Bath & Body Works Inc (BBWI) 2013 Q4 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 L Brands fourth-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 L Brands. Please go ahead.

Thanks, Michelle. Good morning, everyone, and welcome to L Brands' fourth-quarter earnings conference call for the period ending Saturday, February 1, 2014. 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 fourth-quarter earnings release and related financial information, including any non-GAAP or adjusted financial reconciliation tables are available on our website, www.lb.com. Also available on our website is an investor presentation which we will be referring to during this call.

This call is being taped and can be replayed by dialing 1-866-news-ltd. You can also listen to an audio replay from our website.

Stuart Burgdoerfer, EVP and CFO; Sharon Turney, CEO Victoria's Secret; Nick Coe, CEO Bath and 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. Please limit yourself to one question.

All of the results discussed on this call are adjusted results and exclude the items from 2012 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 13- to 14-week basis for the quarter and 52- to 53-week basis for the year.

Comparable-store sales and direct sales dollar increases or decreases are on a comparable calendar period, 52 to 52 weeks for the year and 13 to 13 weeks for the quarter. Thanks, and now I will turn it over to Stuart.

Thanks, Amie, and good morning, everyone. Our overall fourth-quarter results were below our expectations.

Through the first three quarters of the year we were meeting our internal goal of growing operating income by 10%. The fourth quarter was certainly a setback with operating income dollars about flat year over year on a 13-week basis.

While the environment was challenging for most in retail, as we assess our performance, we did not execute as well as we should have. Therefore, we are intensifying our efforts on the fundamentals that we have been focused on for the last several years. Our focus on the customer, improving speed and agility in the business and managing inventory and expenses with discipline.

Earnings per share were $1.65 versus $1.76 last year, or $1.68 excluding the extra week. To take you through the fourth quarter results as detailed on page 4 of the presentation, net sales for the 13-week quarter were $3.818 billion versus $3.856 billion for the 14-week quarter last year. Costs increased 1% on top of 5% last year.

The gross margin rate decreased 220 basis points to 43% driven by a decrease in the merchandise margin rate and slight buying and occupancy expense de-leverage. The SG&A rate decreased by 130 basis points.

Operating income dollars decreased $44.3 million to $863.5 million. The decrease was driven by the extra week last year. Excluding that week, operating income dollars were roughly flat in the quarter.

Turning to our full-year results on page 6, earnings per share were $3.05 versus $2.92 last year or $2.84 excluding the extra week. Excluding the extra week last year, EPS increased about 7% for the year.

Net sales increased to $10.773 billion and cost increased 2% on top of 6% last year. Excluding the extra week last year, total sales increased by about 4%. Our investments in real estate at Victoria's Secret and growth in our International business drove about 2 points of sales growth above our comp.

The gross margin rate decreased 120 basis points to 41.1%, driven by a decline in the merchandise margin rate and slight buying and occupancy expense de-leverage. The SG&A rate improved by 110 basis points as we continued our focus on growing expenses slower than sales.

Page 7 details our full-year operating income results. Our full-year adjusted operating income rate was 16.2%, about flat to last year.

Operating income dollars increased by $36.1 million, primarily driven by growth in our International business, our sourcing function, and Bath & Body Works. Excluding the extra week last year, operating income dollars increased by about 5%.

Beginning with the first quarter of 2014, we will be changing our segment reporting. We will provide restated 2013 and 2012 segment information to you today after this call. Specifically, results from our Company-owned stores in Canada will be reclassified from the other segment into the corresponding Victoria's Secret or Bath & Body Works segments.

We will be creating a new segment called VS and BBW International, which will include our Victoria's Secret and Bath and Body Works stores, both owned and franchised outside of North America. Results of the La Senza, Henri Bendel, the mass sourcing function and corporate overhead will remain in the other segment. As part of this reporting change go forward, we will no longer be separately reporting sales and comps for La Senza, which is not material to our overall results.

Turning to the balance sheet on page 8, retail inventories per square foot at cost ended the quarter up 9% versus last year. Inventories ended the year in line with our expectations with growth driven by investments in core and sport bras at Victoria's Secret.

We expect that inventory growth will continue to exceed sales growth in February and March. We expect to end the first quarter with inventory per square foot up in the mid single-digit range and we expect to end the second quarter about flat.

Operating cash flow in 2013 was $1.248 billion. Free cash flow was $557 million and capital expenditures were $691 million.

We repurchased 160,000 shares of stock in the fourth quarter for $8.5 million. At the end of the year we had $176 million remaining under our $250 million share repurchase program.

We recently announced a 13% increase in our annual dividend to $1.36 per share and also declared a special dividend of $1 per share, both of which will be paid on March 7.

Turning to page 11 of the presentation, our forecast for 2014 reflects actions we are taking to grow our business. Growth in Victoria's Secret real estate; increased store selling payroll, driven by our efforts to improve the customer experience; and investments in international expansion.

