Bath & Body Works Inc (BBWI) 2012 Q4 法說會逐字稿

Good morning. My name is Nicole and I will be your conference operator today. At this time I would like to welcome everyone to the Limited Brands fourth-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. I will now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer for Limited Brands. Please go ahead.

Thanks Nicole. Good morning everyone and welcome to the Limited Brands fourth-quarter earnings call for the period ending Saturday, February 2, 2013.

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 fourth-quarter earnings release and related financial information, including any non-GAAP or adjusted financial reconciliation tables are available on our website, www.limitedbrands.com. Also available on our website is an investor presentation which we will be referring to during this call. The 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; Nick Coe, CEO Bath & Body Works; and Martin Waters, President of International 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.

All of the results discussed on this call are adjusted results and exclude the one-time items that are described in our press release. Also, as you know, 2012 was a 53-week year. All of the sales dollars, margin, and operating income results discussed are on a 14- to 13-week basis for the quarter, and 53- to 52-week basis for the year. Comparable store sales and direct sales dollar increases or decreases are on a comparable calendar period, 53- to 53-weeks for the year and 14- to 14-weeks for the quarter. Thanks, and now I will turn the call over to Stuart.

Thanks, Amie, and good morning, everyone. Our overall fourth-quarter results were good, but not great. Performance was more inconsistent than what we would like. And while earnings were at the high end of our initial guidance, we had hoped to do better. Fourth-quarter adjusted earnings per share were $1.76 versus $1.50 last year. Excluding earnings per share related to the extra week of about $0.08 this year, EPS increased by about 12% in the quarter.

To take you through the fourth-quarter results as detailed on page 4 of the presentation, net sales were $3.856 billion which includes $125 million for the 53rd week, versus $3.515 billion last year, and comps increased 5% on top of 7% last year. The gross margin rate increased 130 basis points to 45.2%, driven by an improvement in the merchandise margin rate and buying and occupancy expense leverage.

The SG&A rate increased by 10 basis points. Operating income dollars increased to $907.8 million. Excluding the extra week this year, operating income dollars increased by about 10%. As noted in our press release, we had two noncash impairment charges that are excluded from these results.

Turning to our full-year results on page 6, adjusted earnings per share were $2.92 versus $2.60 last year. Excluding the extra week this year, in 2011 profit related to the sold third-party apparel sourcing business, earnings per share increased about 13% for the year. Net sales increased to $10.459 billion, and comps increased 6% on top of 10% last year. The gross margin rate increased 300 basis points to 42.3%, and was positively impacted by the sourcing business sale by about 250 basis points. Absent this impact, the gross margin rate would have increased 50 basis points, driven by buying and occupancy leverage and a roughly flat merchandise margin rate. The SG&A rate was negatively impacted by the sourcing business sale by about 170 basis points. Absent this impact the SG&A rate improved by about 10 basis points.

Page 7 details our full-year operating income results. Our full-year adjusted operating income rate was 16.3%, improving by 140 basis points, which includes a favorable impact from the sourcing business sale of about 80 basis points. We continue to make progress towards our goal of an operating income rate in the high teens.

I know there is ongoing interest in the drivers of results in the other segment, so I would like to provide some additional clarity. The other segment consists of our international operations, our sourcing function, Mast Global, Henri Bendel, and corporate overhead. For the full year, other segment revenue consisted of the following. Sales from our Company owned Bath & Body Works and Victoria's Secret stores in Canada and the UK totaled roughly $370 million, and increased by $105 million versus last year, driven primarily by new store openings. La Senza Canada sales were $283.6 million versus $335.7 million last year, down about 15%, primarily due to store closures in Canada. Canadian store comps decreased 2%.

Revenue from our international, franchise, and wholesale business, including our Victoria's Secret beauty and accessories stores, our Victoria's Secret full assortment franchise stores, our Bath & Body Works franchise stores, our La Senza franchise stores, and Mast Global sales to our international partners, all of that was about $250 million, compared to approximately $200 million last year. Our Henry Bendel business recorded sales of about $75 million, 25% above last year. Finally, 2011 includes $702 million of sales related to the sold third-party apparel sourcing business.

