LandBridge Co LLC (LB) 2004 Q4 法說會逐字稿

Welcome to the Limited Brands, Incorporated fourth quarter and year-end earnings release conference call. All participants have been placed on a listen-only mode until the question and answer session. Also, today's call is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the call over to Mr. Tom Katzenmeyer, Senior Vice President of Investor, Media and Community Relations. Thank you, sir, you may begin.

Thank you and good morning, everyone. Welcome to the Limited Brands fourth quarter earnings conference call for the period ending Saturday, January 29, 2005. 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 are available on our website, limitedbrands.com. This call is being taped and can be replayed by dialing 1-800-337-6551 followed by the pass code 583. You can also listen to an audio replay from our website.

Here's who's with me this morning -- Len Schlesinger, Vice Chairman and COO; Ann Hailey, EVP and CFO; Grace Nichols, CEO Victoria's Secret stores; Mark Weikel, COO Victoria's Secret stores; Neil Fiske, CEO of Bath & Body Works; Tom Fitzgerald, CFO at Bath & Body Works; Ken Stevens, CEO of Express; Paul Raffin, President of Express; and Amy Preston, Vice President of Investor Relations. Len will open the call and we will follow with a discussion of our financial performance. Then Grace, Neil and Ann will follow with a discussion of our financial performance. And then Grace, Neil and Ken will conclude with overviews of their brands. We will be hosting today's call for one hour. After our prepared comments we will be available to take your questions for as long as time permits. Please limit yourself to one question so that we can speak with as many callers as possible.

As noted in our press release, like many companies in the industry, we are reviewing our accounting for lease transactions. Based on this review we expect to restate our previously filed annual and quarterly financial statements as applicable. All results discussed on this call are preliminary and unaudited and exclude the impact of this review. We believe that the earnings impact in any given period will not be significant and that these adjustments will not affect(ph) historical or future cash flows. Additionally all results that we discuss on this call are adjusted results. We believe that the adjusted information helps in understanding our financial results. A reconciliation of GAAP to adjusted results is included in the press release and is also available from our website. Now I will turn the call over to Len Schlesinger.

Thanks, Tom, and good morning, everyone. Over the last year we've been talking about the numerous things that we've been doing at Limited to prepare the enterprise for growth. On the product side we've been talking about escalating product innovation and this morning you will here our brand leaders discussing our plans for this year for a number of new product launches. We've also been focused on a number of strategic initiatives that will support the future growth of the Company and provide returns to shareholders. And I would like you to take you through some of those this morning. First, the reorganization of the Company that we announced a few weeks ago.

We appointed group president's over our three business segments, apparel, lingerie, and personal care and beauty. Les Wexner will serve as the group president for lingerie, I will serve as the group president for beauty and personal care and we brought Jay Margolis to the organization to be the group president for apparel. Jay, previously the president and COO of Reebok International, brings extensive brand building and apparel capabilities to Limited Brands from his experience at Reebok, Esprit, Tommy Hilfiger and Liz Claiborne. This move allows us to provide dedicated focus to the unique needs of each of our product market groups and to provide -- give significantly more attention to the growth opportunities that are before us. We've also hired Martin Redgrave, previously EVP and CFO of Carlton Companies, to be our EVP and Chief Administrative Officer.

Martin, who will be responsible for the Company's administrative functions, has an impressive track record in the areas of finance, corporate development, enterprise wide business transformations and large scale systems implementations, a number of the activities that we are all currently engaged in at Limited Brands. We are also pleased with the appointment of Deborah Fine, formerly the CEO of Avon Future, as our new CEO of Pink. Deb, who has an extensive background in the fashion, beauty and consumer product industries, will focus on fully developing Pink into a life style brand from its roots in the Victoria's Secret organization. Secondly, we've been working to identify synergies between Victoria's Secret stores and Victoria's Secret Beauty that will enable both businesses to achieve growth goals and leverage the mega brand.

Two days ago we announced internally that we've decided to integrate store operations for the Victoria's Secret brand effective immediately. The integration of the stores and beauty sales forces will improve the customer experience by creating a captivating and single brand store environment and will enhance team work between lingerie and beauty, both enormous growth opportunities. The new store's organization integrates the reporting structures, processes and roles in store management, field management, store operations, store finance and store human resources. Within store operations the move provides stores with integrated and alliance support allowing them to take advantage of salability to achieve resource and process efficiencies. Another big deal 48 hours old. Third, this week we also announced our plans to consolidate our financial systems across the Company and implement the shared services model for accounting support services beginning later next month. This move will enhance our capabilities and will result in significant long-term benefits in terms of efficiencies and decision support.