These actions will drive sales growth but will result in near-term expense pressure, both in buying and occupancy and SG&A. Occupancy costs are estimated to increase by approximately $125 million this year, or about 7%.

This increase is driven by increased rent for incremental square footage for new and remodeled stores in the United States, Canada and the UK, increased accelerated depreciation for stores that we are remodeling before the end of the lease term and increased depreciation related to the new and remodeled stores that were opened over the last several years.

Our first quarter-earnings forecast reflects a low single-digit comp increase, which reflects a February comp forecast in line with our previous guidance of flat to up low single-digits. We expect the first-quarter gross margin rate to be down to last year, driven by a slight decrease in the merchandise margin rate and buying and occupancy deleverage.

We expect some improvement in the SG&A rate. We expect non-operating expense in the first quarter to be between $80 million and $85 million versus $76 million last year, a negative impact of about $0.01 driven by incremental interest expense related to the November 2013 $500 million bond issuance.

We expect earnings per share between $0.44 and $0.49 in the first quarter against last year's $0.48 result. For the full year, we are projecting positive low single-digit comps. Total sales growth will be about 2 points higher than comps due to growth in square footage in our international business.

We expect our full-year gross margin rate to be down slightly, and the SG&A rate to be about flat to last year. Non-operating expenses consisting principally of interest expense, are projected between $310 million and $315 million versus $298 million in 2013, a negative impact of $0.02 to $0.03 per share.

Before any discreet items, our tax rate will be approximately 38%. We are forecasting weighted average shares of about 297 million in the first quarter and the full year, roughly flat to 2013. Assuming all of these inputs, we expect adjusted earnings per share for the full year of 2014 to be between $3 per share and $3.20 per share.

We are projecting 2014 CapEx of about $750 million. As you know, about 70% of our CapEx budget is for real estate and stores. The remainder relates to investments in technology, logistics and facilities.

As detailed on page 13 of the presentation, Victoria's Secret square footage in North America will increase by just under 6% this year, driven by expansions at existing VS stores and the opening of 37 new PINK stores and 19 new Victoria's Secret stores. Total Company square footage will increase by about 3.5%.

Turning to liquidity, we expect 2014 operating cash flow of between $1.35 billion and $1.45 billion, and free cash flow of about $600 million to $700 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 results 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 Sharon.

Thank you, Stuart, and good morning, everyone. Our fourth-quarter results are detailed on page 16 of your presentation materials.

Victoria's Secret segment had mixed results in the fourth quarter. We had a solid start to holiday with high single-digit sales growth over last year during the Black Friday weekend and Cyber Monday.

In addition we succeeded in driving mid to high single-digit growth throughout the quarter in our key categories of bras, panties and fragrance. However, we continued to have some misses in apparel.

We also added incremental promotions as a result of the challenging environment. While we succeeded in driving traffic, our actions had a negative impact on our margin rates in both channels. On the other hand, we continued our focus on expense management and were therefore able to leverage our SG&A expenses.

Segment operating income in this year's 13-week fourth quarter declined $42.5 million or 9% to last year's 14-week fourth quarter. The extra week last year accounted for over half of that decline.

In the stores channel, fourth-quarter comps increased 3% on top of a 3% increase last year, driven by growth across the assortment. Excluding the extra week last year, total sales increased by 5%. In addition, we had record in-store conversion for the 18th consecutive quarter.

Our merchandise margin rate declined as we continue to see strong response to our marketing campaign and the added incremental promotional event. We also sold through a greater number of clearance items during semi-annual sale this year, which helped drive our January comp store sales but further eroded the quarter's margin rate.

As a result, the gross margin rate was down significantly in the quarter, driven by the merchandise margin rate decline and de-leverage in buying and occupancy expense. We leveraged SG&A and we focused on the disciplined management of expenses.

Operating income in the quarter declined driven by the one fewer week in the quarter. Excluding the impact of the extra week last year, operating income would have been about flat.

In the direct channel fourth-quarter sales on a comparable calendar basis were down 1%, as a double-digit decline in apparel offset strong performance in lingerie, sports and beauty. The merchandise margin rate was down significantly as we had incremental promotions which combined with the sales decline resulted in lower merchandise margin dollars. Operating income dollars declined compared to last year, driven by the decline in merchandise margin dollars and the one fewer week this year.

Turning to our full-year segment results on page 17, Victoria's Secret stores' comp increased 3% with total store sales, excluding the extra week last year, up 5%. Victoria's Secret direct sales on a comparable calendar basis decreased 3%. Total segment sales increased to $6.7 billion and operating income declined by $56.5 million, to $1.1 billion.