The other segment operating loss is driven by corporate overhead expense, and a loss from our La Senza and Henri Bendel businesses, which is partially offset by operating income from Mast and our other international businesses. The increase in the 2012 other segment operating loss of $37.8 million was primarily the result of the loss of 2011 profit from the sold third-party apparel sourcing business. Excluding the impact of this sale, the profitability in the other segment would have increased by about $5 million.

Turning to the balance sheet on page 8. Retail inventories per square foot at cost ended the quarter up 4% versus last year. Free cash flow in 2012 was $763 million and capital expenditures were $588 million. We repurchased 0.3 million shares of stock in the fourth quarter for $14 million. At the end of the year we had $239 million remaining under our $250 million share repurchase program. In 2012, we returned $2.1 billion to shareholders through share repurchases, special dividends, and our ongoing regular dividend. We also just announced a 20% increase in our regular annual dividend to $1.20 per share.

Turning to page 11 of the presentation. Our forecast for 2013 reflects actions we are taking to drive growth in our business, growth in Victoria's Secret real estate, increased store selling payroll driven by a greater mix to full-time associates and increased training, and investments in international infrastructure and pre-opening costs for new stores. These actions will drive sales growth but will result in near-term expense pressure, both in buying and occupancy and SG&A.

Our first-quarter earnings forecast reflects a low-single-digit comp increase, which reflects a February comp forecast in line with our previous guidance for a low-single-digit comp increase. We expect the first quarter gross margin rate to be down to last year, driven by a roughly flat merchandise margin rate and buying and occupancy deleverage. We expect some deleverage in SG&A expense reflecting continued growth in store selling expense and marketing, as we continue to invest to increase conversion and improve the customer experience.

However, I will reiterate our commitment to growing expenses slower than sales. While we continue to believe that these are important investments that drive sales, we will force trade-offs in noncustomer facing areas of our business. We expect non-operating expense in the first quarter to be between $75 million and $80 million. We expect earnings per share between $0.40 and $0.45 in the first quarter against last year's adjusted $0.41 result. We expect to end the first quarter with inventory per square foot up mid-single digits to last year. This forecast reflects a calendar shift that will increase inventory at quarter end by 2 percentage points.

For the full year, we are projecting positive low-single-digit comps, total sales growth will be about 2 points higher, and comps due to growth in square footage, and our international business. We expect our full-year gross margin and SG&A rates to be about flat to last year. Non-operating expenses for the year are projected between $290 million and $295 million, consisting principally of interest expense.

Before any discrete items, our tax rate will be approximately 38%. We are forecasting weighted average shares of about 296 million in the first quarter and the full year. Assuming all of these inputs, we'd expect adjusted earnings per share for the full year 2013 to be between $2.92 and $3.12 per share. We are projecting 2013 CapEx of about $650 million. The increase in CapEx versus last year is attributable to increased real estate investment at Victoria's Secret, primarily to increased square footage for PINK. As we previously noted, only about 20% of our current stores carry the full PINK assortment.

As detailed on page 14 of the presentation, Victoria's Secret square footage will increase by about 3.5% this year, driven by expansions of existing VS stores, and the opening of about 50 new PINK stores. Total Company square footage will increase by just under 3%, as growth in VS and our Company owned international locations is partially offset by a slight decline at Bath & Body Works.

It's also important to note that the square footage that we're adding is significantly more productive than that we are closing. As I mentioned earlier, this activity will put more pressure on buying and occupancy expense in the near term, including accelerated depreciation on stores that are remodeled before the end of their lease term. As we shared at the update meeting in October, these projects are generating returns in excess of 30%. We will continue to closely monitor the results of this real estate activity.

Turning to liquidity, we expect free cash flow in 2013 of about $650 million to $750 million. 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 result 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. Our fourth-quarter results are detailed on page 17 of your presentation materials. Victoria's Secret segment earned record operating income in the fourth quarter as we continue to focus on our key priorities, growing in our core categories, investing in select key growth opportunities, and emphasizing speed and agility.

In the stores channel, fourth-quarter comps were up 3% on top of a 12% increase last year, driven by growth in lingerie and PINK, while beauty was about flat. Our holiday performance, although above last year, missed our expectation. In the past several years, customer traffic has continued to shift into that Thanksgiving Day weekend and post Christmastime period. Our November results were good, driven by a very strong Black Friday. Mall traffic throughout December was very soft, and most mall retailers responded with very aggressive promotions. Conversely, we chose to protect our brand and did not pursue an aggressive promotional strategy. As a result, we likely did not get our fair share of mall traffic, which resulted in flat December comps on top of 11% comps last year.

