Bath & Body Works Inc (BBWI) 2013 Q3 法說會逐字稿

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Limited Brands third quarter 2013 earnings call. All lines have been placed on mute to prevent any background noise. I will now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer for Limited Brands. Please go ahead.

Thanks, Michelle, and good morning, everyone. Welcome to Limited Brands' third quarter Earnings Conference Call for the period ending Saturday, November 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 statement found in our SEC filings.

Our third quarter earnings release and related financial information are available on our website, limitedbrands.com. Also available on our website is an investor presentation, which we will be referring to during this call. This call is being taped and can be replayed by dialing 1-866-news-LTD. You can also listen to an audio replay on our website.

Stuart Burgdoerfer, EVP and CFO; Sharon 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 of you as possible, please limit yourself to one question.

As a reminder, all results we will discuss on this call today are adjusted results, and exclude the 2012 significant one-time items that are described in our press release. Thanks, and now I'll turn the call over to Stuart.

Thanks, Amie, and good morning, everyone. In a challenging environment, we were able to increase our operating income by 7% and earnings per share by 19%. We were more promotional than initially planned in order to drive our 3% comp. Our $0.03 EPS beat versus the high end of our guidance was driven about equally by our focus on expense management and a better than anticipated tax rate.

Total sales increased 6% to $2.171 billion, and comps increased 3% on top of a 5% increase last year. Our gross margin rate declined by 130 basis points, driven by a decline in the merchandise margin rate and a slight increase in the buying and occupancy rate. As we have mentioned previously, buying and occupancy expense is increasing as we invest in real estate expansion for Victoria's Secret and International. These investments continue to deliver very strong returns.

We focused on expense discipline across the enterprise, and SG&A expense dollars increased by 1% and leveraged by 140 basis points. Operating income dollars increased by 7%, and the rate increased by 10 basis points. Sharon and Nick will discuss their segment results. Operating income and the other segment increased by $14.9 million, primarily driven by an increase in Mast sourcing and International. Earnings per share increased 19% to $0.31.

Turning to the balance sheet on page 8, retail inventories per square foot at cost ended the quarter up 8% versus last year. As a reminder, part of the increase is related to previous Body by Victoria product, which will be sold in the January semiannual sale, and by increased investment in bras and sport, which was rolled out to all stores in October. We continue to manage inventories thoughtfully and with discipline. We plan to end the year with inventory up in the mid to high single digit range.

Turning to page 11 of the presentation for our forecast for 2013, we expect fourth quarter earnings per share between $1.67 and $1.82, versus last year's 14 week result of $1.76 and 13 week result of $1.68. Versus our previous forecast, this estimate includes $0.02 of incremental interest expense related to the $500 million notes issued in October. Our fourth quarter earnings forecast reflects a low single-digit comp increase consistent with our year-to-date trend. Depending on our comp results, our fourth quarter sales could range from about $30 million below last year to $75 million above last year, including the extra week in last year's results.

We expect the fourth quarter gross margin rate to be down to last year, driven by a decline in the merchandise margin rate and an increase in the buying and occupancy expense rate. We expect the fourth quarter SG&A rate to decrease versus last year, driven by our continued focus on expense management. Nonoperating expenses, consisting primarily of interest expense, are projected at about $80 million in the fourth quarter, and our projected tax rate is 38%, and our weighted average shares outstanding are forecasted at about 297 million.

For the full year, we are projecting positive low single-digit comps. Total sales growth on a 52 to 52 week basis will be about 2 to 3 points higher than comps, due to growth in square footage and our International business. We expect our full-year gross margin and SG&A rates to be down to last year. Assuming all of these inputs, and others which are detailed in the presentation, we expect adjusted earnings per share for the full year 2013 to be between $3.07, $3.22 per-share.

We expect 2013 CapEx of about $700 million. The increase in CapEx versus last year is attributable to increased real estate investment at Victoria's Secret, primarily to increase square footage for Pink. As we have previously noted, only about 25% of our current stores carry the full Pink assortment.

As detailed on page 12 of the presentation, Victoria's Secret square footage in the US will increase by just under 4% this year, driven by expansions at existing VS stores and the opening of about 50 new Pink stores. Total Company square footage will increase by just under 3%.

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 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'll turn the discussion over to Sharon.

Thank you, Stuart. Victoria's Secret third quarter results are detailed on page 14 of your presentation materials. Overall, the results for the segment were mixed. We experienced double-digit growth in bras and panties in both VS lingerie and Pink. In addition, we also experienced double-digit growth in fragrance, our best add in the beauty category.