The merchandise margin rate decreased versus last year in both channels. The operating income rate was down in the stores' channel, but operating income increased, both including and excluding the impact of the 53rd week in 2012. In the direct channel, operating income rate in dollars declined year over year.

Looking ahead to first quarter, we will continue to focus on our core categories of bras and panties, and we are excited about our spring assortment. We will be conservative in our expectations for the season.

We will leverage speed to read and react to performance in terms of our investments in inventory and expenses. We will continue to focus on the balance between driving traffic into our stores and maintaining the integrity of our brand while also working to balance margin dollar growth with rate.

Consistent with stores' owners comments regarding capital, we are continuing to invest in real estate and customer-facing initiatives to support current and future growth. We are focused on getting better and better, especially in all things that touch the customer, from product to service and selling.

We will continue growth from our core, and are confident about the opportunities in our adjacent categories of swim and sports. We have great products and newness across all categories this season. Those products, along with our emotional brand experience will inspire her to return again and again.

We will balance our optimism with a continued focus on executing with discipline, simplicity and speed. Thanks. And now I will turn the discussion over to Nick.

Thanks, Sharon, and good morning, everyone. At Bath & Body Works results for the fourth quarter were below our expectations, as we were unable to grow earnings versus our record performance last year. We will remain committed and focused on the fundamentals we do well and recognize that we must keep getting better to win.

Sales performance was below our expectations throughout most of holiday. While we did see strength in seasonal form and strong response to certain promotional events, the overall assortment in shop activity did not cut through enough with the customer to win in a highly promotional environment.

Sales in our three key businesses, Signature Collection, home fragrance and soap and sanitizers, all performed at or above the total Company level during the quarter. We were able to improve upon our already high conversion rates during the quarter, but it was unable to offset, fully offset, challenging traffic levels. We did have a successful semi-annual sale following the holiday season, and we were pleased with our decision to extend sales through the Martin Luther King Junior holiday weekend.

Total sales for the 13-week quarter were $1.2 billion, down 4% or $44 million to the 14-week quarter last year. Comps decreased 1% on top of the 7% increase last year. Excluding the additional week last year, total sales would've been about flat to last year.

For the quarter, operating income was $377 million, down $21 million or 5% from last year. The decrease was principally the result of the additional week last year. Operating income as a percentage of sales was 31% in the quarter and was down 60 basis points to last year.

Gross margin rate in the quarter was down to last year, driven by increased promotional activity. SG&A expenses leveraged versus last year.

Although we missed sales expectations, we were able to finish the quarter with inventory levels only up slightly to last year and in line with expectations. Even as the business transitioned through multiple key product re-stages and re-launches.

For fiscal 2013 operating income was $619 million, up $14 million or 2% versus last year. Adjusting for the additional week last year, operating income would have been up about 5%. Operating income as percentage of sales was 21.1%, up 30 basis points to last year.

Gross margin rate was down to last year driven by increased promotional activity in fourth quarter. SG&A expenses leveraged versus last year.

We were pleased with the performance of BBW direct channel, which delivered sales and operating income growth versus last year in the quarter. Sales for the full year exceeded $250 million.

Looking ahead to the first quarter of 2014, we will continue to introduce newness and innovation in both form and fragrance. This month we transitioned from our sweet shop theme featuring new and seasonal fragrances in our three key businesses, to the re-launch of our soap business, featuring new formulation, packaging in both core and seasonal fragrances.

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

In addition to focusing on product and fragrance launches, we will continue to test and read the results of new product offerings and promotional strategies, while maintaining flexibility in our inventory to react quickly to our customers' preferences. We believe we have a significant opportunity going forward to leverage our hindsights and tests and key learnings from the prior year to impact 2014 results.

With that, I will turn the discussion over to Martin

Thanks, Nick, and good morning, everyone. As in previous calls, I shall give you a brief overview of progress in our International businesses. As we all know, our opportunity for International growth is significant. We feel good about the strategic choices we made to be steady and purposeful, to pursue a test and learn philosophy that reflect the DNA of our Company.

We made good progress in the fourth quarter and as detailed on page 14 of your presentation, we opened 160 international locations in 2013, to end the year with 863 international stores. As you will see when you receive the segment information after this call, revenue and profit from our Victoria's Secret and Bath & Body Works Stores outside of North America grew substantially in 2013.

Taking each business in turn, at Victoria's Secret International, we continue to be pleased with performance of our full assortment stores. We now have 34 stores in Canada and we will open another 7 stores this year.

Going forward, Canada will be included with the Victoria's Secret segment. The Victoria's Secret Canada business is growing rapidly and is now about the same size as La Senza in Canada.

In the UK we continue to be very pleased with our London flagship store on Bond Street. And have recently acquired a long lease on the adjacent property to allow us to expand the selling area later this year.