The business was very strong in January, delivering an 8% comp on top of 17% last year, driven by strength in both semi-annual sale and full-price selling. In the direct channel, fourth-quarter sales decreased 1% on a 14-week to 14-week basis, as strength in bras, PINK, and sport was offset by lower promotional selling during holiday and softer apparel sales. Our fourth-quarter merchandise margin dollars increased across both channels with mixed merchandise margin rate performance. In the stores channel the merchandise margin rate decreased versus last year, driven primarily by beauty. In our direct channel, the merchandise margin rate increased significantly, driven by increased full-priced selling.

Turning to our full-year results on page 18. Victoria's Secret stores comps increased 7% and Victoria's Secret direct comparable sales increased 1%. Total segment sales increased to $6.6 billion. The merchandise margin rate decreased versus last year in the stores channel, but increased in our direct channel. Operating income margin and dollars increased in both channels, with operating income dollars up 10% across the segment.

Looking ahead to first quarter, we will continue to focus on core categories of bras and panties. In addition, we are excited by our spring assortment. We will continue to focus on the balance between driving traffic in our stores and maintaining the integrity of our brand, while also working to balance margin dollar growth with rate.

Our inventories are well positioned, allowing us to react as appropriate and to optimize our business. Additionally, consistent with Stuart's earlier comments regarding capital, we are investing in real estate and customer-facing initiatives to support current and future growth.

In closing, we are well positioned and are optimistic about our opportunities. We will continue to focus on executing with discipline, simplicity, and speed. Thanks, and now I will turn the discussion over to Nick.

Thank you, Sharen, and good morning, everyone. At Bath & Body Works we are pleased with the results of the fourth quarter. We delivered sales and operating income growth versus last year's record performance. Comps increased 7% against 3% last year, driven by the customer's response to newness in both form and fragrance in our three key categories. Our signature collection product line, the soap and sanitizer business, and our home fragrance assortment. The customer also responded well to the increased presence of our seasonally relevant fragrances and forms.

We were pleased with the success of both holiday and our January semi-annual sale. The read and react nature of the business and strong customer responses to the assortment throughout the fourth season contributed to less clearance selling. We were also pleased by the launch of Forever Red during the quarter.

As detailed on page 19 of the presentation, total sales for the 14-week quarter were $1.2 billion, up 11% or $122 million versus the 13-week quarter last year. For the quarter, operating income was $399 million, up $50 million, or 14% from last year. Operating income as a percentage of sales was 32% in the quarter, and up to last year. Our gross margin rate in the quarter was up to last year driven by the increase in the merchandise margin rate. The increase in the merchandise margin rate was driven by less clearance selling. SG&A expenses also leveraged versus last year. We finished the quarter with inventory levels up modestly to last year. We continue to grow our inventories slower than sales year over year, while maintaining our high in-stock positions.

As noted on page 20, the fiscal 2012 operating income was $604 million, up $91 million or 18% versus last year. Operating income as a percentage of sales was 20.8%, up 160 basis points to last year. Gross margin rate was up to last year, driven primarily by buying and occupancy leverage. SG&A expenses also leveraged versus last year.

The BBW direct channel also delivered strong sales and operating income growth versus last year in the quarter. Sales for the full year were over $200 million and had a strong increase versus last year. Looking ahead to the first quarter, we will continue to introduce newness and innovation in both form and in fragrance. In February we began the month relaunching Forever Red, our most luxurious signature collection fragrance ever in order to capitalize on Valentine's Day. We will finish the month in our fresh picked market theme.

We're excited about the assortments and we will continue to manage expense and inventory conservatively. Our overall focus continues to be about getting faster and better 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 the customers' preferences. With that, I will turn the discussion over to Martin.

Thanks, Nick, and good morning, everyone. My comments this morning will focus on our international businesses. As you know, 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 feel good about the strategic choices we made to be steady and purposeful to pursue a test and learn philosophy that reflects the DNA of our Company.

We made good progress in the fourth quarter, and as detailed on page 15 of your presentation, we ended the year with 745 international stores. At Victoria's Secret international, we continue to be pleased with performance of our full assortment stores. We now have 26 stores in Canada, and we'll open another 8 stores this year. In the UK, we continue to be very pleased with our London flagship store on Bond Street and with the London Stratford store. They both had a very successful holiday season and we plan to open three more stores in the UK this year.