However, we had some misses in apparel, both in Pink and in the direct channel. As a result, we missed our expectation. In response to lower sales in apparel, and in order to drive more traffic to our stores, we increased our promotional activity, particularly during the Columbus Day weekend. In addition, we continued to see greater overall response to our planned GWP and direct mail. Therefore, as a result, our merchandise margin dollars increased, but our merchandise margin rate declined.

Segment operating income declined $10 million, or 6% to last year. The timing shift caused by the 53rd week in 2012 had a $10 million negative impact on the store channel operating income, as the first week of the August bra launch was pulled into the end of the second quarter this year, versus being in the beginning of the third quarter last year. In the stores channel, third quarter sales increased 5%, and comps were up 4%, with sales growth in each of our businesses, lingerie, Pink and beauty.

As highlighted earlier, we had double-digit growth in core categories, bras, fragrance, and panties. While merchandise margin dollars increased, our merchandise margin rate declined, as we continue to see strong response from marketing campaigns, and we added an incremental promotional event over the Columbus Day weekend. Additionally, in order to accelerate sales in Pink apparel, we added price point promotions in September and October. Total expenses leveraged as SG&A improvement offset by an occupancy increases from our investments in real estate.

Store channel operating income was about flat in the quarter, with operating margins contracting slightly as a percent of sales. As mentioned earlier, the timing shift caused by the 53rd week in 2012 had a $10 million negative impact on the stores channel operating income. Our overall inventory is up over last year, reflecting increased investment in bras and in sport bras. Additionally, as we mentioned last quarter, we are carrying over previous Body by Victoria product that has been removed from the floor. This merchandise will be cleared during our January semiannual sale.

In the direct channel, third-quarter sales declined 1%, as double-digit decreases in apparel and lower shipping and handling revenue offset double-digit growth in lingerie, Pink and beauty. We continue to stay focused on driving our core business, bras, panties, Pink and beauty. We're also very excited about the growth of sport in the direct channel. Our direct channel's third-quarter merchandise margin rate was down significantly to last year, driven by increased promotional offers.

Merchandise margin dollars decreased on the combination of the sales and rates declines. Operating income dollars declined as the decline in merchandise margin dollars more than offset our reduction in SG&A expenses. Looking ahead to fourth quarter, we are cautiously optimistic as we look forward to Black Friday and the balance of holiday. We have strong, fashion right assortments, filled with both self purchase and gifting opportunity for holiday.

We are looking forward to providing our customer with excellent in-store and online execution. Following the all-important Black Friday weekend, we're all very excited for the Victoria's Secret fashion show, which will air on December 10, featuring musical performance by Taylor Swift, Fallout Boy, and others. We will continue to manage both inventory and expenses appropriately to optimize our business.

In closing, we are pleased with the positive results in bras, panties and fine fragrance in the third quarter. There are also areas of opportunity, and we are focused on those for the fourth quarter. We are prepared for holiday, and feel confident that we will provide our customers with world-class emotional brand experiences, both in store and online. Thank you, and now I will turn it to Nick for discussion.

Thanks, Sharon, and good morning, everyone. At Bath & Body Works, we remain committed and focused on the fundamentals we do well, and that led to record sales and operating income growth in the third quarter. Comps increased 3% on top of 5% last year. Customers responded to newness in both form and fragrance in our three key categories. Our Signature Collection product line, soap and sanitizer business, and our home fragrance assortment.

We were pleased with the early results of our Signature Collection relaunch in October, which featured new formulation of packaging in multiple forms. While traffic levels continue to be down during the quarter, but we were able to improve upon our already high conversion rates, while also driving higher average dollar sales. Total sales for the quarter were $567 million, up 5% or up $28 million versus last year. The difference between the comp increase and the total sales increase were strong sales performance in the BBW direct channel.

For the fourth quarter -- for the quarter, our operating income was $67 million, up $9 million or up 15% to last year. Operating income as a percentage of sales was 12% in the quarter, and was up 110 basis points to last year. Gross margin rate for the quarter was up slightly to last year. SG&A expenses leveraged versus last year. The BBW direct channel also delivered operating income growth versus last year in the quarter.

We finished the quarter with inventory levels about flat to last year. Looking ahead to the fourth quarter, we will continue to introduce newness and innovation in both form and fragrance. This month, we transitioned from the relaunch of our Signature Collection to our latest Prestige fragrance, Forever Midnight. We also introduced new and seasonal fragrances in our home fragrance and our soap and sanitizer business.

Throughout the month, we will remain focused on sustaining the relaunch of our Signature Collection, Forever Midnight and our holiday collections. We're excited about holiday assortments and our approach to holiday, but we will continue to manage expenses and inventory conservatively. Our overall focus continues to be about getting faster and better understanding and satisfying our customer needs, while providing them with a world-class in-store experience.

