Bath & Body Works Inc (BBWI) 2012 Q1 法說會逐字稿

Good morning. My name is Matthew and I will be your Conference Operator today. At this time, I would like to welcome everyone to the Limited Brands first-quarter 2012 earnings 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. At this time, I will turn the call over to Ms. Amie Preston, Chief Investor Relations Officer for Limited Brands. Please go ahead.

Thank you, Matthew. Good morning, everyone, and welcome to Limited Brands' first-quarter earnings conference call for the period ending Saturday, April 28, 2012. 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 statements 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-newsltd. You can also listen to an audio replay from our website.

Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO, Victoria's Secret; Nick Coe, CEO, Bath & Body Works; Andrew Meslow, CAO, Bath & Body Works; Martin Waters, President of International; and Martyn Redgrave, EVP and CAO are all joining us today.

We're trying something different this quarter. We've substantially cut back on our prepared remarks in order to allow more time for Q&A. As a result, we won't be repeating a lot of the information that is already included in the presentation. We look forward to your feedback on this new approach.

After our comments, we will 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. Also, just a reminder that all of the results discussed on this call are adjusted results, and exclude the one-time items in 2011 that are described in our press release.

Thanks, and now I'll turn the call over to Stuart.

Thanks, Amie and good morning, everyone. We're pleased with our first-quarter results. There is a lot of noise in the quarter that I'll attempt to clarify for you. But if you properly consider the nature of those items, and focus on the operating performance of our two big businesses, Victoria's Secret and Bath & Body Works, both businesses delivered record results against very strong performance last year. Last year's results included the profit of our third-party apparel sourcing business, which as you remember we sold last November.

Excluding that profit from last year, our operating income dollars increased 15% in the quarter. Additionally, our first-quarter results were negatively impacted by severance expense for several executives. We also incurred additional expense in our international business related to La Senza transition costs and investments related to preparing to open the UK Victoria's Secret stores.

To take you through the first-quarter results, as detailed on page 4 of the presentation, comps increased 7% on top of 15% last year. Adjusting for the impact of the sourcing business sale, the gross margin rate increased by about 40 basis points, as leverage in buying and occupancy costs of about 100 basis points did not fully offset a slight decline in the merchandise margin rate. SG&A expense leveraged by 40 basis points.

Turning to the balance sheet on page 6. Retail inventories per square foot at cost ended the quarter up 9% versus last year, as we accelerated receipts to chase sales. We repurchased 8.3 million shares of stock in the first quarter for $380.9 million. At quarter end, we had $283.4 million remaining under our current $500 million repurchase program.

Turning to page 8 of the presentation for our forecast for 2012. We expect earnings per share between $0.40 and $0.45 in the second quarter, against last year's adjusted $0.48 result. There are a number of factors which are pressuring our second-quarter EPS results, and total to about $0.06 in the aggregate. First, the second quarter is negatively impacted by $0.02 from the sourcing business sale. Additionally, we expect that we will continue to incur costs related to the restructuring of the La Senza business, which reflects some shift in timing from the first quarter to the second, and the opening of the Victoria's Secret stores in London. The second quarter is also negatively impacted by a timing shift of a marketing campaign at Victoria's Secret out of the third quarter and into the second.

Our second-quarter earnings per share forecast reflects a low to mid single-digit comp increase. We expect the second-quarter gross margin rate to be up significantly, as the sale of the sourcing business will benefit our gross margin rate by approximately 300 basis points. Absent this impact, we expect the gross margin rate to be down slightly. We expect the second-quarter SG&A rate to increase significantly, driven by a negative impact related to the sourcing business sale of about 230 basis points. Excluding this impact, the SG&A rate would increase as a result of the investments that I mentioned previously.

We expect to end the second quarter with inventory per square foot up mid single digits to last year. For the full year, we are projecting positive 3% to 5% comps. We expect our gross margin rate to be up significantly, positively impacted by the sourcing business sale by about 250 basis points. Again, excluding this impact, our gross margin rate would still be up for the year, driven by a slight increase in the merchandise margin rate which is weighted to the back half of the year, and a slight improvement in the buying and occupancy expense rate. We expect the full year SG&A expense rate to be up, negatively impacted by the sourcing business sale by about 170 basis points. Again, absent this impact, we expect the SG&A rate to be about flat.

Before any discrete items, our tax rate will be approximately 38.5%. So assuming all of these inputs, and others which are detailed in the presentation, we expect earnings per share for the full year 2012 to be between $2.63 and $2.83 per share. Our 2012 CapEx projection continues to be between $575 million and $625 million. The increase in CapEx versus last year is attributable to increased real estate investment at Victoria's Secret to increase square footage for PINK. As we've previously noted, less than 10% of Victoria's Secret store locations have the full PINK assortment.

Turning to liquidity. We continue to expect free cash flow in 2012 of about $600 million to $700 million. We remain committed to returning excess cash to shareholders through a combination of share repurchases and dividends.

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

Thank you, Stuart, and good morning everyone. Our first-quarter results are detailed on page 12 of your presentation materials. Victoria's Secret had a record sales, and earned record operating profit in the first quarter, with segment operating income dollars up over 13%. We are very pleased with this result and are confident that the keys to our success are the priorities on which we are focused, growing in our core categories, investing in select key growth opportunities, and emphasizing speed and agility.