Fourth, we are continuing to work on the design of our demand chain and merchandise planning and allocation systems which should result in numerous opportunities to increase sales and margin, increase speed to market and customer centric store assortments which are just a few of the examples. You will hear lots more later in the year as this design work wraps up and the business case is completed and our next steps identified. Fifth, we are developing a more robust customer information system with a single fully integrated transaction file and database to drive higher levels of knowledge about our customers and to enable us to improve our marking capability Finally, in terms of growth from new distribution formats, we have decided to accelerate our plans to expand our direct business to personal care and beauty via an expansion of beauty presence through Bath & Body Works and the creation of a BBW e-commerce site as well as the expansion of the Victoria's Secret direct presence in beauty and personal care.

This activity should also accelerate the process of transitioning e-commerce to Express by one to two years. We were also encouraged by customer response to the CO Bigelow and Henri Bendel stores. Both the Bigelow store here at Easton in Columbus and the renovation of the Bendel's Fifth Avenue store in New York and the Bendel store here in Columbus. And we've absolutely committed to expanding both of those concepts in 2005. We are currently in the midst of evaluating real estate location opportunities for growth for both of those brands and expect to announce that within the next 30 to 45 days. In summary, we are optimistic about the opportunities for further growth in the enterprise. In 2005 we are making investments in multiple initiatives that will support this growth and in some cases provide immediate efficiencies and returns. Thanks and now I would like to turn the discussion over to Ann.

Thank you, Len. Good morning, everyone. For the fourth quarter sales increased 3 percent to $3.328 billion compared to 3.231 billion last year. Comps for the quarter were up 2 percent. Gross margin declined 90 basis points to 40.6 percent, primarily driven by a decrease in apparel merchandise margins. The SG&A rate improved by 180 basis points to 19.9 percent, primarily due to a decline in incentive compensation costs and a decrease in marketing expense at the apparel brands. Fourth quarter operating income increased by 7 percent or 47.2 million. The increase was driven by a $34.9 million increase at the Victoria's Secret segment, a $45.1 million increase at Bath & Body Works, and a 27.9 million improvement in the other segment, offset by a 60.7 million decline at the apparel segment.

Fourth quarter earnings per share were $0.95 compared to $0.74 last year, an increase of 28 percent. These results are consistent with our initial earnings guidance. For the year adjusted earnings per share increased 26 percent to $1.40 versus $1.11, driven by strength of Victoria's Secret and Bath & Body Works. Our two tender offers, totaling $3 billion last year, provided $0.12 of accretion in 2004. Regarding our financial position, we ended the year with $1.2 billion in cash. In 2004 we returned $3.8 billion to shareholders through share repurchases and dividends. In 2004 capital expenditures totaled $431 million. Inventories ended the year up 24 percent per square footed cost driven by funding for new product rollout at Bath & Body Works and Victoria's Secret Beauty.

Apparel inventories ended the month flat per square foot at cost. On a cost of goods available for sale per square foot basis, which measures our cash investments and inventory over the quarter, total inventories were up 16 percent in the fourth quarter and apparel inventories were up 3 percent. Turning to our outlook for 2005 for the full year we are projecting earnings growth of 13 to 15 percent versus this year's adjusted $1.40 per share result. Growth in 2005 earnings per share is driven both by growth in operating earnings and by accretion from the 2004 tender offers. Our 2005 estimate is based on a mid single-digit increase in comp store sales, roughly flat gross margins, roughly flat SG&A rates, interest expense of about $23 million per quarter, and weighted average shares outstanding of 415 million.

Turning to the first quarter, we expect flat earnings per share versus last year's $0.13 per share results. The first quarter estimate is based on low single-digit comps, a flat gross margin rate, and an increase in the SG&A rate. Operating income is projected to decrease about 100 basis points on a rate basis driven by a decline at Express and incremental expenses related to the initiatives that Len mentioned earlier. February, which is the smallest month of the year, we expect to be slightly negative on a comp basis versus our initial high single-digit positive expectation. As is always the case our first quarter earnings per share guidance depends heavily upon our March and April product launches. These include the Ipex bra at Victoria's Secret, the Bigelow Les Couvent des Minimes at Bath & Body Works, and also the Daily Beauty Ritual's launches and refreshes at Bath & Body Works. You'll hear more about these plans in a few minutes from Grace and Neil.

