decided to relocate.

The good news is that I will be transitioning to an advisory role to help on-board Nick Coe, who was formerly President at Lands' End, who will be joining us in early July. For those of you who haven't met Nick yet, let me assure you that the brand will be in very capable hands. Nick has an incredible track record as a merchant and is as customer centric as we are at Bath & Body Works. I am convinced that the brand will continue to deliver incredible results under his leadership.

So let me discuss Bath & Body Works results for the first quarter. We were able to deliver significant sales and operating income growth versus last year. We continued to deliver improved results versus strong performance last year by maintaining focus on our three key categories, which are the Signature Collection product line, the antibac soap and sanitizer business, and our home fragrance assortment.

Performance improved on top of strong results last year in Signature Collection driven by the launches of new fragrances like Carried Away and the Country Chic, as well as the relaunch of our already very successful fragrance, Japanese Cherry Blossom. The antibac business continued to deliver growth driven by our hand soap and sanitizer business. Performance in those businesses was driven by increasing fragrance and fashion newness in pocket bac and soap collections.

Our home fragrance sales also grew versus strong performance last year and continued to be driven by candles and new seasonal fragrances, as well as growth in new forms and novelty in our diffuser category.

Transactions were up versus last year, driven by traffic and improvement in our conversion rate. Customers also spent more per transaction versus last year. So with that backdrop, let me take you through the financial results for the quarter.

Turning to page 10 of the presentation, Bath & Body Works first-quarter comps were up 11%. Total sales for the quarter $480 million, up 11% or $49 million versus last year.

For the quarter our operating income was $54 million, which was up $16 million or 44% from last year. Operating income as a percentage of sales was 11% in the quarter and up significantly to last year. Operating income was driven by the positive sales comps, modest improvements in merchandise margin rate, and expense leverage. Both buying and occupancy and SG&A leveraged in the first quarter.

We also finished the quarter with inventory levels down to last year and we continue to drive inventories down year-over-year while our in-stock positions continue to improve. The Bath & Body Works direct channel also delivered strong sales and operating income growth versus last year.

In the second quarter we will continue to introduce newness and innovation in both form and fragrance. This month we launched our newest Signature Collection fragrance, Into the Wild, and will also launch a new collection of coconut inspired fragrances. The antibac and home fragrance businesses will also introduce fashion and newness in fragrances and in form.

We are cautiously optimistic about the second quarter and we will continue to manage expenses and inventory conservatively. Our focus continues to be getting faster and better at understanding and satisfying our customers' needs while providing them with a world-class in-store experience.

In addition to focusing on product and fragrance launches, we will continue to test and read the results of new product offerings and promotional strategies while maintaining flexibility in our inventory to react quickly to our customers' needs.

Earlier I mention that the brand will be in good hands with Nick, but I should also say the brand will be in fantastic hands, not only with Nick but with the entire senior leadership team. That is Andrew Meslow, Amy Hauk, Ken Montera, Camille McDonald, Tom Ramsey, and the entire BBW team.

So with that I am going to turn the discussion over to Martyn.

Thanks, Diane, and good morning, everyone. On our last earnings call I spent quite a bit of time updating you on our strategy to grow our international businesses. The summary of what we covered on that call is that we recognize that we have tremendous international growth opportunities for all of our brands as we expand outside the United States.

We remain on track in the execution of our international strategy and continue to be very pleased with the performance of all of our new international stores.

As you can see on page 11 of the presentation, we, along with our partners, will open approximately 100 to 135 new stores this year. In the first quarter our partners opened 7 La Senza international locations and one Travel & Tourism store, which by the way we are now calling the Victoria's Secret Beauty and Accessories stores. A change in name that clarifies, I think, the brand positioning of that concept.

Just after the close of the quarter we opened 2 more Victoria's Secret stores in Canada and the customer response to all of these new stores has been terrific.

Now before we take your questions I will close my comments by discussing La Senza's first-quarter performance. Total sales increased 3% to $88.3 million in the first quarter. This was driven by foreign currency translation and a mid single-digit increase in reported revenue in the international businesses, which was partially offset by a 4% comp decline in the Canadian stores.

Our bra category delivered modest growth led by the launch of our Body Kiss bra and the continued success of our Hello Sugar and Perfectly Me styles. The gross margin rate declined, driven by a significant decline in the merchandise margin rate.