In addition to focusing on product and fragrance launches, we will continue to test and read the results of new product offerings and promotional strategies while maintaining flexibility in our inventory to react quickly to our customers' preferences. With that, I'll turn the discussion over to Martin.

Thanks, Nick, and good morning, everyone. My comments this morning will focus on an update of our International businesses. We continue to believe that our opportunity for International growth is significant, given the leadership position and awareness of our brands and the success we've seen today.

Starting with Victoria's Secret International, we continue to be pleased with performance in our full assortment stores. We now have 31 stores in Canada, and we'll open another 3 stores during the balance of this year. In the UK, we continue to be very pleased with our store on Bond Street and with the London Stratford store. We opened Manchester, Sheffield and Leeds this quarter, and are encouraged by the results. We have committed to open five more stores in the UK in 2014.

Elsewhere in the world, we have four Victoria's Secret full assortment stores under our franchise agreement with our partnership with Alshaya. These stores also do very well, and we will open several more next year. Our Victoria's Secret beauty and accessories business continues to progress well, and we ended the quarter with 159 stores open, and are on track for about 200 by the end of 2013. About 70 of these stores are in airports, and 130 are in mall locations.

In Bath & Body Works International, we are now up to 79 stores in Canada, and 48 stores under our partnership with Alshaya and the Middle East and Eastern Europe, with another nine to come during the fourth quarter, and business has been good. Turning to La Senza, we continue to see signs of progress within the business. Comps in Canada increased 3% in the third quarter, despite a more challenging October.

The business story declined in merchandise margin rate, and some increased expenses related to our SAP system implementation. 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. We still have a way to go to get the La Senza brands to an acceptable performance, but we remain optimistic.

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'll say thank you and turn it back over to Amie.

Thanks, Martin. That concludes our prepared comments for this morning. And at this time, we'd be happy to take your questions. Please, as a reminder, limit yourself to one question so that we can get to as many of you as we can. Michelle, I'll turn it back over to you.

Thank you very much.

(Operator Instructions)

Ike Boruchow, Sterne Agee.

Congrats. My question for Sharon. Could you comment, within what you're seeing at Vicky's right now the past six or nine months, the weakness at the direct-to-consumer online platform? Could you give us the puts and takes? How much longer would you expect until you can get that business turned around? And then the beauty business for holiday, with Susie's product, any thoughts there as well? Thank you very much.

Sure, Ike. Let me take the direct question first. We're seeing double-digit growth in our shared product categories. The biggest negative increase that we've seen is in the apparel category. We are -- we believe that we have some course correction that we have done for the fourth quarter and into spring season. But I think that we are obviously down downplaying that business as we go forward and putting our emphasis on the shared categories.

When I think about the beauty business, our continued focus on our fine fragrance business. We have some very strong wind at our back as we launched the Victoria fragrance in August, as well as the Night fragrance. We have two more fragrances that we're launching this holiday season, which just launched on Tuesday, is Angel Dream and Bombshell Diamond.

So I think that our focus on fine fragrance is paying off for us. We have narrowed our assortments in gift sets as we go forward that have a much higher emotional content. So we're pretty excited about the opportunity that we have within beauty for holiday.

Great. Good luck.

Christian Buss, Credit Suisse.

I was wondering if you could talk a little bit about how you're thinking about e-commerce as you move forward with your International rollout?

Sure, Christian. We'll go to Martin for that question.

Sure. I think, Christian, as you probably heard us talk about at our investor meeting, we have so much to do in the stores channel, we have decided to prioritize that first. We think when we launch our brands internationally, it makes sense to do so in a stores environment, delivering the highest level of emotional content through a built environment and through a great service proposition. We do see great potential in the online space, but it's just not our immediate priority right now.

Okay. Thank you. And then could you talk a little bit about priorities for return of cash to shareholders?

Sure. Our priorities are consistent with what we've done over the last many years, and that is, first and foremost, to return excess cash to shareholders versus holding it, either to just hold it or as it might relates to M&A activity. So first point is, we return it. And then the second point is, we return it using three vehicles, which we've used extensively over the last several years.

The regular dividend, which has gone from $0.60 a share a few years ago to $1.20, growing in line or at a rate slightly faster than our growth in earnings. Secondly, the repurchase of shares, and we've bought back a lot of stock over time. And then lastly, as you're probably familiar, we've paid a lot of cash back to shareholders, returned a lot of cash back to shareholders through special dividends. And that's a good vehicle for shareholder return as well.

