LandBridge Co LLC (LB) 2006 Q1 法說會逐字稿

Welcome to the Limited Brands Incorporated first-quarter earnings release conference call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) Today's conference is being recorded; if you have any objections you may disconnect at this time. Now I will turn the meeting over to Mr. Tom Katzenmeyer, Senior Vice President of Investor, Media, and Community Relations. Sir, you may begin.

Thank you and good morning, everyone. Welcome to the Limited Brands first-quarter earnings conference call for the period ending Saturday, April 29, 2006. As always, 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 first-quarter earnings release and related financial information are available on our website, limitedbrands.com. We have had positive feedback on releasing our results the afternoon before the call, after the close; and it's a practice we plan to continue. So hopefully you all found that helpful last night.

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.

There are many folks who have joined me today, so I just want to tell you who is on the call. Len Schlesinger, Vice Chairman and Chief Operating Officer; Martyn Redgrave, EVP and CAO; Grace Nichols, CEO of Victoria's Secret Stores, and Mark Weikel, COO, Victoria's Secret Stores; Neil Fiske, CEO of Bath & Body Works, and Tom Fitzgerald, COO, Bath & Body Works; Ken Stevens, CEO, Express; Paul Raffin, President, Express; Jay Margolis, Group President, Apparel; and Amie Preston, Vice President of Investor Relations, are all with me here this morning.

So after our prepared comments, we will be available to take your questions until about 10 AM. So that we can speak with as many callers as possible it's important that you limit yourself to one question. I will remind you about that again later. Now we will turn the call over to Martyn Redgrave.

Thanks, Tom, and good morning, everyone. Obviously, we're very pleased with our first-quarter results. Earnings per share increased 56% to $0.25 per share, $0.09 above our initial expectations. The upside in the quarter was primarily driven by strong results in Victoria's Secret and apparel. Additionally, spending on various initiatives that we had initially budgeted for the first quarter were pushed back into the second quarter and the remainder of the year; and I will discuss that a little bit further later in my remarks.

Comps increased 5% and total sales also increased 5% to $2.077 billion. The gross margin also increased by 330 basis points to 38%, and that was primarily driven by an improvement in merchandise margin at Express; but we also leveraged our buying and occupancy costs.

Total SG&A dollar spending increased by 6%, deleveraging by 30 basis points. That incremental spending was primarily driven by the following. First, an increase in incentive compensation expense driven by the improved performance. Second, an increase in store payroll costs, which were leveraged as a percentage of sales. Third, we made incremental investments in technology and infrastructure. Fourth, we had an increase in marketing expenses, primarily at Victoria's Secret to support the new product launches. Finally, we recognized incremental stock option expense related to our adoption of FAS 123(R).

First-quarter operating income increased by $67.4 million. By segment, the results were -- Victoria's Secret operating income increased by $38.4 million; Bath & Body Works decreased by $1.6 million; apparel results increased by $46.1 million; and the other segment net expense increased by $15.4 million.

Inventories ended the quarter up 3% per square foot at cost. Apparel inventories ended the quarter down 16% per square foot at cost.

During the quarter, we repurchased approximately 3.5 million shares at a cost of $84 million. This included the completion of our $200 million program that began in November of 2005, and the repurchases under our current $100 million program that began in February of this year. We have approximately $58 million remaining under the current program.

Now turning to our outlook for the second quarter, in the second quarter we're projecting earnings per share of $0.22 to $0.24 versus $0.20 per share last year. This estimate is predicated on low to mid single digit comps, an increase in the gross margin rate, and an increase in the SG&A rate. It also includes an estimated cost of one penny per share for stock option expense.

As I mentioned earlier, we're planning for incremental spending on key initiatives in the remaining quarters of the year. In the second quarter specifically, we expect total SG&A dollar growth of 7% and 9% versus last year. This increase will be driven principally by investment spending on new systems and process management capabilities to support all of our businesses, and new distribution center capacity to support the substantial growth at Victoria's Secret Direct. We expect that inventories in the second quarter, on a cost of goods available for sale basis, will be up mid single digits versus last year.