Decrease in the merchandise margin rate was driven by a mix shift to the international business, which has a lower margin rate, and also by a decline in the merchandise margin rate in Canadian stores. And that was driven by foreign currency and increased promotional activity.

The operating loss improved slightly on a dollar basis and significantly on a rate basis.

We are encouraged by the growth in the bra business and continue to be focused on refining our assortment and establishing a strong brand that resonates with our target customers. However, it is clear that our La Senza business remains a work in progress.

So in closing, I want to reiterate that we continue to be pleased with the Company's overall performance, which was driven by an intense focus on the fundamentals, coupled with an orientation to getting faster and more agile and also staying close to our customers. We will maintain this disciplined and focused approach, and we clearly see opportunities to continue to get even better.

Thanks and I will now turn it back over to Amie for questions.

Thanks, Martyn. At this time we are happy to take any questions you might have. Just a reminder please limit yourself to one question.

Michelle, I will turn it back over to you.

(Operator Instructions) Kimberly Greenberger, Morgan Stanley.

Thank you. Good morning. Very nice quarter here. I wanted to ask Stuart about the SG&A leverage point. I know that historically you have said typically when you beat your same-store sales growth plan somewhere between 30% and 50% of those incremental dollars flow through to the operating income line.

I think this is the second quarter in a row where the flow-through rate has been slightly lower than that. So I am just wondering if you can step back from the noise of the last couple of quarters and talk about how you think the flow-through rate should come in the future quarters. Thanks.

Sure, Kimberly, and thanks for the question. It's a balancing act, as you all appreciate. I don't know how many of you have heard the expression you don't take rate home to the bank, you take dollars home to the bank. So there is a lot of things that we think about.

The first is, just to reiterate quickly, operating profit dollars in the quarter were up 40%. The margin rate -- operating margin rate improved by 250 basis points to 12%.

Kimberly, as we look at expenses, while the geography in our P&L kind of highlights SG&A, there is a lot of home office and other important expenses within gross margin in the buying and occupancy line. And those expenses in aggregate grew about 10%, which was about 500 basis points slower than sales.

So we are making investments to drive growth, sales growth and longer-term growth. We think, on an overall basis, those investments are paying off. But to your point, the leverage might not be as great as one might pencil out on paper but we do feel that the investments we are making are absolutely contributing meaningfully to the top-line growth and the dollar profitability of the business.

With all that said, we continue to look at everything very closely. Within the brands, within the overall corporation we continue to look at stuff. We can always get better at how we do it but we think overall we are managing it pretty well.

Thank you.

Thanks, Kimberly. Next question.

Marni Shapiro, The Retail Tracker.

Congratulations on a great quarter. And, Diane, you will be very missed and so I am going to throw my question up to you.

You have done a great job stepping up the fashion at BBW, in particular things like pocket bac. So could you talk about the philosophy behind here and do you plan to expand this throughout the store? And I guess is Nick on board and fully vested in what you are trying to do here?

Hi, Marni. First of all, thank you for saying that, and Nick is not fully onboard until July when he will be on-boarding with me at that point.

But as far as fashion, we continue to work not only in the pocket bac category. We have done it across all of our categories by the amount of fragrance newness that we have across soaps and signature and home fragrance. It's about double and we will continue with that cadence.

We continue to look at our business by how much basic fragrances do we need on a year-round basis. We continue to weed out where we don't need them and continue to pump up them on the seasonal things that we have coming in as well as fashion.

So our business now is a fashion business across all the categories, which is actually pretty exciting because that helps us add to the top line better than having a basic commodity business. So I anticipate that continuing. And Nick has got a lot of fashion in his background so I think it should continue when he starts.

Great, congratulations.

Thanks, Marni. Next question.

Janet Kloppenburg, JJK Research.

Congratulations on a wonderful quarter. Stuart, I was hoping you could talk a little bit more about the SG&A spending. I think it has to do with increasing the payroll on the stores to boost customer service.

I am wondering if the rate of spend will continue at similar levels throughout the year or if there will be a modification in the back half. And if you could help us understand the success level of that project.

Also, for Diane, I wanted to say thank you very much for your wonderful leadership. I was just wondering how long your advisory role -- you would hold that with the Company?