We generate a lot of our cash in the earnings in the -- earnings and cash in the fourth quarter, and so we'll continue to monitor that. And again, our commitment is very clear to return excess cash to shareholders. Thanks.

Kimberly Greenberger, Morgan Stanley.

My question is for Stuart. Stuart, as you look beyond the holiday season and out to 2014, understanding that you haven't issued any earnings guidance, can you just remind us of your long-term financial goals? And within that, can you put into context the other segment? It looks like this year that other segment will show about $60 million -- $55 million, $60 million roughly in improvement year-over-year. Is that a pace that you think can be sustained, or do you expect it to slow, starting next year?

Kimberly, there's a lot in that question, and it's a good question, understandably. And as you prefaced in your question, I'm going to be careful to not prematurely give guidance for 2014 because we haven't finished 2013 yet, and we've got some work to do to get it all sorted out for 2014.

But in answer to your question, our long-term financial goals start with improving the operating income rate of the overall business from about 16% or mid 16%s to the high teens, and over a longer-term basis, about 20%. So we've been clear about that over time. That continues to be an important goal for us, and we remain confident and committed to achieving that goal.

The second goal that we've talked a lot about in the business is Management's mindset, which is -- can be different than our guidance, as you know. But our mindset is to, through a combination of sales growth and margin improvement, good expense management, to grow operating income dollars at about 10%, which by the way for the -- through the first nine months of this year, is exactly what we've delivered. So we want to improve the rate of the business to high teens to ultimately 20%.

We also understand that you take dollars on to the bank versus rate, and that's why we think about dollar growth as well. And again, our internal mindset is to grow at 10% or better, not an easy thing to do, but something we did last year and we're on pace to do. Certainly have done for the first nine months of this year. In terms of the other segment, obviously the actual results are the actual results. This year, it has been an important contributor to operating income growth year-to-date.

And that reflects contribution from the International business. And also profit related to sourcing activity, both for internal customers, specifically VS and La Senza, and profit related to sourcing activity for third parties, including, as you are aware, we sold the third-party sourcing business -- apparel sourcing business, but we are sourcing for third parties related to Victoria's Secret and our franchise operations internationally.

So that -- those have been the drivers of the other segment. But for all major parts of our business, we're working very hard to generate 10% or better operating income growth. So hopefully that is responsive to your question. And again, as you indicated, we'll give our normal guidance in February for 2014.

Great. Thanks, Stuart.

Thomas Filandro, Susquehanna Financial Group.

[Good] quarter, guys. Stuart, can you give us comfort with the quarter and the inventory increase? Can you help us better understand the make up, if you were to exclude that pack away piece for semiannual sale at both brands? And as it -- separately, but related to that, can Sharon and Nick discuss semiannual sale positioning this year, in terms of units, IMU and timing? Thank you.

Thanks, Tom. On the Q3 ending inventory, about 2 points of the growth -- 2 percentage points of growth relates to the Body by Victoria inventory that will be sold in the January semiannual sale. And as Sharon described in her opening remarks, we've also made important, and we think good investment in the sports business.

And we've also made important, and we think appropriate investment in basic and fashion broad depth, particularly in what I'll call the middle of the fleet, meaning not the highest volume stores, but in the middle of the fleet. And we think we're getting paid for that investment. So that's really is the additional color, Tom, on drivers of square footage growth at the end of Q3. I think you had a follow-on question about semiannual sale positioning, which Sharon and Nick can address.

Sure. Hi, Tom. First of all, the semiannual sale this year will fall in the last week of December, versus last year falling in January. So there is some timing -- a little bit of a timing shift due to the calendar. When I think about the units, our units will be up this year versus last year, and slightly up to where we were in the summer months. Our IMU is also -- will be slightly up as we go into semiannual sale.

Thomas, for us, comparable timing, obviously post Christmas Day, our mix will look slightly different, and probably favorable, because of the box up of old Signature that we'll obviously bring out. And then we'll do the same as we did in spring and summer sale, which is, we'll be somewhat of a hybrid floor set as we finish that, knowing that it's a highly, highly promotional period as we come out of sale before really spring hits. So comparable timing, slightly more interesting mix.

Thank you very much. Best of luck.

Matthew McClintock, Barclays.

Challenging traffic trends in the mall, and given the increased promotional activity, specifically this quarter, I was wondering, how does that relate to your investments in selling? And have you pulled back on that at all? And then as a follow-up, more conceptually, are there specific product characteristics within intimate apparel that make the market intensification investments you're doing drive a higher return than maybe other product categories, like apparel? Thanks.