In the stores channel, first-quarter comps were up 9% on top of 19% last year, driven by strength across bras, panties, swimwear, PINK loungeware, and our prestige fragrances. In the direct channel, first quarter were up 4%, driven by strength in PINK, swim and knit clothing. Our first-quarter merchandise margin dollars were up in both channels. The merchandise margin rate was down versus last year, driven by a strong response to our gift-with-purchase programs in both channels, and higher product costs in our direct channel, which were partially offset through improved product pricing.

Looking ahead to the second quarter, we will remain focused on our core categories of bras, panties, loungewear and fragrance. We will also continue to build on our success in swim. Additionally, we will continue to focus on providing outstanding in-store and online experience to our customers with steady newness and right fashion, across all our channels and across all product categories.

We will continue to balance our momentum with the changes and investments that we are making, all of which we feel are appropriate and business-driving decisions, improving our customer connection and our profitability. These include closing for remodel our largest and most productive score at Herald Square, and reducing the number of days in sale in our direct channel, which will further align our approach to semi-annual sale across our channels.

Thanks and now I'll turn the discussion over to Nick.

Thank you, Sharen, and good morning, everyone. At Bath & Body Works we delivered record results versus last year's strong performance in the first quarter. As detailed on page 13 of your presentation, comps increased 6% on top of an 11% increase last year, driven by continued newness in both form and in fragrance across our three key categories, our Signature Collection product line, the anti-bac soap and sanitizer business, and our home fragrance assortment.

Operating income dollars were up 11% to last year, and up 60 basis points as a percentage of sale, driven by expense leverage. The merchandise margin rate declined primarily as a result of increased costs and promotional activity.

Looking ahead to the second quarter, we will continue to introduce newness and innovation in both form and in fragrance. At the end of May we will feature the new collection of candle fragrances inspired by the American Boardwalk. In addition, this month will include the launch of our newest Signature Collection fragrance, Malibu Heat, in all forms. We're excited about the assortments and we'll continue to manage expense and inventory conservatively, while continuing to focus on getting faster and providing our customers with a world-class in-store experience.

With that, I'll turn the discussion over to Martin Waters.

Thanks, Nick, and good morning, everyone. My comments this morning will focus on an update of our international businesses. We believe our opportunity for international growth is significant, given the leadership position and awareness of our brands and the success we've seen from our early efforts. We have made a lot of progress in the first quarter. And, as detailed on page 11 of your presentation, we continue to be on track to open over 200 international locations this year.

At Victoria's Secret, we continue to be pleased with the performance of our full assortment stores in Canada, and we'll open seven more this year. We're on schedule to open two stores in the UK this summer, and three more stores in the Middle East in the fall. Our Victoria's Secret beauty and accessories business continues to progress well, with 65 locations open at the end of the quarter, heading to about 130 by the end of the year.

In Bath & Body Works, we're now up to over 90 stores outside of the USA, and project to end the year with over 120 stores. We're pleased with the performance of BBW in our own stores in Canada, as well as in our franchise stores in Turkey, the Middle East, and in Russia where we opened last week.

Turning to La Senza, although the business is not significant to our overall results, our Canadian business has been slower to turn around than we would have liked. La Senza comparable store sales in Canada decreased 1% for the quarter. As you know, we closed about 40 stores in January and February. And we're encouraged by how the business is benefiting from that. Most important of all, we continue to be very encouraged by the repositioning work we are engaged in at La Senza. We now have a distinct and compelling customer proposition that is globally appealing and highly scalable around the world. And our partners will open over 45 new stores this year.

So that's an update on International. As you know, we're not dependent on International for growth. Our overarching priority is the strength of our brands in North America.

Thanks, I'll now turn it back over to Amie.

Thank you, Martin. That concludes our prepared comments and at this time we'll be happy to take any of your questions. As a reminder, please limit yourself to one question, and hopefully there will be enough time for you to get back in line if you have another question. Thanks and I'll turn it over to Matthew.

(Operator Instructions). Kimberly Greenberger with Morgan Stanley.

Congratulations on a really great start to the year. My question is for the division heads, Sharen, Nick and Martin. I'm wondering if you can look out here over the next two to three years and talk about where you see the opportunity, if you do see any, to raise your divisional margins over time. And Martin, specifically just at the La Senza division, not necessarily International. Thanks so much.

Thanks, Kimberly. We'll go to Sharen first.

Hi, Kimberly, thank you. As I look out over two to three years, obviously we want to continue to be a big growth business. And we do believe that we will continue to see margin improvement. So I am very optimistic about the opportunities that Victoria's Secret has to be able to deliver on that.

Nick?

Hi, Kimberly. I think a couple of things. One is, just based on us being nimble and agile, we'll continue to get faster and therefore we're going to have less clearance on the floor, which will push us back towards full-price selling. And then obviously stay focused on leveraging our expense management as we move forward.

Thanks, Nick. Martin?

Well, you'll recall that La Senza is really our turnaround business. We changed just about everything in La Senza from the customer proposition to the marketing to the product. We even relocated the team from Canada into the US. So an enormous amount of change in that business. And our focus is really on the fundamentals on getting that positioning right and executing solidly. So it's difficult to predict what the next few years will bring but we're feeling very optimistic about the La Senza brand in total.