Elsewhere in the world, we now have three VS full assortment franchise stores opened in the Middle East under our partnership with Alshaya. We're delighted with the early results there and tentatively will open another two to four locations this year. Our Victoria's Secret beauty and accessories business continues to progress well with 108 locations open at the end of the year. We will add another 70 to 100 stores in 2013. In Bath & Body Works international, we're now up to 71 stores in Canada, and 38 stores under our franchise partnership with Alshaya. We continue to be very pleased with the performance of BBW outside of the USA, and in 2013 we will open another 8 stores in Canada and another 20 or so with Alshaya.

Turning to La Senza, we're beginning to see some signs of progress within that business. Comps in Canada were flat in the fourth quarter despite the challenging December, and our merchandise margin rate was up slightly to last year. We continue to be encouraged by the repositioning work we're engaged in, creating a distinct and compelling customer proposition that is globally appealing and highly scalable around the world. Our franchise partners opened 36 new stores in 2012 and plan on opening another 10 to 20 net stores in 2013.

So that's an update on international. As I know you know, we're not dependent on international for growth. Our overarching priority is the strength of our brands in North America. And with that I will say thank you and turn it back over to Amie.

Thanks, Martin. That concludes our prepared comments, and at this time we'd be happy to take your questions. Just a reminder, please limit yourself to one question. Nicole?

(Operator Instructions) Lorraine Hutchinson.

Stuart, in January you had put a press release out outlining your goals for double-digit earnings growth and then the guidance doesn't quite reflect that. Can you just talk about some of the puts and takes that will make this year below your longer term growth plans?

Thanks for the question. We do have a view within the business that operating income dollars should grow in the low teens, and importantly, starting with the year we just finished, on a 52-week basis, we grew operating income 10%. So we were kind of right in the game, if you will.

The second thing I would say is that for the last four or five years, we have intentionally planned our business conservatively, and we think about that within the business in terms of how we manage inventory and expenses and capital spending, and then we work hard to chase to and deliver a better result. And we've been able to accomplish that in relation to our beginning-of-year views internally and externally for the last three or four years. So the summary would be, 2012, we were in that range. '13, we are going to work like heck to be in that range. But as we start the year consistent with how we run the business, and consistent, very specifically with the guidance that we put out a year ago, operating income, growth rates assumed in the guidance are a little lower than that, but we are going to work hard to exceed that result.

In terms of some additional put and take, in my remarks, in Sharen's remarks, we commented on the fact that we are investing to drive growth in our business, and that puts some pressure on expense lines. I also remarked deliberately so that we're going to intensify our work internally as Management to force trade-offs on those investments with a focus on non-customer facing activity. So we're going to work hard to deliver what we put out in January, and we're starting the year with a conservative mindset that really is no different than how we've run the business over the last three or four years.

Dana Telsey.

It's Janine Stichter in for Dana. Just thinking about the fourth quarter, hindsighting what you ended this year, is there anything that you feel like you would be doing differently next year just keeping in mind your goals to maintain lean inventory levels and how you think about it, coming off the holiday season?

Thanks. We're actually going to go to Nick and Sharen for that. And I will start with Nick.

Yes, I think one of the things -- one of the most important things for us to do is deeply hindsight the season, to understand how the season came in, how we leveraged traffic, and then how we managed inventory. One thing we'll have to take into consideration as we go into next year, is it's a shorter period from Thanksgiving to Christmas, so how we get our heads around planning for that and making sure that we're proactive in terms of being ready for it is going to probably be the most important thing to look at. While at the same time continuing to stay as close to the customer as we possibly can and leverage our read and react capabilities.

Thanks. Sharen.

Yes, we spent a lot of time hindsighting this past holiday, and we have really gained a lot of interesting insights. As we think about how the business has changed, that Thanksgiving Black week and Friday, and then the strength that we've had in December, is how do we have to really rethink our entire December. And although we've been very good at adding newness, it's really about traffic and keeping the customer interested in that time frame.