For the full year of 2006, we're projecting earnings per share of between $1.50 and $1.60 per share. Excluding the estimated 2006 stock option expense of $0.04 per share and the 2005 significant items of $0.29 per share, which are detailed in our press release, this projection represents a 16% to 23% earnings growth over 2005.

This estimate is predicated on low to mid single digit comps, an increase in the gross margin rate, and an increase in the SG&A rate. It also includes an estimated cost of $0.04 per share for stock option expense.

We continue to estimate that 2006 capital expenditures will be about 600 to $650 million versus 2005 expenditures of $480 million. Roughly $100 million of that increase relates to investments to support the growth of our Direct business, including new technology capabilities and a new distribution center. With that I will now turn it over to Grace.

Thanks, Martyn, and good morning, everyone. Victoria's Secret Stores' first-quarter results including Beauty exceeded expectations. Comps increased 8% and operating income increased as well. Sales growth in the quarter was achieved in all categories including bras, panties, sleepwear, and Beauty.

In our core lingerie business, growth in bras was driven by three successful launches including the Angel's Secret Embrace, the Body by Victoria IPEX wireless, and the Very Sexy Infinity Edge pushup. All of our bra launches have been supported by national media and strong customer relationship marketing campaigns that drove incremental traffic to the total store.

PINK had a very strong quarter, driven by a strong response to the sleepwear assortment and strength in the panty category. Plus, we rolled an expanded PINK assortment to an additional 50 stores for a total of 93 stores at the end of the quarter.

In addition, we're pleased with our results in Intimissimi during the quarter. The customer has responded favorably to the weekly flow of fashion and to the assortment breadth. Now for the balance of the spring season, we will remain focused on our Best-at-Bra strategy with continued new style introductions. On Tuesday of this week, we launched our newest category, Sexy Sport, supported by print media and a sampling campaign. The Sexy Sport category focuses on a range of sport bras and other related items.

The semiannual sale event will run in the second quarter, and it will be the same length and timing as last year and will be supported by national media. Thanks and now I will turn things over to Len for some comments on Victoria's Secret Beauty and Direct.

Thanks, Grace. Victoria's Secret Beauty's results also exceeded expectations during the quarter, mainly driven by the successful launch of three new subbrands -- Beauty Rush lip gloss and eye shadow; Bare Bronze color and body care; and Pure Paradise, a seasonal body care line.

We also successfully launched Very Sexy Now, a seasonal scent that is an extension of our successful Very Sexy subbrand, and continue to see growth in our Garden body care line. Mother's Day featured the restage of our top-selling Dream Angels fragrance subbrand with romantic new packaging. This week we launched the new Body by Victoria daily body care line, supported with substantial in-store sampling.

Victoria's Secret Direct had another tremendous performance. Sales increased 10% and operating income increased significantly. Performance was above our expectations, driven by strength in intimate apparel and sleepwear. Beauty also achieved especially strong sales growth over last year, as we continue to invest and grow this category. Thanks so much, and now I will turn it over to Neil.

Thank you, Len, and good morning, everyone. Bath & Body Works comps increased 4% in the first quarter and operating income declined by $1.6 million or 90 basis points. The operating income decline was primarily driven by a decline in merchandise margin, which was substantially but not completely offset by leverage in buying and occupancy and SG&A costs.

The decline in the merchandise margin rate was driven by increased promotional activity, increased freight costs, and merchandise mix. We were able to tightly manage expenses in the quarter, partially offsetting the impact of the decline in the merchandise margin rate. We are taking additional steps to improve our sales trends by making clear statements at the front of the store, with stronger calls to action and stronger emphasis on the newness and the assortment. Additionally, we have begun to test reduced assortments to make the store easier to navigate and shop for our customer.

Shifting to the assortment, results for the quarter reflect our customers' continued affinity for our traditional product lines, as well as strong interest in our new subbrands. The signature collection has stabilized as a percentage of the business due to increased frequency of fragrance introduction and more sophisticated fragrances and packaging, like our very successful Japanese Cherry Blossom line. These activities will continue going forward. The Dr. Wexler line has been a strong performer within the brand, beating its initial plan both in stores and in the Direct channels like QVC and the infomercial test. We're planning additional line extensions to round out the assortment and leverage the strong customer affinity to this subbrand.