Kimberly, it's Stuart. I know you're trying to test us. I'm saying that with a smile on my face. But on an overall basis the Company does, just to reiterate, see the opportunity for a high teens operating margin rate as we look over the next several years.

Thanks, Stuart.

Thanks, Kimberly. Next question.

Paul Lejuez with Nomura.

Can you maybe talk about the sales productivity of the PINK square footage compared to the rest of the store? And as you do the expansions to allow for the full PINK assortment, what are you seeing in terms of the lift relative to your expectations? Thanks.

Hi, Paul. It's Sharen. We see -- the PINK sales productivity are higher than the rest of the store, but primarily because they are squeezed for space, and it's not dramatically different. The other thing I want to note, too, is that although PINK is only in 10% of the stores, the true Victoria's Secret -- full line of Victoria's Secret, is even in less than 10% of the stores. It is a true opportunity. As we expand and move PINK out to freestanding stores, we are still being able to have high productivity within those stores.

Does that do it for you, Paul?

Yes. How's it tracking relative to expectations, if you could share that, as you do the expansions?

They're exceeding our expectation as we do the expansions. So what happens is, as we pull out PINK, PINK gets better. We're able to expand the assortments for Victoria's Secret, the total Victoria's Secret box gets better. So it's really a win-win as we go into these malls.

And then as you think about it, too, it's mall by mall based, as well. But we are very pleased because what we see is PINK getting more productive and being able to service the customer with the full assortment. And Victoria's Secret gets more productive because we're able to expand those assortments into our adjacent categories.

It makes sense. Thank you.

Thank you, Paul. Next question.

John Morris with Bank of America.

My congratulations. A question, first of all, kind of a toss-up, I am not sure who would answer this one. You guys talked about the inventory position now, you're chasing business. Is that at both divisions, both Victoria's Secret and Bath & Body Works? I am just wondering where that's happening.

And then secondly, Martin, maybe you can talk a little bit more about what's coming for La Senza right now. I know there're quite a few changes. You've got the move to Columbus, I believe. Talk a little bit about the benefits that you expect to gain from that, what's behind that, and when would we start to see some of those potential benefits? Thanks.

Thanks, John. I think we'll go to Stuart for the inventory question.

John, thanks for your comments. With respect to inventory, the inventory growth is higher at Victoria's Secret, largely in connection with the stronger sales trend in that business. Both businesses are big businesses, Victoria's and Bath & Body are managing inventory extremely well. And our ongoing goal is to grow inventory slower than sales. But the increase is concentrated at Victoria's, again reflecting the very strong sales trend that that business has been having. But we remain very agile, very focused on it. And overall feel very good about our inventory position as we enter the second quarter.

Thanks, Stuart. Martin?

As far as La Senza is concerned, I think we're feeling pretty pleased with the way that the new team is settling in and having relocated from Montreal to Columbus. The benefits of that, I think, are fairly self-explanatory. Firstly, a larger talent pool to choose from, John, than we would have seen in Montreal. But more important than that, the opportunity to leverage the great capability that exists within Limited Brands from a sourcing, design, marketing perspective.

So that's the first aspect of the change. The second is really about right-sizing the real estate in Canada. And you'll recall that the business had a number of stores that were not right for a specialty lingerie intimate apparel business. And the third is really about talent at store level and changing the positioning. We're also re-evaluating the talent and really working on improving that talent at store level.

Thanks.

Thanks, John. Next question please.

Janet Kloppenburg with JJK Research.

Good morning, everyone, and congratulations on a great quarter. Just a couple of questions for Sharen and Nick. I'm wondering as we go through the rest of the year if you'll be getting some moderation in your product costs, and if that could allow you to promote without hurting margins so much?

And just longer term, as we look out, are there some strategies in place that could allow you to drive traffic without deteriorating the merch margin? And for Martin, when we think about the UK stores, Victoria's Secret, I think there's the flagship and then the one mall store. I'm just wondering, should we be thinking about that business as a slight drag to earnings in the next couple of years? Or exactly what we should be thinking about in terms of the P&L of that business. Thank you.

Okay. Thanks, Janet. We'll start with Sharen.

Janet, thank you. When I think about our ability to really test, read and react, and with our speed and agility, I do believe we will see our margins moderate. I think also the cotton cost will, as well. When I think about the ability to drive traffic, and as we are focused on really putting the power of our $2 billion Internet and catalog business and the store together, actually taking returns in store, when we're out of stock using the direct model, putting that power on power for Victoria's Secret I think will help us and enable us to drive traffic.

I do not believe we will ever walk away with -- I shouldn't say ever -- but from our surprise and delight from a gift-with-purchase perspective. It really gives the ability for us -- in a way, it's our own marketing. When, as we give our Victoria's Secret bags away with a purchase, it is also advertising to see those in the mall, to see those in the airport. And it's really part of a longer strategy from an engagement model around the customer.

And one of the things that we think is the biggest leap in strategy that we do have, the more that we can create that engagement model with the customers, the more that they become loyal to us, the more that they come back and spend more dollars with us. And I believe that is also one of our winning formulas as we go forward.

Thanks.