Our first quarter comp guidance reflects a low single-digit comp in March and high single-digit comp in April. The higher April expectation is driven by the end of quarter clearance sales in our apparel brands. Turning to the balance sheet, we expect that total inventories on a cost of goods available for sale basis for the first quarter will be up low double-digits and apparel inventories will be roughly flat. The increase in overall inventory relates to new product introductions at Victoria's Secret Beauty and at Bath & Body Works. We recently announced a 25 percent increase in our quarterly dividends to $0.15 per share. And today we announced the authorization for a $100 million share repurchase program. We estimate 2005 capital expenditures at approximately $600 million.

The increase in spending versus last year is primarily driven by investments in the growth initiatives that Len spoke about, including conversion to new financial systems, the initiation of a shared service center, development of demand chain merchandise planning and allocation and customer relationship marketing systems, and upgrading and expanding our infrastructure to support our existing as well as our future direct to consumer businesses. In addition, some of the increase in funding is related to refreshing our current aircraft fleet with more efficient planes. A significant portion of the cost of these new aircraft will be funded through the sales of existing aircraft concurrent with the delivery of the new planes. Before I turn the discussion over to Grace, I would like to make a few comments on the Victoria's Secret segment results from the fourth quarter. Victoria's Secret segment, which includes lingerie, beauty and direct, had a good fourth quarter performance. Sales increased by 8 percent and operating income increase by 10 percent to 374.8 million.

Victoria's Secret direct sales increased 11 percent and operating income increased significantly driven by strength in all merchandise categories. A distortion to capture last minute shoppers through increased circulation in the last few weeks before Christmas and the available of gift cards this year contributed to strong holiday growth. I will now turn it over Grace to talk about Victoria's Secret stores.

Good morning. For the fourth quarter Victoria's Secret stores, including beauty, had a 5 percent increase in comps and a high single-digit increase in operating income. Gross margin performance was up to last year as a result of a solid fashion performance in the quarter. We were pleased with the customer response to the holiday fashion offering particularly in sleepwear and in Pink. Remember, bras and panties softened in the December period. However, they did improve during January. January, including the semi-annual sale, was successful on top of high comp performance last year. It was driven by regular price selling in bras and panties as well as strong sell-throughs on our seasonal fashion clearance.

The beauty assortment offered our newest prestige fragrance, Basic Instinct, and expansion into the hair care category. This additional offering was a success for the holiday selling period. Focusing on spring activities, I'm very excited to announce the March 1st launch of the patent pending Body by Victoria Ipex bra. This is the world's most advanced bras. Two years in development, Ipex is the remarkable achievement of an international collaboration of designers, engineers and technicians using the latest digital and laser technology and a proprietary manufacturing process. We have created a bra that is virtually weightless at the edges and provides coverage at the center where you need it.

In April we will also introduce Ipex styles into the Angel sub-brand. The Body by Victoria Ipex bras will be supported by an intensive media campaign with both TV and print advertising. We continue to see growth in beauty. As Len described earlier, the integration of the stores and beauty sales force is the next step in the growth of the beauty business. We are excited about the beauty integration and view this as an important growth lever in our business. Thanks and now I will turn things over to Neil.

Thank you, Grace, and good morning, everyone. Bath & Body Works comps increased 12 percent in the fourth quarter, our seventh consecutive quarter of positive comps, and operating income increased by 16 percent or 120 basis points to $327 million. Operating income for the year was $417 million, an increase of 62.4 million or 18 percent to last year. We are pleased with our performance in 2004 as we crossed the $2 billion mark in revenue and exceeded our profitability goals. In holiday we achieved our goal of expanding our holiday assortment from gift sets to multiple layers of gifting. These additional layers of gifting included a successful purchase with purchase program, the perfect Christmas collection, and a strong assortment of seasonal personal care.

Throughout the year we continued our progress on the transformation of the brand marked by several major product launches including Tutti Dolci, Henri Bendel home and personal care lines, the perfect autumn, hydro therapy, and we tested Lucabau Diminen(ph) in 250 stores. Finally, we continued to expand our successful and profitable semi-annual sale. The January sale which was extended for one week longer than last year resulted in plus 30 percent comps in January against plus 33 percent last year. Turning to spring 2005, we have significant product line introductions planned for the first and second quarters. First, on February 16th we officially introduced our new CO Bigelow line. We are very excited about these products which utilize natural apothecary ingredients that deliver therapeutic solutions for every day problems. Established in 1838 in New York's Greenwich Village, CO Bigelow is the oldest apothecary in America and has served some of our country's most prominent personalities.