The four mall locations, three of which we opened in 2013, all continue to perform well. We will open another six stores in the UK this year, continuing to build out our footprint. PINK is and will be represented in all of our locations in the UK.

In the Middle East, we now have four VS full assortment stores open under our partnership with Alshaya. We continue to be delighted with the results and we will open another 8 to 10 stores this year in that region.

Staying with Victoria's Secret, our beauty and accessories business continues to progress well, with 198 locations open at the end of the year, a third of which are in airports. We will add about another 100 stores in 2014.

In Bath & Body Works International, we are now up to 79 stores in Canada and we will open another 10 stores this year. As I mentioned earlier, for Victoria's Secret, the results of our Bath & Body Works Canada business will now be reported within the Bath & Body Works sector going forward.

We now have 55 BBW stores under our franchise partnerships. We continue to be very pleased with the performance of these stores, with notable openings in Southeast Asia and Latin America within the last few months. We expect to open another 20 to 30 BBW franchise stores in the year ahead.

Turning to La Senza, we were not satisfied with fourth-quarter performance. Comps in Canada declined 3% and our merchandise margin rate declined significantly. As such, we have decided to defer our entry into the United States for the time being.

On a positive note, we did successfully implement new merchandising systems in the businesses this fall. We continue to see growth in our core lingerie category, which now represents 90% of the business.

We will continue to focus on improving operating results in this business and focusing on our core. As Stuart mentioned earlier, going forward we will no longer separately report La Senza's results, which will remain within the other segment, given the immateriality of the business to our total enterprise.

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

Thanks, Martin. That concludes our prepared remarks and at this time we would be happy to take your questions. As I said earlier, so that we can get to as many of you as possible, please limit yourself to one question. Thanks, and now I will turn the call back to Michelle.

(Operator Instructions)

Brian Tunick, JPMorgan.

Thanks very much. Two quick ones for Sharon, if I could. Sharon, I think this is the second holiday in a row that there was a lot of zigging and zagging out there.

What are some of the key take-aways that you and Les had to better position the brand at holiday for next year? If this is really the new world out there, given how much profitability Victoria's Secret has in the fourth quarter and holiday?

And the second question is, it looks like the inner-wear market growth, the reported numbers were flattish in 2013. Wondering about your position as an innovator to drive newness against several strong years of the category's growth. Love your thoughts on that. Thanks very much.

Great, Brian, thank you. Let me take holiday first. There is a lot of learns. I think on the opinion maker days for Victoria's Secret, whether it is Black Friday through Cyber Monday and the week before Christmas, we really won.

What we have found, and this is just truly a customer mind-shift is those two weeks prior to Christmas, they're big volume weeks. That is going to require a total re-think. And as we have hindsighted what our strengths were and our opportunities were for next holiday, we are applying that as we think about, not only the holiday season, but throughout the entire fall season.

I do not think that the customer mindset is going to change. I do not believe that holiday is what holiday used to be. It is interesting. We saw a lot of shift into self purchasing versus gifting. I think we have to put that in our play book as we approach next fall and holiday.

In terms of the innovation piece, I think that that is something that I am proud to say that we continue to excel at. If I look at our innovation pipeline, sitting here and looking at 2014, there are some very new things coming our way.

We just launched one of the original T-shirt bra. You would think, T-shirt bra, isn't that out there? We just launched that this week. Very successful so far for the launch.

As I look out through the entire fall and holiday season, we see many opportunities within that bra innovation. As you know, as we approach innovation we always approach it as, what are we solving for the customer?

So it's not just something that is a frill, but is something that will mean something to her, and that we can gain credibility with her, and get her loyalty to come back to us. So I am excited about what we see.

Simeon Siegel, Nomura Security.

Thanks, guys, good morning. For Nick, can you talk about the longer-term margin objectives, maybe your AUR expectations, given your commentary around the environment? In a mall filled with all these store-wide discounts, how do you view your promotional messaging? Thanks.

Hi, Simeon. I think when we think about AUR and ticket, I think many of you have noticed we have taken some ticket increases last year. And in some cases we have been able to push that all the way through. And in some cases we might be at the edge of how far we can go.

In my perspective at this juncture, is that we want to be really, really balanced between where can we push margin and how do we drive growth. I don't think that's a simple blanket statement across each of the different segments. I think it is one for us to play with as we read and react to the business.

As it relates to your question in terms of the highly promotional marketplace, I think we have a lot of really good learnings as we went through fourth quarter. It becomes incredibly difficult to compete with, in many cases, entire store 50% off. That's not what we're aspiring to do with the brand.

I think we're able to test and play with different ideas on different days that yielded us really good traffic and healthy margin rates that we should be able to implement for next year. And then I would say the real work that needs to be done is in the first quarter of this year, as we start thinking about planning those and what do they mean, so that we can go into fourth quarter next year.