Thanks, Janet. We will go to Stuart first.

So, Janet, on the first thing on kind of SG&A expenses and what we are doing and how we are thinking about it and how it may play through for the whole year, the first thing that we are committed to, and it's a shared view across the business, is that we are going to grow expenses slower than sales. So I want to reiterate that and ensure that that is clear for everybody that is following us. We will grow expenses slower than sales.

Then what I would, in some form, repeat but I think it's the key message is, with that said, we are going to invest in a lot of things. Whether it's working to serve customers better through a better experience in our stores or better visual display in our stores, more effective visual display, or more compelling marketing, we are going to invest in those types of things -- all of which are in SG&A -- where we believe that we are getting paid for that work, that customers notice, and that it drives growth in sales. And that is what we are doing.

We will continue to do that, as any reasonable business would. What you can expect for the balance of the year is more of that, but again with a commitment that expenses will grow slower than sales. So we are not going to go into a lot more detail about the specific aspects of those investments for reasons I hope you can understand in terms of we think some of those things can create some competitive advantage and we want --

I think it's really paying off, Stuart. I just wanted to know if it --

We think it is too and I appreciate your acknowledgement of that. We are happy with the growth of the business, the experiences customers are having, and the profit growth of the business. So thanks for the comment.

You are quite welcome. Diane?

Yes, Janet. First of all, thank you for your kind words. And also, as far as an advisory role, Les and I have been -- are in conversations and I am willing to help out as long as Nick or Les need me to.

Will you help through the holiday season?

If that is what the need is I am willing to come back on a partial basis to try to help out.

Okay. And has the marketing and merchandising program for the holiday season been developed or will it be before you exit the Company?

We basically have our merchandising and we are putting the marketing themes together as we speak for holiday, so it will pretty much be in place. But as you know, managing the business day today is pretty significant in our business.

Absolutely. Good luck to you.

Thank you.

Thanks, Janet. Next question.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone. And Diane, you will be missed and best of luck.

With Bath & Body Works and with Victoria's Secret can you give us a little update on any cost pressures that you are seeing? I know obviously it's much less than a lot of the apparel retailers. Any updates there?

And then just also on inventory levels, which appear very lean, how do you think about inventories for the balance of the year? Thank you.

Thanks, Dana. We are actually going to go to Stuart for both of those questions.

Dana, on costs our views in summary haven't changed much from what we communicated in February when we did our call. And that is -- to reiterate some of that 40% of our product is personal care and beauty.

The biggest opportunity that we see at the end of the day is to get fashion right; to manage inventories tightly and with discipline, with an appropriate balance of optimism and conservatism; to continue to work down markdowns, to reduce markdowns where we can, which includes a much more substantial opportunity, frankly, than the pressure of costs.

But with that said, as we have communicated before and it's still our view and I reiterated again in our prepared comments, there is some cost pressure in the business that will be more weighted to the back half of the year. We are going to work hard to offset as much of it as we can. But not -- in summary to answer your question, not a lot of change in view from how we saw it a few months ago.

With respect to inventories, similar in mindset to expenses which is -- as you know, it is a critical area for us. All of us, all the leaders of the business are -- pay very close attention to it; balancing, creating an appropriate experience for customers along with managing the risk of inventory and working hard to get better at reading and reacting and chasing.

We made good progress on that, but there is more that we can and will do. As I commented on, we think inventory in terms of where it will end the second quarter will be flat to up slightly. So it remains a continued area of focus for us and we are managing it very carefully.

Thank you.

Next question please.

Jennifer Davis, Lazard Capital Market.

Hi, guys, congratulations. A comment, a clarification, and a question if I may.

First, Diane, congratulations to you. You have done an amazing job over the past couple of years. You have really turned BBW into a fashion brand so best of luck to you. And by the way, the in-store marketing at BBW looks amazing right now.

Clarification, you guys had guided May comps up low single digits and hadn't provided any update. So since you didn't provide an update should we assume that that is where comps are trending now?

And then Stuart, any update on your 15% operating margin goal? I think that was based on 16% to 17% segment margins at Bath & Body Works and VS, and I am actually modeling that this year. So any comments there? Thanks.