Our alliance with CO Bigelow provides authority to Bath & Body Works' new brand position to become the modern apothecary of beauty and well being. April will feature the national introduction of Lucabau Diminen, the province based line of face, body and home products developed in partnership with Loxitane. Additionally, throughout the season we will introduce new frangrancies in our Daily Beauty Ritual's line. In March our spring theme will feature Cherry Blossom. Then at Mother's Day we will introduce two more fragrances. Just like last year our profit plan for spring is weighted to the second quarter as we support new product introductions at the beginning of the season. With that I will turn the discussion over to Ken.

Thanks, Neil. Fourth quarter financial performance was disappointing and well below our expectations. A significant decline in operating income was driven by negative 17 percent comps and a higher markdown rate year-over-year. Continuing the progress made in third quarter, stores and home office controllable expenses in the fourth quarter were down to last year and leveraged on lower sales as a direct result of efficiency initiatives that we began implementing in October. Progress in growth in Wear to Work, particularly pants, was more than offset by declines on the casual side of the business. In hindsight, we went too conservative in our tops focus, maybe a bit weekend preppy, versus the more feminine fashion forward tops our customers seemed to prefer from our brand.

In addition, our stores did not appear to have been put together with one eye. Wear to Work tended to look very different from the casual areas. We are addressing this issue by consolidating and integrating Wear to Work and Casual under a single design team. We have reworked our spring '05 collection as well as the balance of '05 with an eye to getting back our younger focus. We have also re-thought our overall selling strategy. Originally our strategy called for a sustainable basics in both pants and tops. We have since modified this strategy to couple a strong stable pants business that engenders customer loyalty with a faster turning, fashion forward tops business.

While the revised top strategy won't be fully implemented until fall '05, you'll see evidence of it this spring beginning with the return to younger, sexier, bearer women's tops. Within pants, we just launched a second fit in women's called the Correspondent, designed in response to customer feedback. We know that 70 percent of our customers who have tried on the Editor pant find it to be too straight through the waist and hip. The correspondent was developed expressly with this curvier customer in mind. In terms of real estate, our dual gender stores continue to outperform standalone single gender stores proving to be a successful model for the future of Express brand.

Stores opened through the end of December '04 have seen productivity gains of roughly 30 percent relative to their preconversion levels. As the penetration of dual gender stores reaches critical mass this year we expect the impact of conversions to become more evident in total Company results. We ended the year with 193 dual gender stores and we plan to convert or open another 52 stores in 2005. By the end of 2007 nearly 55 percent of our fleet will be in a dual gender format. Thanks and now I will turn the discussion back over to Tom.

Thanks, Ken. Before we take your questions I would like to make a few comments about Limited stores. Fourth quarter results at Limited stores were below expectations, comps for the quarter were down 5 percent and operating income was down for last year. A strong performance in pants was more than offset by disappointments in the sweater category. That concludes our prepared comments. At this time we would be happy to take any questions you might have and again as a friendly reminder I'd like to say we would like one question per person so we can get to as many people as possible. With that I would like to turn it back over to the operator.

[Operator Instructions]. Our first question comes from Barbara Wycoff. You may ask your question and please state your company name.

Hi, Barbara Wycoff, Buckingham Research Group. A good job, everyone. Grace, I guess a question for you is you've done such a super job building Victoria's Secret lingerie. Can you talk about potential opportunity to service a little more mature customer, Pinks mother or big sister, across, I guess, product categories.

Barbara, thanks. We will go both to Grace and Mark for that question. Grace, you want to go first?

Good morning, Barbara. Yes, we are very pleased with the success that we've had with our mid 20s customer and the introduction of Pink to bring in an even younger customer into the brand. I think one of the things that's most important for us is really the aspirational nature of the brand. And as such, we believe that we do have the ability to bring down into the brand this customer that you're describing as they aspire to have a sexy, sophisticated and more forever young approach to the lingerie business.

Thanks, Mark. Operator, Wendy, back to you.

Thank you. Our next question comes from Mark Friedman. You may ask your question and please state your company name.

Merrill Lynch. Good morning, everybody. I was wondering if you could comment a little bit further about real estate? Len, you talked about Bigelow's and Henri Bendel expanding some of those concepts in '05. It also alluded to about the dual gender. So if you could just give a little more clarity by division of what real estate plans are? Thank you.