We have a lot of things that we're thinking about pretty radically that I'm pretty excited about, and just a little bit of information on that. As you know, our fashion show this year, it's always going to be the first week in December. I think we have even more opportunity to use that vehicle in driving traffic as we think about next holiday. We will continue with the rigor that we have on our speed initiatives, on testing, keeping lean inventories, and managing our expenses.

Brian Tunick, JPMorgan.

I will add my congrats as well. One for Sharen and one for Stuart. Sharen, on the beauty side of the business, I think Susie joined back in November, and so we were curious what is a reasonable timetable to expect changes at the beauty business? And will repositioning hurt your first half gross margins?

And then Stuart, thanks for the color on the other segment, but we were curious on the profitability of the international business today, maybe either versus your domestic business or maybe long term what are some goals there? Thanks very much.

Thanks, Brian. So we'll start with Sharen.

Thanks, Brian. I'm very excited about our beauty business. It's a big, profitable business for Victoria's Secret. It just hasn't grown at the rate that we'd like it to do. I think that through the repositioning that we've already started that I'm pretty confident by the back half of this year, and I think maybe you might see some even in late spring, but predominantly in the back half that you will see some different changes for us within the beauty area.

Thanks, Sharen. Stuart?

Brian, with respect to the international business and profitability of that, the international businesses in aggregate will contribute to earnings growth in 2013 to some extent, and as you would imagine or expect, that contribution will be even more significant in 2014.

You would also recognize that we have a number of different businesses there that today have different profit characteristics, but certainly as they scale, and as we turn around the La Senza business, the international business in total should be at or, frankly, above the Company's operating income rate. But we've got work to do. So on the La Senza business, we're working that turnaround, and that's an important part of today's results, and as Martin said, some signs of progress.

And there are investments that we're making in the international business, whether it's pre-opening costs on Company owned stores, or investments in technology and other infrastructure that go against the addition in 2013, but it will contribute to earnings growth in '13, more in '14, and over the long term, will be at or above the overall Company's rate.

Kimberly Greenberger, Morgan Stanley.

I will add my congratulations for a really solid 2012. Stuart, I just wanted to follow up on Brian's question with regard to the international profitability and the flow-through rate. I know that as you have been building out your international infrastructure over the last three years you have incurred a lot of expenses on the front end, and I'm wondering, are we at the point here in your growth cycle internationally where the incremental revenue in 2013 and 2014 will actually start to flow through at that sort of accretive level, meaning above your existing operating margin rate, or is that more of a 2014 and beyond event?

Yes, it's a tough question to answer, Kimberly, in the sense of a lot of that will hinge or a meaningful amount of it will hinge on the result that we generated in Canada with La Senza. But apart from that, I would say that the profit contribution on the increment, or on the margin, would be roundly inline with the total Company operating income rate, which is different than the store-based flow through. In a store-based flow through in a scale business you might get 25%, 30%, 35%, 40% flow through on an incremental sales dollar. It won't be at that level. But apart from the variability on La Senza Canada, we'll have profit contribution in '13 but not at the rate that you would see in a bricks and mortar business from comp sales. Hopefully that is helpful.

Thank you.

Erika Maschmeyer, Robert W Baird.

Sharen, could you talk a bit about your strategy on the apparel side at direct, what categories are possibly non-core and then could be phased out? I guess how should we think about that business evolving throughout the year?

Then Stuart, just to follow up on your guidance, it seems to imply that there will be a greater drag from your growth initiatives in the first half of the year, and less in the back half of the year likely as you recognize the benefits from those initiatives. Is that a fair way to think about it? Thanks.

It's Sharen. On the apparel strategy, as we think about it for direct, our first priority is how do we align our apparel strategies with the things that we're already doing as a brand. Therefore, when we think about our supermodel essentials, we think about sport, we think about the entire knit category, that is primarily the focus. When we think about how we will position those businesses around beach lifestyle, we have a very large swim business, not only in the direct business, but also growing in the store channel. So another piece of the apparel business is really surrounding the beach lifestyle that is out there.

The categories that we will probably be exiting is more in the woven career kind of work. I think it's just irrelevant in terms of what's happening in the world today. So those are the things that we're working on in the apparel strategy for direct.

Thanks, Sharen. Stuart?

Your intuition is right, that the pressure on the P&L is more concentrated in the first part of the year than on a year-on-year basis than it is in the back half of the year.

Thanks so much.

Jeff Stein, Northcoast Research.