As Sharon said, I agree, I don't think the customer's mindset is going to change. But what we control is our ability to play differently and while still trying to protect the brand equity.

Great, thanks.

Ike Boruchow, Sterne, Agee.

Thanks and congrats. Stuart, I just wanted to ask you about the inventory guidance that you laid out. It looks like inventories per foot are up about 9% right now.

I think that you said that you expect them up mid singles at the end of Q1 and then flat by Q2. Curious, some of the puts and takes around what it takes to get there in terms of comp and how much margin you are willing to give up to clear the decks by the end of Q2.

Sure, thanks, Ike. The sales assumptions that run along with the inventory projection that we have are not aggressive sales assumptions. They are consistent with the guidance that we have provided with respect to earnings.

What is driving it is, as you know, a meaningful part of the increase year on year was investment in core lingerie at Victoria's and sport bras at Victoria's and some investment related to the International business as well. We have detailed projections, as you would expect. And I am confident that we'll be at mid single-digit by the end of Q1, and should be about flat by the end of Q2.

We will have a little bit of an increase beyond sales growth in February and March. But again, mid single by end of Q1 and flattish by the end of spring. Again, based on a conservative sales assumption.

In terms of margin impact related to that, the quality of the inventory is very good. There is a lot of things, obviously, that affect a margin rate in a business. Based on the nature of the inventory, not expecting a lot of margin pressure related to that inventory.

Great. Good luck.

Jennifer Davis, Buckingham Research.

Hi guys, good morning. Two quick ones. I guess we will see Canadian sales later when you give us your new reporting segments. Was wondering if you could give us a little color around the franchise revenues and then any comments on the margins there.

And then, Stuart or Sharon, I was wondering if you could provide us with a little more color around Victoria's Secret margins in 2013, excluding the impact of the 53rd week. How much of the margin pressure did you see from square footage expansion? How much from increased promotional activity?

And then, should we think about 2014 in a similar manner? And then I will throw one more in. Longer-term, How do you guys feel about Victoria's Secret's ability to increase margins to 20%-ish range? Thanks.

Okay, Jennifer, we may have lost some of those questions in there. I will take the first one about franchise revenues. We will put this out obviously later today.

Essentially what that will look like for fiscal year 2013 is total revenues in excess of about $200 million. And an operating margin rate that, as we have said in the past, is accretive to our total Company operating margins. So above that 16% margin. Stuart, I don't know if you caught all of her questions in the second part.

I can speak to the Victoria's Secret, Jennifer, in terms of the 2013 margins for Victoria's Secret. It was primarily really three things. One, is that we did have some miss in PINK in terms of our assortments early on in the season.

By cleaning those out and getting the new assortments in, was a margin hit for us. I do believe that we've course-corrected those assortments as we go into the summer season.

The second piece of it was the promotional environment that we saw. Although we did have some big key items that we had engineered, it wasn't enough to basically drive the traffic and get the sales that we needed. The third piece is that as we continue to do GWPs in our marketing initiative, it continues to exceed our expectation.

The next question that you asked, do we see a road map to getting Victoria's Secret to 20%? If I look at it from a total segment perspective, including the direct channel, we do. I think it will probably take us a couple of years to get there.

We have a big initiative in terms of margin architecture and how we are looking at the business, both from a top-line sales growth, the product categories that we're in, editing out some peripheral categories that are not margin-accretive for us. So I think that we are well-positioned as we go forward to be able to continue to see growth on the top line and reach our ultimate goal of 20% operating income total segment.

Great, thanks.

John Morris, BMO Capital Markets.

Thanks, good morning. If you can hear me everybody? Two questions. First for Stuart, SG&A down 7%, really good cost control there. Talk about any of the components that help you got there. Where were you able to really achieve that?

And then as you look ahead to next year, with the guidance that you have, give us the puts and takes on the plan into 2014, essentially flattish. Would you say that there are any particular cost savings we should be looking for there? And where in particular are the investments?

The quickly from Sharon, if she can talk about the VSX product and how that is performing and what the plans are in the coming year. Thanks.

Thanks, John. With respect to the SG&A result for 2013, so the leverage of 110 basis points, the Company took some actions at the beginning of 2013 to reduce discretionary spending.

We talked about those things at the beginning of the year. Broad-based effort, third-party expenses and some internal costs. Through the year, we had a focus on managing expenses in a very controlled way and I think across the businesses, did that well.

And then the other driver that I would mention is that there is a meaningful component of SG&A related to performance-based or incentive compensation. And as we did not meet our Company goals this year, those costs were down year on year. It's not the primary driver, but it was a contributor to the SG&A leverage that we realized in 2013.

As we think about 2014, our mindset will continue to be to grow expenses slower than sales. There is slight leverage in our beginning-of-year view of 2014. Collectively, we are working hard again to manage expenses growing slower than sales, with a focus on particularly as it relates to non-customer-facing expenses, as you would expect us to do, John. That is some more color on expenses.