Mark, thanks. I think we are going to go to Ann Hailey for the real estate update for '05.

Well, first with growth aspects that Len talked about and we are, as you know, testing a Bigelow store at Easton, we are testing a Bendel's concept , much smaller than the store in New York City, at Easton. We are revamping the New York City store as the Bendel flagship. And we have Pink in the Victoria's Secret store but don't yet have a standalone concept for now. Right now we are evaluating those results and evaluating real estate opportunities that might be consistent with a larger test of those stores rolling out some time in '05. That's about all I can tell you on that specific initiative.

I would expect on next call or the call after that us to have more specific things to talk about in terms of number of stores and timing and exactly what we're going to do. With respect to the remainder of our brands we are going to open about 45 stores during the year roughly equally between Victoria's Secret stores, Bath & Body Works and Express dual gender. We will close about 191 stores and we will remodel about 142 more. So overall that nets out to a change in square footage of about down 3 percent with Victoria's Secret being the brand that will grow low single-digits, Bath & Body Works roughly flat and the impact of the conversion of the Express stores into dual gender and a few closings at Limited will mean double-digit teen decline in square footage in those apparel brands.

Thanks, Ann. Operator, we're ready for the next question.

Thank you. Kimberly Greenberger, you may ask your question and please state your company name.

Thank you, good morning. Smith Barney. This question is on Bath & Body Works. Bath & Body clearly had a spectacular '04 with double-digit comps for the year and double-digit revenue growth. We saw about 90 basis points of operating margin lift on those sales numbers and I'm wondering if that's an indication that we are getting to a more stable operating margin for Bath & Body Works or do you think there is further opportunity to improve that margin from here?

Kimberly, thanks. We will go to Tom Fitzgerald, the CFO of Bath & Body Works for that response.

Yes, Kimberly, overall we believe operating margins at Bath & Body Works will increase modestly as we target solid double-digit annual profit growth. We believe with sustainable positive comps sales productivity will improve and we will achieve better leverage on our fixed buying, occupancy and SG&A costs. And also allow us to invest back into the brand to accelerate the top-line.

But does that imply a merchandise margin that's probably where it's likely to be for the long-term?

Sorry, I couldn't hear the first part of your question.

Does that imply merchandise margin will roughly be flattish going forward?

Roughly.

Okay, thank you.

Thanks, Kimberly.

Thank you. Richard Jaffe, you may ask your question and please state your company name.

Thanks very much, at Legg Mason. If you could talk about the inventory build up you are planning for the first quarter and for the balance of the year and be more specific in terms of product investments at Bath & Body Works, whether it's the additional premium brands or the essentially private label Bigelow. And on the Victoria's Secret beauty side, Pink versus the Ipex and new bra launches.

Thanks, Richard. We will go to Ann Hailey for that, for the overview of that question. I think the outlook -- we gave the outlook for the first quarter of inventory in my prepared remarks earlier which was significant growth at Bath & Body Works and Victoria's Secret and flattish to slightly up at the apparel brands. You have actually, obviously, picked up on some of the factors that are driving that. It is -- it is primarily at Bath & Body Works, the new product launches. Bigelow is one of the big ones. There'll be some buildup for the launch of the Daily Beauty Ritual spring fragrance. There is some third party investment but it's smaller because it's in a much smaller number of stores, only in the flagships. At Victoria's Secret we are funding launch bras. We are funding the Pink collection. So, those are the new things in those brands.

At Victoria's Secret Beauty there is some funding for a hair launch. Our science is now in the bulk of those beauty stores and there is a new fragrance launched, Basic Instinct, and another one planned for the spring. So there's some build up for that inventory. Going forward for the full year, which I think was another part of your question, I think you can expect to see some moderation in those trends at Bath & Body Works in terms of the increases as we start to get experience with some of our third party and some of our older brands and start to wean out some of that inventory. And I expect that we will see some growth toward the latter part of the year in the apparel businesses. We have squeezed them pretty hard over the last year or so. And as they improve their ability to identify and chase winners, I would -- we want to fund that and I expect that we will.

Thank you very much.

Next question.

Thank you. Dana Cohen, you may ask your question and please state your company name.

Hi, guys, Dana Cohen of B of A. Just going back, for the full year what should we think about as the leverage point for BBW. And then, Ann, could you go back on the SG&A? Because it was down 70 some odd million versus expectations of which 30 or 40 was in corporate. What were the chunks of it? I mean it's hard to imagine that's just incentive comp.