Stuart, question on Victoria's Secret real estate. You have talked about growing the real estate 25% over a period of time, and this year it looks like it's just 2 points. I'm wondering what kind of ramp should we be looking at over the next couple of years to get to that 25% increase? And over what period of time?

For Victoria's, Jeff, for Victoria's Secret specifically, the square footage growth is between 3% and 4% for 2013, and with the illustration that we shared in October, we continue to believe in. So the pace of that may accelerate in future years, but we're going to get about 4% growth in square footage for Victoria's in '13, and that's net of some closure activity, and we'll continue to monitor, as I mentioned, and there's a lot of opportunity for it.

The good news is as we see it, is for the first time in our Company in awhile, we are going to have a net contribution in per square footage growth, and that spread will become meaningful, as we outlined in '13, and we think those investments in that growth is good growth.

Thank you.

Jennifer Davis, Lazard Capital Markets.

First, Sharen and Nick, let me say that we're excited about your spring assortments also. The stores look great. But my question is for Sharen regarding beauty. Could you remind us what percent of Victoria's Secret sales beauty is and how much higher the margins on beauty are versus lingerie, and how long it's been underperforming? I guess what I'm really getting at is the potential up side to sales and really to margins with improvement in the category. Thanks.

Sure. Across the 1,000-store fleet it does vary a lot, but on average it's around 20% of the total business. And on the margin rate perspective, the difference is about 200, 300 basis-point difference between the margin rates.

When I think about the Victoria's Secret beauty business, beauty has not benefited from any of the real estate strategies, and basically, over the last three years, we've actually taken and shrunken the beauty space. At one point in time we felt like we overspaced it, we actually moved it from the front of the store next to the cash reps, and we've learned a lot about that, and in some stores we probably got it too small. So we are actually course correcting that within our investment in real estate as we go forward.

I think really over the last 24 months has really been the most disappointing for us in beauty. We have had good growth over previous to that, and as we go forward I think that it needs to be able to keep pace with our 10% goal of increasing Victoria's Secret each year.

Thanks.

Oliver Chen, Citi Research.

Congrats. Regarding your opportunity in terms of hoping to do better, could you just prioritize the nature of the opportunity between the nature of your promotions and your marketing and your store execution there, and planning into that versus product? And then just as a follow-up in terms of a modeling question, is it right to assume that the spread between comp and total revs will be consummate with your square footage growth? Are there other factors that we should consider given that you are adding more productive store square footage versus taking out less productive? Thanks.

Thanks, Oliver. So I'm guessing that your question, your first part of your question is referring to the fourth quarter, and our opportunity to do better there.

Yes, in terms of the learnings and thinking about the findings there. It sounds like there was an environment such that there could have been an opportunity for even more planned promotions in terms of competing in the new environment and going forward, how that plays versus product tweaks.

Okay. I got you. So we'll go to Sharen for the first part.

Sure. I believe in Victoria's Secret that we really didn't have assortment misses in December, except for in beauty. I think that's what we've been talking about course correcting. When I think about the three weeks in December, which was our -- or four weeks in December this year was the primary miss for us in terms of getting our fair share of traffic. I do believe with the nature of the business being so highly promotional that we have to be -- we have to rethink how we drive traffic to our stores.

When you talk about the operations of the stores, I believe that we have made great progress. You can see it through our conversion rate that we are continuing to climb and grow. So I think adding all of those things in terms of better assortments, always we can new and improve our assortment, thinking about how to engage with the customer in terms of driving her to the store, and, yes, it may be through some promotions, but there's also our great GWPs that we do, so we're rethinking how we go about that and thinking about using the fashion show all the way up through Christmas.

Thanks, Sharen. Stuart?

Oliver, the spread between comps and total sales growth we're estimating to be about 2 percentage points for the year. And that factors in three or four main variables, including the timing of store openings and part year effect of store openings.

Thanks. Best regards for the year.

(Operator Instructions)

Jennifer Black, Black & Associates.

Also let me add my congratulations. I think this question is for you Sharen. We've seen the new Date collection at PINK, and we wondered how many stores this line is in. It appears that you have a nice opportunity to gradually increase prices, and I would love your thoughts. And it also appears you have a few bras that are catering to even a younger customer. Thanks.