Janet, it's Stuart. On the effect of the London Victoria's stores on profit this year or the next several years, two or three things. One, it will have a negative effect on profitability in 2012, just as we have startup costs, pre-opening costs, investments in the store. Frankly, we would expect that over time it will be a positive contributor to profit, but we'll see when we open the store. And I think most importantly, as we've talked about a lot before, what's going to drive our profit growth in 2012, and will be the key driver going forward, is the North American business. And we'll see. We obviously expect over time the International business is going to become an important driver of profitability in the business, but that's over time. In the near term here we're investing in that business. We expect the store will do very well in London, but it will have a negative effect in '12. Not counting on any key contribution from International in '12 to drive our 2012 results.

Thanks. We'll go back to Nick.

Hi, Janet. Thanks for the kind words. Yes, as it relates to the cost, we'll start lapping those costs as we go into Q3. So we should start to get flatter there. But actually I think we're more focused currently on continuing to test different price points and different concepts so that we have a better sense of our ability to drive full-price selling. I think that's really where the energy gets that is going. So as we bring newness in, test that newness, test those prices and assure they're in a workable arena for us that would allow us to really, really push on the full-price selling.

Does that mean the frequency of newness will pick up at BBW through the fall?

No, I think what you'll see is the newness should continue to flow the way it's been flowing because that's been really successful for us. I think what you'll see pick up is probably how new it is and how animated it is, so that we continue to tell a very engaging story for the customer when she comes on to the store, because it is about really trying to engage her and the excitement of that to drive the traffic.

Great. Both Victoria's Secret and BBW look great right now, so good luck.

Thanks very much, Janet. Our next question please, Matthew.

Dana Telsey with Telsey Advisory Group.

Good morning, everyone and congratulations. Can you talk a little bit about the sub brands of Victoria's Secret as a driver of top line sales, what you're seeing there? And as you prepare for the second half of the year, what type of cadence we'll see of new launches? And also how the pricing differs this year from last year? And same thing on BBW, what we'll see there from the three key categories and how you see that evolving. And will the assortment be similar in London to the US? Thank you.

Thank you, Dana. Well, I'm very excited about it because our bra business and our panty business, which is at the core of what we do, has great strength coming into the second quarter. We have the same amount of launches. But one of the things we are doing is adding another fashion drop before Memorial Day weekend. We also have, coming out of semiannual sale in July, an even bigger opportunity for us in terms of what we're launching at that time frame. So I'm very excited about the assortment going forward, very excited about the fashion and the newness that we do have.

Our swim business continues to be strong in both channels, the direct channel and the store channel, exceeding our expectations wildly. And the other piece of it is, it is even a bigger part of the business as we go into second quarter. And we didn't have all of the stores that we do today. We're landing new fresh swimwear receipts, both in direct as well as in the stores, for second quarter. All of them have been tested and we feel very good about that.

When I think about the opportunities that we've had in beauty and really focusing on our fine fragrances, at each launch we have now tied a fine fragrance to that launch, and putting power on power. And that formula is very strong. And we will see that continue as we go into the second quarter.

So if you go into the stores right now you'll see the summer Bombshell event. The Angel, a new summer Angel fragrance which is launching, which will coincide with the Angel floorset. So it's really an exciting opportunity for us.

The loungewear business, both in PINK and in Victoria's Secret, have been strong and continue to be strong really across all categories within that lounge business. So there's a lot of exciting things as we go forward. As you know, we have our sport category which we've been testing, and very pleased with that. We now have two freestanding stores and we'll continue to be expanding that assortment as we go forward. So thank you, Dana. I hope that answers your questions.

Thanks, Sharen.

Nick.

Hi, Dana. Thank you. Yes, a couple of things. I think we see plenty of opportunity across the three core businesses. And I would bucket it into two or three things. I think the first one is, we continue to try and provide an elevated experience. So we're taking pieces of each of those brands and trying to find out how can we elevate that experience slightly for the customer. And the customer has responded really well to that during Q1. So we'll continue to drive that as we go into the rest of the year.

And I think the second point would be, as we look at our Home Fragrance business and the strength of that business, we found that where we focus on that, and have got a good story to tell on that, we're actually to able drive the entire shop performance, which is new for us, and therefore tells us there's more opportunity. And then just standing back from the three of those businesses and saying there are still some core components of that business that are feeling like they've still got upside if we were to really focus on profiting from the core out of those businesses. So I think about those three points against those three businesses, that's what's going to help us continue to keep momentum going through the year.

Thanks, Nick. And then to Martin about the VS UK stores assortment.

On VS International, the assortment that we'll put in both the UK stores and the Middle East stores that open later this year will be substantially the same as the assortment that we have for VS and PINK in the USA. Our approach really is to replicate the outstanding customer experience that we have in North America in terms of assortment, price positioning, in-store experience, everything.

Thank you.

Thank you, Dana. Next question please.

Barbara Wyckoff with CLSA.

Good job. A question for Nick. Can you talk about the key competitors in the United States and International? And also, is there any opportunity to focus on any of those other sub brands like Bigelow or Wexler to add another layer of growth in BBW?

Sure. Thanks for the kind words on the business. In terms of key competitors, we really look from high to low at the competitive landscape. So whether that's what's happening in the prestige market, trying to figure out where that's going, all the way through to, frankly, the grocery and the mass sector. So I wouldn't say there's one particular place. I think it's a very dynamic business and it's penetrated across the landscape in general. So we would look everywhere from that, both domestically and internationally.