Hi, John. We made the decision that we felt like that we had a great assortment in our sport bra category. We said let's go forward and roll sport bras to all stores, of which we did in October.

We have been very pleased with the performance of the sport bras. As we continue to go forward, we have rolled the full assortment of sport out to more stores. Will we continue to roll out the full assortment? It can penetrate a store anywhere from 10% to 15%.

Our focus was, okay, we are best at bras, let's go dominate that category. We see great repurchase in that sport bra category. We've seen new customers in that sport bra category into Victoria's Secret. So we're feeling very optimistic about that as we go forward.

And further extensions there, Sharon? Opportunity?

Yes there are.

Okay, great. Thanks, guys.

It's just about, as we continue to work on expanding our real estate and our square footage, where we're constrained is within square footage.

Thanks.

Kimberly Greenberger, Morgan Stanley.

Good morning. Stuart, you had been talking post holiday about a re-focus on speed in the supply chain here in 2014. I am wondering if either you or Sharon or Nick could offer some examples of some of the things you're working on this year.

And then, a question specifically for Sharon. In the apparel category, can you reflect back on 2013 and how your go-forward strategy is being informed by the performance both either in licensed apparel and other apparel? And what's the ultimate goal for that category going forward?

Hi, Kim. I will start with speed in the supply base. We have done a lot of work. When I think about that we can order and receive panties in 7 to 15 days. We have done a lot of the low-hanging fruit, as I would call it, from a speed perspective.

Now as we think about all the way up into raw materials and component pieces and how we're thinking about that. Really the mindset for us is to think about that if the factory was in our parking lot, and how would we react to that.

So we are doing a lot of work. And in fact, we are going a quick trip to the Far East soon to be able to continue to work through that. So it's a continuation of an initiative for us as we go forward.

A lot of exciting things which would take longer than this call to go through all of the things that we are working on. But if you have to think about it from when we get an idea all the way to it's delivered in the store and I take it.

When I think about the apparel business, let me break it down. Our PINK business, which is about 45% is the lounge business. It is a strong healthy business and well-recognized. We had a bump in the road as we went into fall season. Just missed a trend.

I believe that we are back on track and we are seeing good results as we go into the spring season. When I think about the apparel business and the direct business, our focus is going to continue in the direct business to focus on the shared categories and continue to diminish the emphasis on that apparel category. And actually probably thinking about and exiting some of that woven category as we go forward.

Hi, Kimberly. A couple of things looking forward. The first one is, we will probably be pushing for further reduction in lead time on our candle business, just because of the strength of our home business, which has been growing at a pretty healthy clip.

I think the second thing is, as I look back at last year and as we mentioned in the opening comments, our seasonal business was extremely good. So we will continue to really utilize the beauty part to make sure that we are maximizing that part of our business, which turned out to be stronger and better than we anticipated as we went into fourth quarter. So that will be really important.

And then overall, I think maximizing as we did last year, that allowed us to finish, we missed our expectations in fourth quarter, but were able to finish the year with fundamentally flat inventory. So we will continue to use that model as a critical component to winning as we go through 2014.

Roxanne Meyer, UBS.

My question is on merchandise margins. I am wondering, Stuart, if you can tell us what your assumption is for the full year embedded in your guidance for merchandise margins?

How do you think about the long-term opportunity for margins, for the merchandise margins specifically, and the progression? And how important is merchandise margin as a driver to get to your high teens or 20% margin goal? Thanks.

Roxanne, thanks. With respect to what is implicit in our guidance for 2014, for the whole Company, we are expecting a slight improvement in the merchandise margin rate for the full year. The amount of buying and occupancy de-leverage is a little bit greater than that, which is how we get to the slight de-leverage on the gross profit or gross margin line. So slight improvement in merch margin for 2014.

As it relates to the longer-term view on merchandise margin rates, Sharon and Nick may want to comment on those. But for the Company getting to 20%, the primary driver as I've talked about previously, is driving sales growth and leveraging expenses over time. There might be some further opportunity in merchandise margin rates, but really the key driver is top-line growth and expense leverage.

Anna Andreeva, Oppenheimer.

Good morning, guys, and thanks for taking my question. A couple of questions, if I may. On international expansion, it looks like compared to what you guys outlined at ICR, the VSBA openings in 2014 are a little bit lower, I think by 25 stores give or take. And you are adding a few more full assortment international stores.

Talk about what is driving the change in thinking there. And what are some of the differences in returns that you guys are seeing between the two formats?

And then to Nick, on Bath & Body, has been choppy lately, and environment, obviously, is promotional. Talk about how should we think about operating margin performance at this division. What are some the categories you see as areas of opportunity in 2014? Thanks so much.