The Date bra was a test for us, and it actually did extremely well, so we will be rolling the Date bra to all stores this spring season and we're excited about the opportunity. I imagine what you're talking to in terms of when you are thinking about the younger assortment in bras, is that we've made a big statement in our bra lat, our lacy bra lat, the really great use of layering pieces. Not only are they a fashion item, but they're also a great first bra for some of the younger customers. So we are absolutely capitalizing on that as we go forward into the spring season.

Great. Thank you.

John Kernan, Cowen and Company.

Another follow-up on the productivity of the square footage you're adding, Stuart. You have talked about it's obviously higher. How much more productive from a sales per square foot perspective are these new stores you're adding? And how does this sales productivity of the 20% of the store base that carries the full PINK assortment compare to the other store base? ¶ And then just a quick question away from the stores and on the capital structure, you took out a significant amount of debt, both in the first quarter of 2011 and 2012, and funneled that right back to shareholders. As you look at your capital structure how do you think that could evolve in 2013? Thanks.

First point on overall productivity of new square footage versus the productivity of stores that we're closing, as an overall assumption, the productivity of those new stores or new square footage is between two and three times, I'm speaking for the Company in total, between two and three times the productivity of the stores we're closing.

With respect to Victoria's Secret stores that have the full PINK assortment versus balance of the fleet and so on, it tends to be the case that the stores that have the full assortment are in the higher volume malls and venues, and as a result, the productivity in those stores is very good, and would be, as a general matter, above the Company average.

With respect to capital structure, you are right, obviously, the facts are the facts in that we added leverage to the business in the last couple of years, and that provided an additional source of cash for distribution to shareholders. As we've looked at our leverage and we've talked about consistently, we're not formulaic about it. With that said, we're in the mid 3s in terms of debt to EBITDA, and adjusted debt to EBITDA, and we think that's about right.

We do monitor the capital markets. We think about maturity profile cost of debt, et cetera. Importantly, that is something that ultimately is evaluated with our Board of Directors, and they obviously have the final voice on that. But we think we've got it about right as we sit here today with about $4.5 billion of balance sheet debt. But what we'll continue to look at from the time to time as we have over the last couple of years.

With all that said, apart from capital structure this business generates a lot of cash, just inherently from the operating results of the business, and we outlined what we think the free cash flow will be for the business this year, and that will be an ongoing source of funds to return to shareholders. Thanks.

Thank you.

Janet Kloppenburg, JJK Research.

Congratulations on a fabulous year. Just a couple of questions, Sharen. Some of the pressure of markdowns from the beauty category hurt your ability to leverage your operating margins even more than did you in fiscal '12, and I'm wondering if you think that if there will be less pressure from markdowns there and how inventory is of discontinued beauty product versus last year.

And Stuart, I apologize for this, I was on another call and got on late, but the SG&A rate for the fourth quarter came in higher than I expected. Was I not listening, or were there some incremental spend there that pushed that level higher? Thanks so much.

We are excited about our beauty assortments for spring, and we're being very conservative as we go into the spring season with beauty. Right now, we aren't planning on a lot of new liquidations. As you know, we are a fashion business. We're bringing in fashion, comparable or a little higher to last year. As long as that, we continue to get the customers and the acceptivity of those assortments I don't believe we'll have as much margin erosion as we did in the holiday season. And it's something that we manage and look at every day.

Thank you, Sharen.

With respect to the SG&A rate, as we put out guidance at the beginning of the quarter, we expected it to be roughly flat. It was up 10 basis points. I'm not trying to be flippant at all, but it's pretty close to roughly flat and nothing significant to call out in terms of the driver of year-on-year change or something versus our beginning of quarter.

Okay, thank you.

Roxanne Meyer, UBS.

Let me add my congratulations for a good quarter. I just have two follow-up questions. One for Sharen. You talked about the need to maybe think about driving traffic and balancing your income growth with the rate growth. And I'm just wondering, I just want to understand, are you looking potentially to change the way that you promote just for the holiday, or really take a new approach for the full year as it relates to promotions and gift with purchase? I know that last year you had increased it at the amount of gift with purchase, just to be able to meet demand that was out there. Have you maxed out on that? Just wanted to get a better understanding of that strategy.

Sure. No, we have not maxed out on the gift with purchase opportunities. In fact, as we are launching one right now with our new Fabulous launch for the month of February, we're going through it faster than we can keep up with it. So I do not believe that we have maxed out on that.