As it relates to the other brands, I want to be careful how I answer that because it's not like we don't focus on those other brands. They play a very, very important role in the business, especially from a story-telling perspective. And we have a very loyal customer following. So in many cases we're looking at each of those brands and saying -- which parts of it are under-leveraged and how might we maximize that so that we have a total in-store experience for the customer pretty much from head to toe? So yes, we absolutely continue to focus on those. And in many cases it's really just looking for the small opportunities that exist that we might be able to drive into something significantly bigger for the store.

Thank you.

Thanks, Barbara. Next question.

Jennifer Davis with Lazard Capital Markets.

Sharen, and your whole team, actually, the stores look great. You continue to outdo yourself with every delivery. I was wondering if you could talk a little about your opportunity in bras. You obviously dominate in push-up. And it looks like you're getting more into the lightly lined and other non-push-up styles. So just wondering maybe if you could talk about your market share data, or if you have market share data by category of bras. My guess is that push-up is a lot higher. And just wondering what opportunity you see by expanding into non-push-up styles. And then also just wondering if you guys could give some updated thoughts on La Senza and if you see an opportunity to expand in the US there. Thanks.

Jennifer, thank you so much for your kind words. When I think about the bra business, we definitely dominate in the push-up category. And we own quite a bit of the market share in the sizes that we want to be in. And we still see opportunity in push-up. We can't ever forget that our girls love push-up.

The opportunity that we have in the other categories, whether it be lightly lined, our new Fabulous bra that we have just launched -- wildly successful. It's really one of the best t-shirt bras ever. So we do see the opportunity through push-up, lightly lined, unlined, we see opportunities across all those categories.

The dominance of push-up is so strong, and the volume that we do there is so strong, it remains our focus. The percent growth in the other categories is larger because we have a smaller base. So as we think about owning the customer from her first bra purchase within PINK, which is unlined, a little bralette business, all the way to -- for the rest of her life, we will be expanding in these other categories outside of push-up. But I do want to reiterate, we will still always consider ourselves best at push-up. And cannot lose that focus, but add the increment by these other bra categories.

Thanks, Sharen. Martin?

Thanks, Jennifer. I think as we've said before, we are excited about the opportunities for La Senza in the USA. But right here and now in the short term our priority has got to be getting the Canadian business into the sort of shape we know it can be, and at the same time opening 45 stores internationally around the world. So yes, we think the opportunity is significant but right now it's a question of priorities and focus.

Thanks.

Thanks, Jennifer. Next question please.

Brian Tunick with JPMorgan.

I guess, Stuart first. Maybe just talk about how you're thinking about uses of the free cash flow. Is there further buybacks in your earnings guidance for this year? And then generally how you think about buybacks versus special dividends. And then maybe give us an update on what are the lead times you're seeing maybe for getting more Company-owned stores up and running outside the three stores you have planned for London.

And then maybe for Sharen, I think beauty is your highest margin business, and it doesn't look like it's kept pace with the other categories in Victoria's Secret. So just wondering, Sharen, what changes you're making to really get the beauty business accelerating here.

Okay. Thanks, Brian. We'll start with Stuart, and that was uses of free cash.

Brian, and I know you know this, the most important thing on our mind as we think about uses of cash is our --- or free cash flow I should say is our ongoing commitment to return excess cash to shareholders. And as we've talked about before, but again to reiterate, we achieve that in a balanced approach between regular dividends, share repurchase activity, and special dividends. So just by way of reminder, our thinking with respect to that hasn't changed at all.

As you know, we announced a $500 million program earlier this year. We're in the middle of that program. We finished programs we announced, obviously. And in consultation with our Board we'll think about other things we may do through the year, based on, obviously, facts and circumstances. With respect to assumptions that underlie our EPS guidance, what's in there is completion of the $500 million program and nothing further. So that's what underlies the guidance.

Thanks, Stuart. We'll go to Martin for a question about lead times and additional UK locations.

So our view of the expansion opportunities for VS International is it would be substantially mall-based. You would probably know that the lead times of 6 to 12 months is probably reasonable for that sort of property. With all of that said, though, let's get the first five stores open this year and go from there. At this stage we're really not too distracted by what '13 and '14 might bring, we're just very, very focused on '12.

Thanks, Martin. Sharen?

Very excited about the opportunities that we have in beauty. And, yes, you're correct, it is our highest-margin business, and therefore we do want to see even a higher growth rate. We're actually in the process of re-establishing what we stand for in beauty. We have been very much in what we call our Fantasy World, which is really an opening price point,like Bath & Body Works opening price point. So that's been where our focus is. And we're moving away from that into the fine fragrance world, which we believe that we have the opportunity to dominate in. As I spoke earlier about the connectivity between what we're doing in PINK and what we're doing in Victoria's Secret, to align our beauty strategy with those strategies and putting power on power. So I do believe that we have the opportunity to grow. Beauty is probably one of the categories that's has not benefited from our expansion model. We're actually driving more productivity out of our beauty business versus expanding the space, which we believe is the right strategy to do. So we believe we continue to have an opportunity to actually build upon the franchises that we have in terms of Victoria's Secret. Let me talk a little about that.

As you think about Angels and how do we play up the whole Angel category, we have a huge Body by Victoria business, so wouldn't it be wonderful if we had Love Your Body bodycare line, which we will be launching in the fall season. So there is really a robust pipeline for newness and restaging and refreshing where we are today in beauty. And now I believe we will hopefully have the means to outpace the total store in beauty as we come to the back end of 2012, and as we go into 2013.