Okay. Jennifer, I will take your first comment on May comps. So we didn't update guidance, obviously, about May on this call, but you shouldn't read that -- anything into that one way or another. And then Stuart for the 15% margin.

Well, with respect to the 15% operating margin, our first focus is to achieve that goal that we set out more than two years ago and we are working very hard collectively to do that. We have made good progress, as you know.

Separately, as we start to approach that goal or it gets closer in our sights, we do think about the full or true potential of our business. And we are starting to get more formal in our thinking, including looking at other international and well-known retailers, like Inditex and H&M and others, about what the full potential of Limited Brands is. We think that it certainly can exceed 15%, but our focus is first to get to the 15%.

As you point out, depending upon what one assumes, we could get to that goal in different time frames. We are working hard to get there as quickly as we can, but doing so in a way that also ensures the long-term growth and health of the business. So we are making good progress, there is more that we can do beyond it, but it's kind of like one step at a time.

Thanks, good luck.

Thanks, Jennifer. Next question.

Lorraine Hutchinson, Bank of America Merrill Lynch.

Morning. The other operating loss of $27 million was a bit steeper than we had expected and I know you have international in there, which seems like it's going very well. So can you just talk were there any unusual items or what should we expect for that division going forward?

Lorraine, it's Stuart. We did -- in the prepared comment I mentioned that the key driver of change year-to-year was related to some legal matters. We are not going to expand on those, as is our practice on an earnings call, but part of the Q1 result relates to some legal matters that impacted the Q1 results.

Can you quantify that, Stuart?

Not going to go into more detail about it.

Okay, thanks.

Thanks, Lorraine. Next question.

Brian Tunick, JPMorgan.

Thanks, good morning. Question is really on the international side.

Just curious, maybe you guys could talk a little about how much less now is spending this time on growing international? Then between the franchise, wholesale, or your company-owned store in London that you will be opening how do you think about sort of those paces of growth over the next few years? And outside of London have you thought about maybe the next few cities that you guys would be looking at?

Thanks, Brian. We are going to go to Martyn.

Morning, Brian. I think the key thing to say about Les's commitment is he is very committed to the core brands in the United States and also our expansion outside the United States. He will talk about the amount of time he spends on it relatively speaking, but the fact is he is committed to all the parts of the business and working very hard along side of the rest of the management team to make all of it work.

In terms of our international expansion plans, the things that we -- we have kind of discussed this in great detail or more detail on the year-end earnings call. If we remain on track with all the expansion plans that we have previously described, the London flagship store for next year, as you called out, is the next step beyond North America for Victoria's Secret. The expansion of Bath & Body Works outside the United States through our partners in the Middle East and Turkey is part of our plans for this year.

And beyond that geographically -- in addition to that the expansion of this Victoria's Secret Beauty and Accessories concept, formerly known as TNT, remains a priority for global expansion. And in addition to that the La Senza international business, which we are very committed to working very hard because we believe that brand is well-positioned for expansion globally. All of those remain on track and on plan.

Geographically beyond that we are continuing to be curious about other parts of the world -- Asia, South America, and elsewhere -- and we have not yet decided on where we would go next.

Thanks, Martyn. Next question.

Jennifer Black, Jennifer Black & Associates.

Thanks a lot. And Diane, you will be missed and congratulations to everyone.

Thank you.

So I have a question for you. Over the last year you have run a number of tests for a BBW loyalty program, most recently the Love BBW Club with the mobile app, and I wondered what your findings are. Do you believe these test programs have been effective and does a credit card makes sense for your customer? Thanks so much.

Well, we are continuing to -- first of all, thank you, Jennifer. We are continuing to read some of the other tests that we have out there. We have mixed results depending on the type of test that we have.

And Les has actually challenged us on a whole other level to make this a little different. I don't want to share too much of it, but it's to take a whole new level of how we look at the stores and kind of how the loyalty type club programs are. So you will probably be seeing a lot more tests going forward into the fall season and into next year.

But as far as a credit card, our AURs are so low that I don't know if still it makes sense for us to have a credit card in our business.

Yes, that is what I got. Thanks so much. Good luck.

Thanks, next question.

Neely Tamminga, Piper Jaffray.