We will go to the folks at Bath & Body Works, first, Dana. I believe you're referring to 2005, the leverage?

The leverage point for BBW is the '05 question.

Okay, thank you.

Yes, Dana. We believe, as I said before, that, as Ann said, our real estate growth is pretty modest. In fact, it's flat. We have some remodel work that we are doing. And that our -- with our comp expectations we will be able to leverage literally all of the lines including B&O, SG&A. So that's really the sort of a point to leverage, then. We leverage at sort of mid single-digit comps.

Great, thank you.

Thanks, Tom. Now we will go back to Ann for the SG&A follow-up.

What happened in the fourth quarter is that we were -- it's a variety of things. The incentive comp is obviously a piece of it and I mentioned that. But we also had a decrease in marketing expenses which was a significant contributor as we continued as we have been in the past to reduce the spending at the apparel brands primarily around POS, in store marketing, and CRM programs at Express. We also had some home office favorability. We have talked from time to time about the efforts at BBW, Limited Brands and Express in terms of looking at the whole home office structure and making changes and those benefits are starting to flow through. We are lapping some legal accruals that we made last year. And also, very importantly, on the SG&A front we were able, as our sales didn't materialize as we had hoped at the holiday, to do a better job than we had done in some seasons of actually pulling back the store selling expenses to -- so we weren't over spending to support the level of sales that we actually got. There were a whole bunch of factors that enable us to deliver more favorability than we had originally determined.

Just on the marketing expense pull back. Was that done throughout the quarter as sales didn't materialize? Did you spend less than you originally thought?

Yes, pretty much. Okay, great. Thank you.

Thanks, Dana.

Thank you. Paul Lejuez, you may ask your question and please state your company name.

Thanks, Credit Suisse First Boston. Although it's early I'm just wondering if there are any initial reads on the CO Bigelow launch that you might be able to share with us? And, also, how you think about training the sales force on that product given that it is a bit more high tech than some of your normal launches. Thanks.

We will go to Neil Fisk for that response.

So far so good on the Bigelow launch. We are very pleased with its introduction and the selling rate to date. Obviously it's early in the theme. But the feedback from both our associates and the customer has been tremendous. And one of the key points that has been played back to us qualitatively is that more than any other product line that we've introduced, this product line really starts to change the face of Bath & Body Works to be credible, authentic, real and on the path to becoming a modern apothecary of beauty and well-being. And the feedback from the field has been terrific on that. So we are very pleased. With regard to the training model, we actually did in fact change the way that we approached training for this line. Both for the introduction of CO Bigelow during its theme but also the way that we sustained training over the spring season. And we created several new training techniques, invested substantially more in the training of the associates than we ever have before, any comparable launch, and have mapped out a plan really to continue that training impulsive over the course of the spring season. And again the feedback from the associates on the effectiveness of that training and being able to tell the Bigelow story, sell the key items, link sell, cross-sell, has been exceptional.

Thank you.

Great. Next question, please.

Thank you. John Morris, you may ask your question and please state your company name.

Thanks, it's Harris Nesbitt. Sort of a two-part question, I guess, I am going to squeeze in if I can. One is the change in heart on the outlook for February? Maybe if you can give us a little bit more color since it is kind of a fairly large magnitude of an adjustment, although clearly the quarter overall looks fairly intact as does the year. But, Len, I think also, if you could -- you did a pretty good job in the overview of giving us your five or six initiatives listed and maybe if you can give us a little bit more color, specifically with respect to -- it sounds like the potential for really two factors. One is maybe some cost savings with respect to some of the realignments that you are talking about. But also what it is that the customer will see differently as a result, or what we will see in the stores differently as a result of some of these initiatives. Thanks.

John, thanks,. We're first going to go to Len for that part of the question and then we will recircle to Ann for further February commentary.

Let me start by focusing on the Victoria's Secret Beauty, Victoria's Secret stores integration at the point of customer contact. One of the things that we've known over the past several years has been despite the rather remarkable growth of our beauty business, when we really looked at the customer and the customer experience at the point of contact, and we looked at transactions, we discovered that in the business as a whole roughly one-third of the Victoria's Secret lingerie customers had ever -- had ever tested Beauty product. And we believe that part of that is merchandising but the other part of it is very much the way in which we run our stores. Two different sales forces, two different management organizations.