Matthew, it's Sharon. First of all, when we think about the challenging traffic, obviously we want to trend bust that this year, and we are not pulling back in terms of our selling investment. I think it's very important from how we give our customers the right service, and the right emotional content, and that's something that we're focused on and we'll continue to go forward on.

When I think about the market intensification, obviously our core business, our bras, really lead and dominate the profitability of Victoria's Secret. And that's something that we're very focused on. The only apparel business that we really have in Victoria's Secret stores really lies in Pink. And I really wouldn't call it a true apparel business. I would call it a lounge business. And right now, in the Pink apparel business, the fleet slowed up a bit, but it's all about the leggings and tunics, of which we've now course corrected some of those assortments.

Thanks, Sharon.

Anna Andreeva, Oppenheimer.

A question to Stuart, on the expense line, there were several initiatives that you guys took in the first quarter that helped the second quarter and the third quarter, and SG&A dollars have been managed extremely tightly. Just curious, how should we think about SG&A management over the next 9 to 12 months?

And a quick follow-up on inventories, at up 14% on the balance sheet, a little higher than the 8% increase of cost you called out at the end of October. Could you maybe help us triangulate that and how should we expect inventories to be managed as we go through 2014? Thanks so much.

So in terms of management of expenses, in terms of what's driving the leverage, it is, we're getting leverage across all major categories of expense. So there's not a particular thing to point to, rather than, the thing to know is that we're being disciplined and thoughtful about our expense levels, again, across all major categories, that being selling expenses and marketing expenses and home-office expenses.

The Company is very committed, over time, to grow expenses slower than sales, and we're doing that this year, and I think you were asking about mindset going into next year without getting into specific guidance, but we will continue to work hard to grow expenses slower than sales, so that's what I will tell you about that.

With respect to the difference between the inventory growth per foot at 8% and the inventory growth in total on the balance sheet at 14%, the fundamental difference is -- are two. One is related to in-transit inventories -- inbound in-transit inventories that are on -- not available for sale yet. And then separately, Victoria's Secret Direct's inventory is up, contributing to that difference.

And it's up on inventory that was down substantially last year. So on a two-year basis, it is still down. And as you would appreciate, direct inventories aren't included in the per foot calculations. So -- and lastly, International-related inventory is also part of that in-transit as well. So that's really what's driving the difference between the per foot calc and the total balance sheet result.

Howard Tubin, RBC.

Can you give us an update on your market intensification program? How it's continuing to work and how it moves forward into next year?

Howard, we'll go to Sharon for that question.

We have been very pleased with our results in market intensification. As you know, we started in Chicago. We're on our third year in Chicago, and continue to learn and continue to see increases in that market. As we have gone forward, we have taken some stores in Texas, both in Dallas and Houston, some stores in Florida, New York/New Jersey, and then as we enter into 2014, we'll be starting our journey into California.

Betty Chen, Mizuho Securities.

I was wondering if Nick can talk a little bit more about some of the opportunities at BBW? How much more lead time reduction do you think we can do as you continue to work on newness and innovation? I know you said earlier, one of the goals is to continue to test merchandise and really quicken the speed to market. Any color there would be really helpful. Thanks.

For us, we'll continue to -- two things, I think, are important. The first one is, we've made dramatic strides in lead time reduction, and I think it's about continuing to do that. But it's also about making sure we've got a broad enough assortment of things that are on a speed model or are seasonally relevant that we would want to be able to read and react to as quick as we possibly can.

The second thing that I would say is that the fact that we have the beauty park so close to us really leads us to have an opportunity to work even closer with the vendor, and start establishing different approaches that might allow us to find further reductions. I think the biggest opportunity is really about how broad -- how much of the assortment is available to us on those shorter lead times, versus continuing to try and take days out of it.

So we've made dramatic progress in the soap and sanitizer business as well as the signature business and we're beginning to make pretty good progress as well in the candle business so we'll continue that path but again it's really about the breadth that's available to us because that will have a bigger impact to this the total store business.

Thank you, Nick.

Simeon Siegel, Nomura.

For Nick, the BBW margins continue to improve. Can you talk about where you think that can go? Maybe thoughts around taking price, despite the challenging environment? And then where you believe the direct penetration should go there? And then just quickly for Stuart, given the earlier commentary on the calendar shift impacts, can you quantify the 53rd week impact you'd expect to sales and op income for the fourth quarter? Thanks.

Sure, Simeon. Really, our number one goal is about having as much full price selling as we can get on the floor. And that, in our mind, is driven by two things. One, our ability to read and react [in depth] to the test products so we can get a good read, so we only try to put full price selling goods on the floor.