Thanks. I really have a question for Martyn or Stuart in terms of the La Senza. I think -- recalling back in the days when you guys bought the business and kind of what the EBIT margin structure was there, and obviously so many things have changed since then. Just wondering what the roadmap is in terms of EBIT contribution, how much might be weighing on the overall entity. That would be helpful.

And just, again, gratitude and best wishes to Diane.

We will go to Martyn for that, Neely.

Morning, Neely. La Senza, as I mentioned in my brief remarks, continues to be in the process of transformation. I just want to remind everybody they are only nine months into this process of transformation in the sense of we relocated the management team; we got a new leadership team in place.

We have now repositioned the brand in terms of the brand positioning to be more of a fun, flirty, and sexy brand positioning. We are repositioning the assortment to focus on bras and panties. All of that is a work in progress and only nine months old, so knowing the track record we have with building brands I would suggest we need to be patient and stay the course.

The other thing I would say about Canada is -- and if you have tracked any of the competitive results in Canada it's interesting. The Canadian retail market is actually quite challenging right now; mall traffic is significantly negative. And so in addition to the transformational challenges that the management team is working their way through the Canadian retail market has presented more headwinds than we are seeing in the United States.

Neely, it's Stuart; just a quick follow-up. La Senza at this point is not contributing meaningfully to the profit of the Company. So it's diluted on margin rates where it should be, which would be, in our view, for any of our store-based businesses with brand equity and so on, is it should be at 15%-plus operating margin business. So with the background that Martyn provided financially there is a big opportunity to improve this business.

Great, thank you. Next question.

Stacy Pak, Barclays Capital.

I guess I have two sort of fundamental questions. One is just on Victoria's Secret you have this incredibly powerful brand and it feels like you are tiptoeing internationally with it. You are leading with franchising; you are doing the Travel & Tourism. Why are you not opening Victoria's Secret stores internationally more aggressively and when are you going to?

I guess the other question is what are you doing about Lulu and about Soma? And if you don't want to answer those two, then just answer the category questions. Are you going to leave those businesses alone? I know you are doing some stuff at [Easton] on the [VFX]; maybe you can address that as well as sort of the older mindset in lingerie. Thanks.

Thanks, Stacy. We are actually going to go to Sharen first for the second part of your question. Then we will go to Martyn for international.

Hi, Stacy. We believe that the opportunity within the sport yoga world is a real one. As you know, we have been testing and playing with that concept for a while. And as now we have our business really on a growth pattern, I think that you will be seeing us getting much more aggressive about that concept as we go forward.

In terms of the Soma question, we have a targeted customer in terms of the size band that we want to serve and we, at this point, will not deviate from that as we go forward.

Thanks, Sharen. Martyn?

Stacy, it's a challenging question because I know people can be frustrated about the pace. The best way for me to answer that is through the things that we have said very consistently over the past two years.

Number one, we are focused on our core brands in the United States. We have great core brands in the United States with great growth opportunities. Our international expansion, therefore, is paced at a rate that will not distract us from that first primary mission.

The VS brand, we believe, is a very complicated brand to deliver to the rest of the world because of the complex nature of the brand, the multi-sub brand categories, the big-box positioning, etc. The La Senza brand, the BBW brands are easier and less complicated, and that is the reason we have been focused on those brands principally in the early days.

We are very encouraged by the results that we are seeing in Canada. Not just the customer sales and profitability results, but also the operating results. In other words, demonstrating that we are able to operate a big-box Victoria's Secret store outside of the United States.

Our next step in that dance will be the London store and that will help us to demonstrate our ability operationally to do that across the ocean and do that well. Then beyond that I think that will open the doors to further expansion of the Victoria's Secret brand. But as Les had said many times, we are going to be careful and cautious about the pace and make sure that we don't distract ourselves from the core mission of our US business.

Thanks, Martyn. Thanks, Stacy. Next question.

Paul Lejuez, Nomura Securities.

Thanks. What month are you guys targeting for the London flagship opening? And I guess also, what are your plans in the rest of the UK? Will you wait till that store opens or are you already looking at other sites?

And then, Stuart, just wondering what is behind the higher CapEx numbers? Thanks.

Thanks, Paul. We will go to Martyn for the first question.

Paul, the new Bond Street store that we are planning to open in mid-2012 is a very complex store from a construction and other points of view, and so we are targeting to have that open in mid-2012. But we haven't kind of zeroed in on the exact opening date yet.