Idiosyncratic and discrete locations for beauty product, vis-a-vis lingerie product. A general inability because of the organizational structure to cross-sell with ease. So what we've done essentially is remove all of those barriers to a customer centric solution. And in this respect it's very much consistent with the kinds of strategies we are trying to pursue in the mega brand as a whole. Organizing around the customer means that the customer should be able to find beauty product throughout the store. Organizing for the customer means that while there'll also be beauty product expertise and lingerie expertise in the store, there will be substantially more cross-selling opportunities. And it also means at the end of the day that we will be able to avail ourselves of being able to -- be able to integrate product categories around sematic launches. So for example, we have a Pink fragrance and we also have a Pink product line. Now those were designed and introduced at different times.

But at the end of the day the customer is forced, off her own volition and her own effort, to be able to track the Pink beauty fragrance in a different environment of the store and with all of her energies going into it without the store helping that process. We expect all of those things will become substantially easier. We also expect at the end of the day that this is situated structurally to the make sure that both the beauty businesses and the lingerie businesses are getting credit for the selling of product. And, again, taking away the traditional inhibitors of a P&L structure that provided incentives for one side or the other to sub optimize at the point of the customer. This is all about the customer. It's all about providing opportunities and it is all about dramatically increasing the percentage of our customer base that's buying both beauty and lingerie product.

Thanks Len. We will go to Ann now for additional February commentary.

John, I think you put it right when you said that February is the smallest month of the quarter. The primary reason for our comps being a little softer than we had hoped is the Express business and it will probably take another -- a few months while they are re-assorting and redoing their business to start to get momentum back in that business. A timing piece of it was that holiday at VS -- the Victoria's Secret holiday for Valentine's Day was a little softer than we had anticipated and as it was at BBW. But the primary driver was Express.

Thanks. Next question.

Thank you. Dana Telsey, you may ask your question and please state your company name.

Good morning, Bear Stearns. Can you talk a little bit about the milestones that we should be watching for on apparel and how you want the business to be assorted, maybe denim, casual and Wear to Work? And as you look across the enterprise how are you looking at pricing IMUs? Is there more opportunity for margins in any of the other businesses? Thank you.

Dana, first we will go to the Express part of your question. We'll go to Paul Raffin.

Well, clearly we are re-examining the balance within the brand as far as the Wear to Work strategy versus casual jeans wear. As Ken had mentioned, within the Wear to Work strategy we were very successful at selling pants. Our Editor pant program has to date sold 5.5 million units in just an 18 month period and has exhibited some terrific price elasticity where we have successful gotten our customer to trade up. The balance of the Wear to Work offering, however, was too missy. And what we've discovered in speaking to our customers that she wants to look credible, professional in the work place but young because she is, again , a 24 years old edit point. Conversely, on the casual jeans wear side of the assortment, we didn't provide her with young, sexy glamorous fashion that she's always come do expect from Express.

And the double whammy was we passed along price increases that clearly our customer was not prepared for. So, we are in the process of rebalancing that brand positioning strategy and a key event will occur in July of this year when we launch X 2, which is a new denim sub brand within the Express mix, really aimed at recapturing a customer who wants to buy denim and jeans wear from our Company but clearly we did not provide the kind of offering that compelled her in the past. Thanks, Paul. We will go to Ann for the IMU question.

Dana, I am going to kind of combine the -- couple things you said in the two questions. One in terms of, I think, the milestones that you always need to look for in terms of health of our businesses is transactions. If we don't have transactions growing, if we don't have more customers coming in the store and buying more of our products then that's always a sign to me that we don't -- we need to be very careful because we may have an issue. So I don't -- I would say that there are small pockets of opportunities in some of our brands to look at the margins. But overall, what we need as an enterprise to do is to drive productivity, to drive top-line, to drive transactions by having attractively priced products that captivate our customers, get them in the store, and get them to say I'll take it home. So we are not trying to build a margin -- and you will note in our guidance, our margin -- our margin growth is typically -- our margin guidance is typically for relatively flat margin and to grow the top-line by utilizing that strategy to drive profitability.

Thank you.

Thanks, Dana. Next question, please?

Thank you. Todd Slater, you may ask your question and please state your company name.

Thank you, Lazard. Jay, are you there in the background?

Jay is not here, Todd.

He's not there. All right, maybe Paul, if you could just expand a little bit -- I'm just wondering on Express if you could sort of talk about where Express is now and where you see it sort of in '05 and going forward. Where it needs to go in terms of target age demographic, target income demographic, the appropriate mix of career structured versus casual and active. How you see tweaking that. And also just talk a little bit about the promotional cadence, if you expect any evolution in that strategy? Thanks.