And the secondly, what's relevant to the question, I think, is our continued approach to trying to evolve and have a base of brand which says that we are consistently reinvesting in the brand. And as we have reinvest, in some cases, we see the opportunity to take price up. And in some cases, we see the opportunity, just because the product looks better, that we can maintain the momentum.

So I don't see big strides for us for further gross margin gains on that front. I see more of an opportunity to have the more aspirational, better looking, full price selling products as we continue to reinvest in it. Does that help?

Yes. Thank you. In terms of direct business, do you see certain penetration there?

Yes. We continue to see our direct -- as I mentioned earlier on in the prepared comments, we continue to see health in our direct business. We continue to see sales grow slightly faster than they are in stores. And at a comparable operating income rate, as well as growth in there, as well. So yes, an important piece of the business.

With respect to the 53rd week, so there is a little bit of art in estimating that. But as we look at it, we think the effect is between $130 million and $140 million of sales, and about $40 million plus or minus in operating income.

And Simeon, I'll just add, in Stuart's prepared remarks, we tried to help on sales guidance as well, by saying that, depending on the comp results, our fourth quarter sales could range from about $30 million below last year to $75 million above last year. So in terms of specific sales guidance for the fourth quarter, Stuart mentioned that in our upfront comment.

Great. Thanks a lot, guys. Good luck for the holiday.

Lorraine Hutchinson, Bank of America.

As you look out over the next few years, while planning your Victoria's Secret store expansion, how's the real estate availability in adjacent stores to VS? And how do you think that will balance between new Pink stores and expanded Victoria stores?

So as we look out over the few years, obviously one of the things that we would love to have is continuous square footage. It becomes harder and harder, and it's a mall by mall, store by store issue. So it's really hard to see, in terms of all the square footage that we would like.

Something that we're doing in the business constantly is saying, do we see a difference in whether sales or profitability, if you separate Pink out from Victoria's Secret lingerie? And right now, we're not see that, whether it's in the same box or separated, but what happens over time? So that's something that we're looking at.

And then, as we think about the growth, is that you know that we're very -- we don't have all full assortment of Victoria's Secret in all the stores nor in Pink. So we probably -- as we continue to expand and have freestanding Pink stores, you'll see a percent growth bigger in Pink, but true, hard square footage, you'll see bigger stores in Victoria's Secret lingerie. The beauty is the fact that we have a balance of both to be able to grow, as we look out over the next three to four years.

Thanks, Sharon.

Oliver Chen, Citigroup.

Congratulations on great performance. Regarding the overall strategy, and how we should think about this long-term, could you speak to the dollar versus rates, and the merchandise margin? What might be the catalyst for getting merchandise margin flatter at the VS division over time? Or how do you see that, and how should we think that you are proceeding there strategically?

Lastly, as a follow-up, on the online side of the equation, we feel this will be a very important this year for this season. From the consumer perspective, what might be different year-over-year? Thank you.

When -- as we look at the Victoria's Secret from a rate and a margin, our goal is to increase both. Obviously, we are -- we think there's opportunity in the margin rate. We think there's opportunity in terms of the top line sales, which would then obviously give you more dollars. So as we model, and as we go forward, we're looking for growth in terms of our margin rate.

When I think about the direct business or the online business, there is so much going on in terms of the omni-channel and how we engage with the customer, and our goal is to service the customer wherever she wants to be serviced. We know she goes online to actually find out where things are, what's new, and then comes into the store. We also know that if we don't have the stock in the store, that we can get it from the online business.

We're very positioned in the shared categories in the online business for holiday. The big thing we keep talking about is that the apparel business has been such a big piece of that business over the years, and that we're not trying to get out of it. We're just trying to contain it, therefore investing our growth in terms of the shared categories.

Thanks for that. And on the rate, what are the aspects from which might be the most striking opportunities to get upside to the merch margin rate?

There's so many things that go into merchandising margin rate. When you look at this $7 billion business, and just domestically. Some of it is mixed, is that your highest margin businesses are at beauty, so it is -- some of it is in the mix. Some of it is in terms of how we're thinking about developing product from the fashion perspective. We will never sacrifice quality. We will always be a fashion business and being the first in fashion.

So those of the things that we continue to think about. The thing that helps us with fashion is within our speed models. How are we testing, reading and reacting? How are we holding open to buy in some of these longer lead time businesses? And we have made great strides in being able to do that.

When I look at something that's I always look at is like, how many -- the total available units for sale, in a season, do we take to semiannual sale? Because at Victoria's Secret, we only have two sales a year. We don't put out clearance goods during the year. It's only twice a year. So I think balancing the fashion and the mix, the fact that we have speed within our portfolio across all different categories, in every single category, basically on different timelines.