Great, thanks, Sharen. Thanks Brian. Next question please.

Lorraine Hutchinson with Bank of America.

I just wanted to focus on the VS direct business for a minute. The growth has generally been lagging that of the stores. I think a lot of the reason for that is less promotions or pulling days of sale. I was just hoping to get a little more clarity on when that all ends or anniversaries, and if we could potentially see a surge in growth in your online channel from some of the investments you've made.

After this tranche of pulling back on promotion, we should be through that as we head into the fall season. I think that the opportunities that we have in our direct business, and how we're thinking about it, is the fact that we even want to get that direct business even more branded. And so one of the things, as we think about the apparel business, which is quite large in that category, how do we think about that from more of a key item lifestyle business that wraps into super model essentials, or the same thing of the lifestyle business that would wrap into PINK. So I think that there is a big opportunity there.

The other piece of it is, is that within the direct channel things are really moving. So when I think about the buzz word, omni channel, out there, there's two pieces of what I see growth and opportunity in the direct channel. It's not only where we are with our Internet business today but also where mobile is starting to play. And I believe that is going to be the biggest next channel that we have, and we're already seeing that. So I do believe how we use the ability on our online, within store, whether it's catalog, whether it's the Internet, whether it's mobile and how we tie that back to the store, I think you'll see all channels lifting from that strategy.

Thanks very much, Sharen. Thanks, Lorraine. Next question.

Jennifer Black with Black & Associates.

Congratulations on a great start to the year. I wanted to ask about VSX. Online there're many stock-outs, and it seems like -- and this is for Sharen -- in smaller sizes. And you've also raised your price points pretty significantly over the last couple of years and the demand seems to be there. So I wondered when you were going to roll it out to more stores. And also how are you going to be better in-stock? And then my other question is, as far as the returns in the stores, I wondered how that was going, and how long it will be until a customer can get a credit and actually use the credit in the store from a return from the catalog. Thank you.

Thank you, Jennifer. Right now I would totally agree with you that our VSX online is a very disappointing experience. I think that we did much better than we thought we would. And we are actually regrouping and coming back with a stronger direct strategy, as well as in-store strategy as we go into the fall season.

We have, in terms of our speed and agility, and keeping one foot on the gas and one foot on the brake, we were probably more conservative and blew away the expectations, both in the store and in direct. And so then obviously didn't buy the depth that we needed to. But we do have an opportunity as we go forward and have that position to be able to react to the business.

I think the other thing is that our positioning online is very disappointing. We have opportunity to improve that. So we will be coming out with a full-blown relaunch that you will see later this season. So I'm excited. And agree with you, there's lots of opportunity in terms of making our experience better online.

In terms of returns in stores, we will pilot -- go into pilot, starting I believe in September of this fall season, of being able to give the credit in-store, being able to actually transact that in-store. So that goes into pilot this fall with a hopefully roll in spring '13.

Great. Thanks so much and good luck.

Thanks, Jennifer. Next question.

Neely Tamminga with Piper Jaffray.

Martin, I just had a question for you as it relates to travel retail. And maybe more specifically, are there some specific strategies you guys are going to be putting into place to capture some of that international mind share during the Olympics this year? If you could remind us what your travel retail strategy is and maybe address the Olympic fervor, that would be great. Thanks.

We love the travel retail space, that's for sure. I think it's a terrific opportunity to market the Victoria's Secret brand to sophisticated customers traveling around the world. Of the 75 or so VSBAs that we'll open this year, I think about one-third of them are in travel retail locations. As far as the Olympics is concerned, for sure people will be traveling all over the world in a concentrated period of time. But it doesn't feel to me as if that's any different than any other time of the year, frankly. Every airport that I travel through, and I travel through a lot, there are tons and tons of people enjoying the shopping experience. So I don't think we have a strategy specifically for travel retail around the Olympics but we definitely have a strategy to capitalize on travel retail in its broader sense.

Thanks, Martin. Thanks, Neely.

Marni Shapiro with The Retail Tracker.

Congratulations. The stores look fantastic. I have a quick one for Nick and a quick one for Sharen. Nick, if you could talk a little bit about the men's business, which seems to be slowly encroaching on space throughout the BBW stores.

And then Sharen, if you can talk a bit about -- you have Sexy Secrets and VSX, and a lot of these smaller categories, which I think look fantastic. But in the grand scheme of things can they ever get to scale where they're really important? And do you have the space with the focus on bras? How should we think about these businesses, I guess?

Okay, we will start with Nick. Thanks, Marni.

Hey, Marni, first of all, thanks for the kind words about the business. I appreciate that. I'm wondering if you might have been in a test store on men's, because technically we're not giving it more real estate. It might be because we pulled C.O. Bigelow to sit next to it because it feels more like a cohesive story.

Having said that, at the same time, our men's business is performing extremely well. It's not something we wanted to start the store towards, but it's certainly something that we're happy with the results and want to figure out how we continue to get that without having to send a message to the store that it's becoming more dominant on men's. So I think it's really a case of how we pulled C.O. Bigelow to sit next to it and therefore it's starting to look more like a men's area within the store. But technically it's not grown in terms of cabinets or square footage.