Okay, Todd. Clearly the spring assortment was assembled and bought largely prior to our witnessing the extremely disappointing fall results. Upon seeing the trend we shifted into high gear, as Ken had mentioned, and radically changed a large piece of that assortment. Most of those changes flowing into our stores starting in the March/April period and straight through the second quarter. We clearly feel as though a differentiating characteristic for the Express brand is to service several wearing occasions for a 20 to 30 year old target audience both men and women. And our intent is to headquarter within our box a Wear to Work zone that provides essential pieces, obviously, on the foundation of the pant business, that are young but that do allow our customer to purchase high quality Wear to Work apparel at reasonable price points that they can come to expect season after season.

In fact, right now our men's business is exhibiting a very strong trend in starting to solidify that strategy and our customer response has been, quite frankly, stronger than our current women's response has been. As we moved into the fall season and this fix that we are establishing in spring begins to emerge into a much more balanced strategy, we will have roughly 35 percent of our assortment in what we would term Wear to Work, probably another third in a -- this X 2 jeans wear sub segment and another third in sportswear. We take a look at aspirational boutiques that offer this young customer a mix within her wardrobe or his wardrobe and we think that that's a very modern way of thinking about our customer. As far as price points, we had a -- basically our price pyramid became a diamond.

We began to migrate some of our good price points into better and best and clearly we are going back and rebalancing the assortment so that we are always going to offer our customer great fashion at great prices. Coupled with that, Ken and I are taking a look at much more aggressive promotional campaigns, actually starting next month, and we will selectively go back and use these techniques and tactics aimed at driving traffic and transactions, as Ann mentioned, that is the life blood of the brand. And we need to get back the customers who, frankly, we may have alienated with a strategy that just didn't work in fall. Paul, thank you very much. We are right at about 9 o'clock so let's take one more quick question.

Thank you. Our final question comes from Stacy Pak. You may ask your question and please state your company name.

Thanks. Just on the SG&A I was hoping perhaps, Ann, you could give us dollar guidance for '05 overall with some help by quarter. And quantify some of the costs associated with your new initiatives and the benefits, like especially that VS store combination. And comment particularly on this last question on thoughts about apparel marketing spend in '05.

There's a lot going on in SG&A. That is the call with a lot of questions.

It's one SG&A question, though. You can just give us the quarterly number and we will be fine.

Not this morning, Stacy.

Well, the guidance that we gave on SG&A was -- in the first quarter is -- there's about 100 -- what I said is there's about 100 basis points deterioration in operating margin in the first quarter and that's all driven by SG&A. So that's roughly $45 million and it's split pretty much evenly between selling costs and the initiatives to support growth. So that kind of gives you a feel about the first quarter. And the -- it is a little front-end loaded because our guidance for the full year is roughly flat, it's actually up a little bit, you know, a few tenths of basis points as a percent of sales. And it's driven kind of by the same factors. It's -- it's the primarily the investment that we are making in growth initiatives.

So, turning more specifically to those we have for the year split roughly evenly in terms of expenses. We have some investment in finance and customer marketing systems. We are going to replace our financial systems. Starting in August of this year we will start converting the first wave. The much needed change to one system implemented the same way throughout the enterprise in a shared services system. There are benefits associated with that that kick in in a small way in '05 and then in -- more heavily in '06 and beyond and there is an economic return to that case. There is an investment in kind of a new backbone for our enterprise for systems overall. That is pretty much offset so it's not driving an increase, pretty much offset by reduction in supporting the hodge-podge of existing systems that we have. There is an investment in understanding how we want to expand to support the growth in Victoria's Secret Direct and then to expand the direct business to all our brands. That obviously will have significant benefits.

We need to do the work, so there's an investment in doing the work so we can quantify what that expansion plan looks like and what the business case is. And then we know that there are significant benefits available in our whole demand chain. And there is an investment in the year that over time, not in '05, but in '06 and beyond, should result in very significant benefits from simple things like -- that a lot of -- that companies are doing right now, like a reduction in out of stocks, assortment that is tailored to the size and socio-demographics of our given stores and Len referenced some of those in his opening comments. So there are investments in all of those things in the quarter and in the year.

Ann, thank you very much. That concludes our call this morning. I would like to thank everyone for listening in.

Thank you. That concludes today's conference call. Thank you for your participation. You may disconnect at this time.