Beyond that, yes, we are looking at additional real estate opportunities in the UK. And with the assumption that this first store will be wildly successful, I would expect that we will expand beyond that first store.

Thanks, Martyn. Stuart?

Paul, on the CapEx two things. One is the number of new store openings has come up a little bit from the beginning of the year just opportunistic.

And, secondly, we need are, on a spectrum, doing a few more things with respect to technology, nothing major, but a few more things with respect to the technology than we thought about at the beginning of the year. But again it's still $400 million to $425 million; it's just up modestly.

Thanks. Good luck, guys.

Thanks, Paul. Next question.

Howard Tubin, RBC Capital Markets.

Thanks, guys. Maybe just a question on the promotional cadence going forward at both the big brands. Is there further opportunity to kind of be less promotional or are you kind of at a point where you will be consistent with where you were last year?

Okay. Thanks, Howard. We will go to Diane first.

The way we have run our promotional business for probably the last 18 months is we plan it flat and then we pull back in-season where we need to. And we still see significant opportunity for us to pull back on our promotional strategies.

Victoria's Secret, as a total brand, both in the store channel and the direct channel, have really been on a pathway for the last 3 years to really pullback true sale promotional timeframes. I think there is still some opportunity. As you know, we really have just now 2 big events a year, which is within our semiannual sale. I think there is opportunity more on the direct side and a little bit on the store side.

Great. Thanks, guys. Next question.

Michelle Tan, Goldman Sachs.

Congratulations on the performance, it has been fantastic. I think in your prepared comments you mentioned that you saw some further opportunities for improvement as you look at this year. I was wondering if you could give us any more specifics on what some of those opportunities might be as you look forward to fall and holiday.

Michelle, are you referring to top line or other aspects --?

I think Sharen made the comment when you were talking about kind of all the progress you have made in terms of customer relationship, product, all of those things. I guess I am curious kind of helping -- there was a mention of some further opportunities and I am curious what you are most focused on, I think specifically at Victoria's Secret.

Sure. Hi, it's Sharen. I think that when we think about Victoria's Secret and as we are continuing to be agile, we are in the fashion business and continue to flow the newness. How we are testing and reading and reacting to those, there is still opportunity as to how fast we can get back into the big winners.

When I think about how we are really focused on where the product meets the customer that there is always opportunity for improvement, and especially when you are looking at 1,000 store chain and also the direct channel. So we do have an initiative this year is that really how do we even get closer to the customer when we think about the efficiencies in the business.

So I think that if we, as a brand, and continue to have a vision for growth, we do believe that there is always opportunity to get better and better and to think about how we do things differently. And especially as we think about what is happening in the social media world and just how we utilize our advertising dollars. So it's really a longer conversation, but I think that we have got a lot of great ideas, new initiatives, but still focused on our core categories to even make Victoria's Secret a better company.

Thanks, Sharen. Thanks, Michelle. Next question.

Laura Champine, Cowen and Company.

I guess this is piling on to Stacy's comments, but looking at your international slide and seeing that La Senza is going to have over 500 franchise stores by the end of the year internationally I can't help but wish those were Victoria's Secret stores. Is converting those stores a possibility? Are those the box sizes even what you would want? Is that something you guys have thought about?

Thanks, Laura. We will go to Martyn.

Laura, I guess I will say that we very much appreciate the support for the Victoria's Secret brand outside of the United States. The simple answer to your question is, no, they are really not box size-wise compatible with the VS brand which is multiple sub brand, multi-room based, and will be more flagship oriented as we take it to the rest of the world.

And again, I do want to reiterate that we have tremendous confidence in the La Senza brand internationally. It is well distributed, it performs well in 40 -- over 40 countries today and we do see that as an opportunity as well.

Next question please.

Jeff Black, Citigroup.

Thanks. Stuart, back on the inventory which seems to us to be getting very lean indeed, how much of this is due to taking out clearance from direct? I guess the question is do you think you have enough inventory to drive a comp and what things you are doing on conversion give you confidence that we can see a nice strong comp on these low levels?

Then finally, on the back half, what kind of comp do we think we need to get the leverage on B&O to offset the rising costs? Thanks.

Jeff, Sharen is actually going to take the inventory question.