Hi, Marni, thank you. We always are challenging ourselves to edit out the peripheral. And we're always testing things to see what we can't make bigger. In terms of Sexy Secrets, which is a very small, tiny piece of the business, it's really more of a service. It will probably move to just an online business in the future state.

VSX, on the other hand, I believe very strongly in the opportunities that we have in terms of our sport business. I do believe that we can be a very strong player. It fits right into our positioning. It fits right into us being best at bras. It fits right into the fit strategies that we do have. And, yes, we are real estate challenged and so there will be choices. In a perfect world I'd like to own a lot of frontage with PINK, Victoria's Secret, sport. We don't always live in that perfect world. We have to take it deal by deal, space by space, to make the choices in terms of what goes in what market.

Great. Good luck, guys.

Thanks, Marni. Next question.

Laura Champine with Canaccord Genuity.

My question is more generally about what you're seeing in terms of mall traffic and whether you think that spring weather had a pull-forward impact. Maybe, Nick, if you can talk about Bath & Body Works' decision to promote more and perhaps take a lower gross margin rate so that you could get more margin dollars. And what the strategy is there about market share as we move through the year.

Sure. Thanks, Laura. I think, just in terms of mall traffic, I think we're feeling good and feeling pleased with where we're at. Obviously, we'll continue to think conservatively, knowing that the ups and downs of the marketplace are always going to be around the corner.

In terms of where are we from a promotional perspective, it really is a slight amount of additional promotion. And I want to make sure I'm clear that it's not about incremental discounts, it's not about whole house, or it's not about taking deep cuts. Technically we actually have less clearance on the floor. And in a couple of cases it was some extra promotion that was really driving traffic. The rest of the margin rate decline was really coming from cost of goods or logistics that we've seen previously.

Great, Nick. Sharen, anything you want to add about weather or traffic or --?

I agree totally that we're pleased. We obviously are optimistic about what the second quarter, what it brings. I think that the ability to interact with the customer in terms of our consecutive increases and our conversion rate is also a big benefit to us, as well. So I think that things are looking pretty good as we go forward.

Great guys. Thanks, Laura.

John Kernan with Cowen and Company.

I was wondering, Stuart, if you could give us some more color on how the operating margin line in the Other segment should trend as International becomes a bigger part of the business and into 2013. I guess that's where a lot of the very really strong performance on an operating margin basis in the Victoria's Secret concept, and the Bath & Body Works concept. I want to see if we can get maybe a better way to model the Other segment as the International business becomes bigger. Thanks.

Sure, John. Thanks. There are two or three things to think about. The first is the effect of the sale of the third-party sourcing business and the effect that that has on the Other segment until we lap that later this year. So that's an important thing to note, as you think about modeling out the Other segment.

The second point that I would make, and I think as it relates to your question about International, and obviously it's part of the Other segment is, in 2012, as we mentioned back in October, and as I reiterated earlier, the International business in 2012, particularly in the first part of the year, we were making investments. The investments in the UK related to Victoria's Secret. Some investments related to the turnaround of La Senza. Obviously beyond 2012, meaning into '13 and '14, we will expect to get some benefit -- operating income benefit, from the International business as we move into '13 and even more so obviously in '14. So in a general sense, that's how you should think about it. Again, the effect of the sale of the third-party sourcing business, investments in International in '12, we would expect to get some benefits in '13 and '14 for sure.

Okay, great. That's helpful. And then as we look out beyond just the back half of 2012, in terms of average unit cost, what do you see going into 2013, both on the Victoria's Secret and Bath & Body Works side in terms of unit cost? It seems like there's some structural headwinds out of Asia that would see this line item continuing to grow. How are you guys viewing that? Thanks.

John, I guess maybe at an enterprise level, and then Sharen or Nick may want to add. The biggest thing we think about, and it's really important to convey this and we certainly work hard to over time -- the most important thing that we do is to maximize full-price selling through delivering compelling merchandise, great newness, great store experiences that drive full-price selling. Markdowns remain an opportunity. We made a lot of progress on reducing markdowns. We think there's more opportunity.

Obviously, we're not immune to cost, and we expect to have some benefit in the back half of this year related to cost. Really tough to predict what costs are going to do in 2013. But, again, where we put our time and energy is to maximize retail margins through delivery of great assortments, great marketing, great in-store experiences. That's what our business is about.

Thanks, Stuart. Thanks, John. Next question please.

Howard Tubin with RBC Capital Markets.

Can you maybe update us on the development of your beauty part and how that's going, and when you think you will start to see some benefits from that?

Sure. Let's start with Nick and then see if anybody else has anything to add.

Sure. Howard, the beauty part for us is really going to be more up and running as we go into the back half of the year. We're pleased with the progress we've got, we're pleased with the proximity. We're excited to be really fully taking advantage of it as we go into the back half, and probably more accurately into the fourth quarter, which is obviously the biggest period for us.

From a Victoria's Secret beauty perspective, we did a little bit last year in terms of our gift sets in being able to read and react to our gift sets last holiday. We plan on continuing to take that forward. And again, for the beauty part, it really doesn't have anything to do with the fine fragrance part of the business. It's really the base of the business in terms of lotions and soaps that we do have. So it will be a small percentage of the total Victoria's Secret part. But on the liabilities that we get in terms of the gifting strategy, it will be a huge benefit for us.

Great, thanks guys, and thanks, Howard. Next question please.

Roxanne Meyer with UBS.