And then most important is that we are an emotional brand, and not only having that emotional content from a product perspective, but take that emotion to our sales associates, and also to all of our Associates in Victoria's Secret.

Nick, do you have anything you want to add about your online business?

Yes, I would say that very comparable to Sharon. So three things that will be different or built higher this year versus last year in the online channel will be our commitment to telling great stories about the new launches that we've done. Secondly, as Sharon said, the brand does have high emotional value, so we've really dialed up the emotional content So it's a dramatically better looking site than it was last year. And then obviously, finally, our ability to be nimble with it, and if need be, leverage it to drive traffic to the stores, if we see traffic trends challenged as we go through the season.

Thank you. Best regards.

Roxanne Meyer, UBS.

On BBW, I know it's early days and only about a few weeks that you've taken some pricing in your core Signature Collection, but wondering if you can comment on customer reception to the higher prices there? And also on the margin for BBW, it was -- merchandise margin was flat in 3Q. Wondering what your base assumption is for 4Q?

Hi, Roxanne. So the customer hasn't really -- she hasn't really indicated that she's noticed that the price has gone up, and I think that's a lot to do with the amount of emotion and quality that we added to the product. The thing that she's most interested in is, is she still able to participate in the day in, day out price of buy three, get two. That's what she focuses on when she comes in. So I think she's getting a better looking product. She's seeing an improved product, a better display, and then looking for by three, get two et cetera, et cetera. So we haven't seen any negative impacts associated with that.

As it relates to margin going forward, at this point, we don't -- we're not looking or planning to see a decline in that. But obviously, it depends on how promotional is the marketplace going to be? What are the traffic trends like? And what triggers promotions might we pull in order to drive traffic to the stores? That would be the only thing that would really affect us, from a margin rate perspective.

Okay. Great.

Dana Telsey, Telsey Advisory Group.

Can you talk a little bit about the market intensification program, and the updates to that you're seeing in 2013 and as you look out to 2014? And then lastly, on AUR improvement, is it different by -- at Victoria's Secret versus La Senza? And we know elevated AUR is a focus of the BBW. Thank you.

Dana, sorry. You might have not been on the call earlier, but Sharon's already addressed the market intensification question. So we'll take your question about AUR.

Thank you.

Do you want to repeat that?

Yes. On the AUR improvement, where do you see it most? Would it be at Victoria's Secret? Would it be at La Senza? As we know already, BBW is seeing elevated AUR. That's one of the key focuses. So as you look at what's happening at each of the other brands, when should we see it? How much should we see? And it as it is it by category at all that it's different? Thank you.

Hi, Dana. It's Sharon. When I think about, for Victoria's Secret, and Victoria's Secret, Victoria's Secret Pink, lingerie and beauty, is that we continue every year to balance the good, better, best pricing. We continue to grow the top end and reach from AUR. We continue to grow the midsection and our opening price points. So we always, every year, look at that balance.

And so that is across our beauty category. As we continue to put more emphasis on our fine fragrance, and really dominating the prestige fragrance market, that is at a higher AUR than what our Fantasy business has been. So that's kind of goes into the mix.

When I think about our core category, which is bras, we actually have four different tiers of price points, and we constantly look at what is the critical promise of value and the relativity to the market. But we're not afraid to sell a $150 bra either. So it's about that balance. It's something that we look at every -- really, every year, every quarter, every day.

Thanks, Sharon. Thanks, Dana.

Susan Anderson, FBR capital.

My question. So there's been quite a bit of change in the competitive landscape, if you look past the past 5 or 10 years, including like specialty guys emerging with their own formats, and now also the merger of Hanes and Maidenform. So I was wondering if you could talk about how you see yourself positioning on the intimate side, say, over the next five years? Especially as you're going after more basics, which seems to be more of a department store category?

First of all, Susan, I -- we are not going after more basics. We are a fashion brand, so I just wanted to make sure that we understand that. I think that, when -- and we have to define basics, as well, because we might consider a Pink a basic bra. Most people would not do that. So we are basically having a -- we're growing our fashion faster than our basic category. We will continue to do that.

When I think about -- there's always competition within the lingerie market, and it morphs and it changes every year. We've had specialty retailers who were retailers who got into the business. And from a competitive perspective, when I think about Hanes and Maidenform, both of those are really manufacturers. They're actually -- do not have all the store skills. They actually sell through third parties versus their own stores.

Obviously, we are very appreciative of our competition and keep a close eye on what's happening. I think Maidenform is going to be the higher end price point for Haynes. And then you also have the Triumph, who's trying to enter into the US. But when you look at what their skill set is, is more on the manufacturing side, of which we've been doing that for many, many years. What they don't really have is the store skills.