I believe that in the -- I think that all retailers are going to be rethinking December. I think that things have changed so dramatically, as you think about how big Black Friday has become, where Victoria's Secret did over $100 million in that one day, and how big that weekend through Cyber Monday, then what you have seen for the last four or five years is then now a drop in those three to four weeks prior to December, and then you see a huge lift the week after Christmas into January.

So I think we have to say this paradigm is here to stay and how do we want to manage that? How do we want to think about that? I think we have to think about it on a more forward basis, not just of everything that we've done in the past and become deeper in our discounts or become deeper in our promotions. I think we just have to think about that time differently in a whole new way.

Okay. So you are just more focused on the holiday strategy than versus a new approach necessarily for year-round?

Yes, we're always looking at new ideas and new opportunities year round, whether it's with our loyalty programs, whether it's with -- which we're actually launching our new credit card program this year, so we're always looking for new opportunities. I think that as we're talking about fourth quarter and talking about what insights did we get from our hindsight, that's where we're primarily focused right now.

Okay, great. Then just quickly, I know you addressed your apparel strategy for the direct-to-consumer business, and potentially phasing out of certain classifications. I'm just wondering how we should think about the impact, both in 2013 and over the next three years from both a sales and profitability perspective as you do get rid of some of these underperforming categories.

We are hoping, with all the strength in our other core categories, whether it's the PINK growth, whether it's the opportunity in beauty, which we have not maximized in the direct channel, with actually putting even more emphasis on our lingerie categories, that by the back half of this year, we'll be able to offset any decrease that we might have in the apparel businesses.

Those categories have different margin characteristics. Although our apparel business is very, very profitable, our intimate business and our PINK business has a higher margin characteristic than just the apparel businesses. So I think that hopefully we'll be able to see some improvement of that come in for the fall season.

Okay, great. Thanks so much.

John Morris, Bank of Montreal.

My congratulations on a good finish to the year as well. Nick and Sharen, Nick, or both of you really, can talk a little bit more about the opportunity for the spring season in terms of product versus last year. I know we heard a little bit from Sharen on, in particular on beauty, and on PINK, but maybe if Sharen can tailor her comments to the opportunity on spring in the core assortment, then Nick if you could give us more color there as well on the opportunity ahead for the spring season and product. Thanks.

Thanks, John. So we'll start with Sharen.

We are very excited about our product assortments for the spring season. If I started with the lingerie category, within our bras and panties, we have new programs that are launching this spring season that have been tested. We believe very strongly that we have the right product.

In the panty category we're getting great new results from our new fashion deliveries, all the testing that we had done. We're actually introducing four new silhouettes in panties, so I think that we're very solid in terms of the lingerie category as we go forward into the spring season.

We're look at flowing newness. We're also ramping up our ability to test and read and react. We've actually been even more open to buy than we have in the past, and especially in the PINK apparel category. So I feel confident that we have the right assortments and the right agility if the customer votes differently.

John, it's Nick. For us, I think staying very, very focused on our three big categories because we still fundamentally believe there's good growth opportunities that exist within there. A couple of thoughts around it, is how do we continue to look for trade up and elevation opportunities, so we continue to build the brand and tell a great story. We've done that well I think in signature and I think we've got opportunities to do it in the other two categories. And we continue to see very strong product acceptance in our candle business both from a quality and from a fragrance perspective. And then obviously, our ability to stay very, very close to the customer, and therefore our ability to read and react what it is that she is liking, and therefore push ourselves towards continued growth in full-price selling.

Christian Buss, Credit Suisse.

I was wondering if you could talk about your expectations for the ramp to full productivity of the square footage that you're adding in 2013 and beyond. How should we think about when that square footage will become fully productive and accretive?

Thanks, Christian. We'll go to Stuart.

Generally when we open stores, for Victoria's Secret and Bath & Body Works, they start with very good reaction from customers or expand square footage. The PINK free standings are a little less productive than the Victoria's business overall, but generate good return. But we don't have what I would describe as a big ramp-up period. There is timing of store openings to consider, but apart -- once the store opens, they tend to do very well, frankly, from the first week. So there's not a ramp-up, per se, unless you're in an unusual circumstance, but typically we start out of the gate very strong.

Thank you very much. Good luck.

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

This concludes the conference call. You may now disconnect.