Let me add my congratulations. For Bath & Body Works and Victoria's Secret, I'm just wondering where you've been successful in taking prices up so far and what categories you see additional opportunities as you move forward.

And then secondly on the gift with purchase, it sounds like you're very pleased with the response there. Just wondering if there's any change to the strategy going forward. Whether you think you need to do more of them or whether you think you ordered the right amount, or you need to even take that a step further. Thanks.

Thanks, Roxanne. We can start with Nick.

Hey, Roxanne, thanks for the compliments on the business. So yes, in terms of an example where we've done price-up, I think a good example for us would be fine fragrance mist, which I want to be careful. We didn't just take price up and get a good result. We actually redesigned the product and put it into a better packaging that the consumer clearly responded to, and felt like she was, and was, getting an elevated experience, a much better product. And we took the price up. In general we saw incremental units as well as dollars. So we were able to --- we are really excited about our ability to drive unit share, as well as market share and reap the rewards of both units and dollars.

And the second part of that question is, as I look across the business, I think that is part of an ongoing function of any merchant, to be working closely with a customer and understanding which pieces of the business do I have the opportunity to take to another level, that I can keep the customer engaged with?

I think that was --- because the other one was GWP.

When I think about the cost and price increases, our primary focus is really less about cost and more about what the product value is to our customers. And we test any price increase that we make, and where it makes sense, based on those tests, we take price up. But I think it's more important that it's really not about cost. It's really about the product value.

The other thing that is near and dear to my heart is the balance between unit growth and sales growth. So I like to see a balance of both. And I think that is an important strategy that we look at.

In terms of GWPs, I don't see us doing more GWPs. I think that how do we make them special and what's the timing of those GWPs and what they actually are. The other piece of it is do we buy enough or do we not. Most of the time we buy to actually sell out. And we have been doing that. It does create some customer frustration if they wait until the last minute to come in and we've sold out. But we think that's okay.

Okay, great. Thanks so much and best of luck in 2Q.

Thanks, Roxanne. I think we have time for a couple more, next question please.

Christian Buss with Credit Suisse.

Congratulations on a nice start to the year. I'm wondering if you can help us understand a bit better the incremental spending associated with that UK roll-out over the balance of the year. And then also, could you provide color on how much progress you expect to make on rolling out the PINK assortment across the portfolio over the balance of the year?

Thanks, Christian. We'll start with Stuart.

Christian, thanks for your comments. With respect to the Victoria's Secret UK investments, as you would imagine, we've got pre-opening payroll and training. We've got some marketing in advance of the store opening. We've got some costs related to the building of the store and the construction of the store that aren't capitalizable. some travel related to the opening of the store. The combination of all those things does add up. Again, it's of a view that it's for an important store that we'll evaluate over the long term that we expect will be very good. And, obviously, pre-opening rent, as well. So it's a number of different things, all in connection with opening an important store. And one that we expect to be successful over a long period of time.

In terms of the PINK, we will open up, by going into fall, an additional 15 freestanding stores, which we'll have 31 then. The other piece of it, as we go into our real estate stores and our high-profile stores, there're three big stores that we have for spring that PINK will also be getting expanded space. That would be Baybrook in Texas, Pearlridge in Hawaii, and Somerset in Detroit. So as we continue our journey, PINK will continue to gain real estate. As well as -- and it's important to note this, it's also important for Victoria's Secret to gain real estate, as well.

Thanks, Sharen. Okay, one last question, I think, operator.

Richard Jaffe with Stifel Nicolaus.

Really a great quarter to all divisions. But a couple of questions about marketing. You talked about a shift from 3Q to 2Q for Victoria's Secret marketing, and wondering how you'll make that up in 3Q and in the second half. Is there an opportunity for more marketing? And should we think about that in terms of expense as well as possible traffic drivers? And then a specific question for Bath & Body Works and the opportunity to test and perhaps expand into new categories beyond the core three.

Great. Thank you so much. In terms of the marketing, it's basically really a shift in timing. This calendar year is a funny one for all of us, being a leap year. So what you're doing is, it's really a time of when you mail and then you have to accrue those expenses. But it really is mailing like the last week of July. So therefore, you're still going to get all the sales in August but how you have to book it is when you mail it. So there's no real liability or opportunity either way in terms of the quarter. It's just a matter of when we actually mail, the mail date on the calendar.

Got it.

Great. And Nick.

Hi, Richard. It's Nick. Good question. A couple of things. One, we're constantly looking at white space opportunities to figure out how to grow. As an example, our accessory businesses have pretty solid growth now for about 18 months, which is really fundamentally a brand-new business for us. And then I would say equally important is almost a flanker approach to some of the core franchises that we've got. There are areas that we should be in business that we're not in business that we're starting to add in that would support some of the businesses, like Signature or support some of the businesses like Home, where the customers are clearly giving us permission to do that. So I think there're two areas outside of the core core business that we've got opportunity to continue to grow.

And should we look for these in the fourth quarter or in the holiday season?

If you walk in the store now, you'll certainly see a broader assortment of accessories from a home-dec perspective, as well as just accessories that go with the soap business. In terms of flanker products you'll start to see in the fourth quarter interesting things that we'll be putting into play then.

Great. I look forward to it. Thank you.

Thank you, Richard. That concludes our call this morning. We appreciate all of your interest. Thank you.

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