Great.

That doesn't mean they can't go there.

That's helpful. Thanks.

Janet Kloppenburg, JJK Research.

Congratulations on a good quarter. I also wanted to wish you luck for a great holiday. Just a couple of quick questions. Sharon, I was wondering if we should expect the margin compression and the direct channel to continue, given that I believe the repositioning there is not yet complete on the apparel side? And Nick, I was wondering how confident you were in your ability to continue to drive AURs higher and ADS up, as we look out into fiscal 2014?

And lastly, for Stuart, I was wondering if you could help me with -- first of all, congrats on that SG&A leverage in the third quarter. And I was wondering if we could expect the same kind of leverage in the fourth quarter? Or because of the sales comparison 52 to 53 weeks, if we should be expecting something more modest? Thank you.

Okay. (multiple speakers) I think there's still a little bit of compression in terms of the direct margin. It really depends. When you think about, we are taking a very conservative approach as we look at fourth quarter. Direct is starting to get a little bit of the wind at their back right now, and it depends on how competitive that we have to get as we go into the fourth quarter, but we're well-positioned. We have the inventories in control. I think that the -- we have the inventories behind the key categories that are growing, so I am a little cautiously optimistic.

Thank you.

Hi, Janice. Good question. So I think, first and foremost, aspirationally, we would always want to be trying to do that. And at the same time, I want to make sure we're very balanced against customer reaction. And so one of the benefits we have of being a pretty nimble business model allows us to do an awful lot of read and reacting.

At the same time, we obviously want to get paid back for the investments that we put into products. And we can -- as you see, we continually looking to improve formula, looking to improve better quality fragrances. We recognize that we are in the packaged goods business, so we're also looking at how do you continually upgrade the look of the products. So I would say aspirationally, we'd like to -- I think we want to be cautious around really watching customer reaction, and we can do that by read and react. And so overall, we'll be pretty careful as we test and move forward.

Yes, Janet, with respect to SG&A, management and leverage, probably the first thing to say is, it's a team effort, and the enterprise at large focused on doing it in a thoughtful way and in a disciplined way. We did get good leverage in the third quarter, and as I commented on in the prepared remarks, we're expecting to get leverage in the fourth quarter, as well. Maybe not quite to the same level on a basis points standpoint, but we would expect to get meaningful leverage in Q4 as well.

Thank you.

Thanks, Janet. And Michelle, I think we have time for one last question.

John Kernan, Cowen.

A lot of my questions have been answered. Just a high level question. The promotional environment, obviously, is accelerating here. What gets us out of this cycle? It seems like once it starts, difficult to break. And then Stuart, on the CapEx, where do you see this going next year and over long-term? I know it's increased significantly, up from $275 million in 2010, so just wondering when CapEx levels out here? Thanks.

Thanks, John. So Sharon, talk about (multiple speakers) --

It's interesting, because I think the whole promotional retail environment has been going on for a while, and I think it's a good question is that, when does it end? And from a Victoria's Secret perspective, is that we didn't play in the game at all last year. And how we think about it, it's about staying close to the customer, having the right product and the right fashion product, delivering in an emotional way, having the inventory available for the customer, cleaning up the floors and not having a lot of clearance on the floor, and really being thoughtful in how we approach the business. And I think that's how we're going to continue to win.

Do you have any thoughts, Nick?

Yes, John. I think very similar thoughts to Sharon. We will remain very, very focused on trying to keep the brand as relevant as we possibly can. That would allow us to throw as much newness, and hope that newness really, really cuts through. I think wherever we got -- wherever we have really, really solid product newness that cuts through with real cut through messaging, that often allows us the ability to hopefully trump the promotional activity that's taking place. So really focused on helping the -- help working with the brand to get there.

On CapEx, we'll give 2014 guidance formerly in February. But what I would say, consistent with recent remarks, is that as you understand the substantial majority, about 70%, 75% of our CapEx is going to our stores. And as we reviewed broadly during the October analyst day in New York, we're getting very good returns on those investments. And so as we think about it, we'll continue to invest at about this level.

We monitor those investments very, very closely. We're getting great returns. And you should expect that we'll continue to invest at about this level, as long as we continue to get those returns. So we feel great about those investments, and we're monitoring it closely.

And we'll adjust if conditions warrant, as we did back through the economic crisis in 2008 and 2009. But short answer is, probably be in the $700 million range, as we go forward. We'll give you an update in February.

Thanks, Stuart. And thanks, everybody, for joining us today. We hope you have all have a great Thanksgiving.

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