Thanks, Anna. We will start with Martin.

No real change in our philosophy or thinking from when we last updated. I think within the international sector, we see three key engines for growth.

The first is the Victoria's Secret full assortment stores, where we'll open about 15 in the year ahead. Some of those are Company-owned in the UK, as you know. The majority of them are under our franchise partnership in the Middle East, about 15 stores there.

The VSBA business is growing at about the rate that we predicted, 100 or so stores within 2014. Very good economics there. And then the BBW franchises business at about 20 to 30 stores during the year ahead.

I think on balance that's about where we predicted it to be. There are always a few puts and takes based on availability of real estate at any given time. I think you could expect that number, any of those numbers to swing by plus or minus 10%.

Hi, Anna. Looking at operating margin, actually we were up last year 30 BPS, so we're in a pretty healthy place. I think the outlook on that would be flat. And if anything if there is any upside, the thing we would want to be doing would be in a position to reinvest that back into the brand which is a conversation Stuart and I and Les have been having.

In terms of thinking about opportunity as we go forward, I think probably the big opportunity that could impact that and should impact top line as well, is the natural trajectory of our home business, which has been pretty good. So as I mentioned early on, even as we went through a challenging holiday, all three of our core businesses either grew at, or better than, sharp.

And then home was a key player in that. Even as we go into this year, that continues to perform. So I think looking at the margin rate then and the growth, how does that impact both top-line and bottom-line opportunity for us.

Great, thanks, Nick. Thanks, Anna. So guys, we've got about 10 minutes left and we've got a lot of people to get to. If I could ask you one more time just to ask one question, that would be great. Next question please

Matt McClintock, Barclays.

Good morning, everyone. Martin, I was wondering, now that the stores in the United Kingdom have been open for a while, could you share with us any lessons or surprises that you have seen in those specific stores regarding any specific or different merchandise categories. Specifically, as you look to expand that flagship store, what opportunities are you looking to address with that expansion? Thanks.

I will take that. The headline in the UK is we are pleased with the results. I would say, in terms of comparing the merchandise mix, the sales rate in those stores with our businesses in North America, it is substantially similar.

As we always say, what sells here, sells there. What sells there, sells here. That's very good news in terms of simplicity of expanding the organization and the operation.

Specifically on Bond Street, we have terrific sales densities in that store. The opportunity came to get some contiguous real estate which allows us to develop a much better customer experience. And hopefully add some additional categories where we're short on space particularly in areas like beauty, swim, sport and some of the other great categories within VS.

Oliver Chen, Citigroup.

Hey, guys, thanks. On a bigger perspective, you have been such pioneers on speed and test read and react. On the omni-channel side in the direct business, are there opportunities for reserve-in-store programs or greater universalization of inventory? Thank you.

Oliver, this is Sharon, I'll take that. There's always opportunities. We've had a very long history of a direct business. I think, as you know, we opened up our give-her-what-she-wants with return-in-stores.

When I think about all the opportunities that we have and it is something that we have that we are focused on, how it is whether reserve-in-store pick-up, whether it's the mobile opportunity. These are all big things and big nuggets that we are focused on as we go forward. Because we so believe that you have got to give the customer, let her choose how she wants to shop. What tools she wants to. We want to make sure that we continue to provide her that with ease.

Are there any that you would prioritize in terms of nearer term driving the comp?

In omni-channel? I think that right now there's a lot of things that I would prioritize in terms of comp. But from the omni-channel perspective, one of the things that is surprising all of us, is the quick move to the mobile phone.

Not to the iPad, but actually to mobile phone. So much more transactions are being done. And that is one of the biggest things that we are seeing and the opportunity to utilize that across channel.

Thank you. Best regards.

Jennifer Black, Jennifer Black and Associates.

My question is for Sharon. I wondered if you could talk about Logoing at both Victoria's Secret and PINK? How much are you toning it down?

And how do you envision the use of logos a year from now? We do understand that there is an international customer who really wants the logo, so I would love thoughts overall. Thank you so much.

Thanks, Jennifer. It is always a balance. I think that we are still seeing a different kind of logo and technique in PINK that is coming forward.

As I think about Victoria's Secret, cleaning that up a bit, I do believe we are going into a trend where it is more simplistic than the heavily over-logo'd product. I think you will see some changes from us within that as we go forward.

The Victoria's Secret brand and the PINK brand are so highly emotional that there probably always will be a small package of that extreme logo product. So we will just keep reading it and reacting to what the customer wants.

Marni Shapiro, The Retail Tracker.

Hi, guys. Good morning, thanks for taking my call under the wire. Sharon, I'm actually going to stick on Victoria's Secret as well. I know you are trimming down apparel at the direct side. You talked about so many of the different areas within Victoria's Secret and PINK.