Jeff, if you think about it from a Victoria's Secret perspective, we had to go on a diet. We actually got a little bloated in our inventory and as we really changed our model in terms of being more agile and being faster to market with our ideas and our reading and reacting skills. I think that we have really been able to come a long way and still have opportunity for improvement.

So when I think about the inventory is that you also have to look at the flow of goods. As we think about how we are flowing our products into the stores, it's a much better efficient more agile model.

Great. Thanks, Sharen. And leverage on B&O, Stuart?

Jeff, the leverage or the sales growth required to leverage the buying and occupancy expense categories that again are within gross margin is roughly 3% on a full-year basis.

Great, thanks. Good luck.

Michelle, I think we can take maybe two more questions.

John Morris, BMO Capital.

Congratulations and great quarter, Diane, good luck. You will be missed, thanks.

Martyn, a little bit more color on La Senza. I want to ask the question maybe this way in two parts. I know you have talked a little bit about it already, but dive a little bit deeper on where you like the progress that you are seeing. What do you approve of? Where would you particularly want the division to focus more? Where do you want more progress?

And is there a difference in the performance between what you are seeing in Canada versus outside of Canada internationally, besides the weather factor here in Canada lately? In other words, are we seeing strong performance in La Senza international versus in Canada or is it consistent? Thanks.

Thanks, John. Martyn?

John, so hopefully you would recognize my comment about the Canadian retail market, right?

Correct, yes. Yes, I am saying kind of beyond that.

No, no, I got it. It's just that I am recognizing that you have more focus on the Canadian retail market than maybe some others.

Where we like the progress is the transformation of the brand in terms of becoming core focused on bras and panties, less focused on sleepwear, but continuing to have an important part of the assortment around sexy sleepwear. And that transformation, which we also believe is positioning the brand to be younger, fun, flirty, etc., is also changing the customer mix.

There is a lot of change going on there. And I think I can represent that Les is very pleased with the progress that we are making in that kind of a transformation, similar to other transformations that I have seen Les take other of our brands through over the past two decades.

The repositioning of the brand imagery, if you have seen the stores in Toronto, John, is working and we are pleased with that brand positioning. But that is new and it's not fully distributed throughout Canada yet. So that needs to be fully distributed and proven to be a good brand positioning in terms of store design and imagery and etc.

So all works in progress and we are pleased with the progress we are making. It's not yet producing the financial results, as Stuart said, that we would want or we would be targeting to produce.

In terms of the international business, that is also going through the same kind of transformation and a number of our international franchisees are adopting the new standards, the new store design and positioning, and seeing great success from that. And relatively speaking, I would say the international franchise business has been performing better than the Canadian business, because it's a less competitive market that they are in in many of the cases.

So we are pleased with that progress and working closely with a number of our key international franchisees to convert them to this new model, this new brand model.

Thanks, Martyn. Thanks, John.

Last question, Michelle, please.

Roxanne Meyer, UBS.

Great, thanks. Congratulations on a terrific quarter. I just was looking for a little bit more color on PINK. Where do you see the biggest opportunities in terms of category expansion and how do you see the growth opportunities in terms of store within a store over the next several years? Thanks.

Thanks, Roxanne. We will go to Sharen.

We are very excited and pleased about the growth that we have seen in our PINK business. We also believe that there is still an enormous amount of opportunity.

As you know, we have really not been focused on the bra category. It was really based upon our lounge business and panty business. We think there is a big opportunity within that category and getting great traction and success as we go forward.

We also believe that there is another opportunity within the accessory category. Still continuing to hand even more opportunity in the lounge, so we do believe that this is a powerful brand and a well-told story.

As we think about our go-forward strategy, as we can appropriately right-size PINK within the Victoria's Secret box we prefer that as a side-by-side. Where we cannot we will be then expanding and opening up free-standing PINK stores. As today we have about 9 free-standing PINK stores and we probably still see some more in the future where we just can't get enough real estate for the side-by-side concept.

So I think there is opportunity in growth in the bra category and continuing with the apparel category. We have a unique differentiator for us is in our collegiate licensing apparel program that is so targeted to that market. And then either within the store is our first and the second one would be free-standing opportunities.

Great. That concludes our call for today. Thanks everybody for joining us and for your continuing interest in Limited Brands.

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