Is the store feeling a little over-assorted? Is there an opportunity to edit the Victoria's Secret stores? I know even as you are growing them, this seems counter-intuitive, but to edit them to make them a little easier to shop.

When I think about PINK and the fact that you're trimming apparel at the direct business. Yet when I walk into PINK this spring, I feel like there's more apparel than I'm used to seeing. If you could just talk about those two topics.

Marni, I appreciate the question. I think there is always an opportunity to edit out the peripheral. When we think about really being focused, focused, focused and what's our best at. That is something that we continue to challenge ourselves with. I think that we will continue to be editing out the peripheral.

The difference between the PINK apparel and the direct apparel, the direct apparel is truly, truly street wear. It's shoes, it's denim. What PINK is in is truly the lounge that actually targets that 18-year-old collegiate customer. That is the real focus of that apparel business. That is something that is not going to go away for us. That is something that we're going to continue to focus on.

But at the same time we do that, our penetration is moving higher and higher to the bras and to the panties. So as when we think about that intimate apparel business in PINK, it is that dominance will be bras and panties. And the apparel is the icing and the layer that goes back to that.

Betty Chen, Mizuho Security.

Good morning, everyone. Continuing on that train of thought regarding apparel for Victoria's Secret direct, how quickly can we see the minimization of apparel online? And when do you feel like that's really going to be the big inflection point? Thanks.

I think into fall 2014, into spring 2015.

Great, thank you.

Laura Champine, Canaccord.

Good morning. Could you talk about what your assumptions are looking to that low single-digit comp this year in terms of mall traffic and your own ticket overall?

Sure. We will go to both Sharon and Nick for that.

Basically, what we are looking at is mall traffic being flat. It is interesting over the last couple of weeks, we have been exceeding the mall traffic, but it's from a conservative perspective. We think mall traffic will be flat. In terms of our AURs, are up slightly but not dramatically.

I can't imagine why we would be looking for anything other than flat traffic. We have played with ticket a fair amount. I really think us being focused on conversion right now to maximize that, will be the key focus area for us.

Great, thanks. Let's do a couple more here. Next question.

John Kernan, Cowen.

Hi, guys, thanks for squeezing me in. A quick question for Martin. It sounds like Victoria's Secret in UK is ramping nicely. Have you thought at all about e-commerce in Europe and launching any country-specific websites? Thanks.

Sure, absolutely. Of course we do currently ship from our e-com business to 200 countries around the world. That is something we are actively engaged in.

However, as we've said before, really the best way for Victoria's Secret brand to come to life in a new market is with a built-in environment and the service proposition that goes around that. Yes, we have thought about it. It is just not our highest priority right now.

Blair Pircon, Robert W. Baird.

Good morning. Thank you. Martin, could you talk a little bit more about some of the other regions, specifically reception for the various brands in the Middle East and other places around the world? And how you are feeling about entering China, leading with VSBA and the opportunity there?

Sure, I think when we last updated, we said our priority geographical focus is in three areas of the world. The first is Middle East and Turkey, where we have a very substantial partnership with Alshaya Group. We will be growing that business significantly in the year ahead across all of our format.

The second priority is the UK. Thinking about the opportunity that other forges into Continental Europe in the app here. So really building out our business in the UK.

The third is Southeast Asia where we're seeing great growth in VSBA and in the Bath & Body Works for all that. And La Senza continues to perform well there. And of course that is a lead indicator for China which will be an incredibly significant market for us in the future. We will open our first VSBA stores in mainland China later this year. So, excited about that.

Randy Konik, Jefferies.

Here is a question for Stuart. How do you think about the plans for La Senza, given that you are going to not start reporting pieces of the business. Does it really fit into the key natures of where you guys are trying to take the Company long-term? How do you think about net debt to EBITDAR targets for the Company? Thanks.

Thanks. We will go to Martin, actually, I think, for the La Senza question.

Yes, sure. We absolutely believe in the notion of owning the three best intimate apparel brands in the world. Victoria's Secret, PINK and La Senza are having clear blue water between the positioning of each of those brands.

I think evidenced by La Senza continuing to trade well in Canada and the Middle East where Victoria's Secret has entered in a dominant way, gives us great optimism that we can position those brands differently. And that La Senza can have a relevant place in our enterprise. Our focus is going to be on building better assortments in core categories, zeroing in on the young sexy obvious positioning and improving our store experience overall.

Randy, on leverage, we are not formulaic about it, so we do not manage to a specific number. With that said, leverage as we would look at it on an adjusted basis in the mid 3s feels about right to us.

That is where we have been over the last several years as we have updated regularly and periodically. So in the mid 3s feels about right. Obviously that is a function of the cost debt in relation to the cost of equity. Our maturity profile is good, but in the mid 3s feels about right.

That's great. Thanks, Randy. Thanks, everyone, for joining us today and for your interest in L Brands.

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