We also saw continued strength of the C.O. Bigelow product line, while expanding the product assortment. We have seen solid performance in the daily use products, indicating strong growth potential for this subbrand.

Also in the quarter was the launch of the first Bath & Body Works catalog. We view the catalog as a valuable marketing and education vehicle to familiarize our customer with our brands and their benefits. Initial response has affirmed our optimism about the power and the growth potential of becoming a true multichannel retailer. We are taking the learnings from this first foray into the catalog channel and applying it to our second catalog in the fall.

Currently, stores are focused on our Beach Beauty theme, featuring the relaunch of our True Blue Spa line and the introduction of Temptations, a new collection of tropical skincare pampering treats.

Beginning the first week of June we launch our semiannual sale, which like last year is planned to run for five weeks. Wrapping up the season is our post semiannual sale theme featuring the launch of our signature collection hair care line as well as new fragrances in both the signature collection and Breathe. With that I will turn the discussion over to Ken.

Thanks, Neil. Good morning, everyone. Express's first-quarter results exceeded our expectations. Comps were up 4% and operating income increased significantly to last year, primarily as a result of improvement in merchandise margin. Both the women's and men's businesses achieved positive comps in the quarter. This was driven by transaction increases of over 20%, more than offsetting our average unit retail decline.

Growth was realized in several categories including women's knit tops and bottoms, shorts, jackets, and dresses; while the growth in men's was realized in knit tops, jackets, and outerwear.

A number of factors contributed to our improved margin performance. First and foremost, we are seeing positive reaction to our assortment changes, resulting in better sellthrough at regular prices. Second, better product sourcing is driving lower average unit cost. Lastly, from a marketing perspective, we planned and executed a much quieter quarter clearance sale. We discounted fewer items, and our markdowns were not as deep as in previous clearance events. Therefore, although our event's sales were lower we were able to generate a higher margin for the period.

Operationally, we continue to focus on a disciplined inventory management philosophy, which has allowed us to stay more nimble, turning our inventory faster and align our decision-making much closer to the time the merchandise will be in the store.

In May, we began our focus on summer, with women's merchandise shifting from white sexy suiting and party knit tops to crops, shorts, sleeveless shirts, and graphic tees. In men's, the summer assortment includes track jackets, graphic tees, and polo shirts, together with cargo shorts.

We're moving to our Best of Summer sale in a few weeks; and then we will transition to our semiannual Volcanic Sale event toward the end of the season. Thanks, and now I will turn the discussion back over to Tom.

Thanks, Ken. Before we move to Q&A, a comment on Limited Stores. Limited Stores' first-quarter performance was disappointing. Comps decreased 7% and bottom-line performance declined versus last year. Avra Myers, our new GMM joined us at the beginning of the month. Avra, as many of you know, was previously the co-founder and GMM of Club Monaco.

That concludes our prepared comments. At this time we would be happy to begin to take questions that you might have. Again, in the interest of time and consideration to others, I want to remind you we would like to limit you to one question each. Operator, we're ready for the first question.

(OPERATOR INSTRUCTIONS) Barbara Wyckoff.

Buckingham Research Group. A question for Neil. I presume the signature is the daily beauty rituals, right?

Yes, that's correct.

Okay. Then long-term, can you talk about the focus on driving transactions with gift-with-purchase kinds of activity? Do you expect that to tail off or is that an integral part of your strategy?

I think there are three primary traffic drivers that we utilize in the business. One is the purchase-with-purchase program that we typically run every theme. That has been very successful for us and improving over time.

The second is our increased success with our CRM program. We now have a database of 25 million customers and have found it very economical and profitable to reach deeper, more deeply into the file to drive those customers to stores.

Then third and finally, we're moving to a strategy of having one or two sharp promotions every theme. Not 10 or 13 spread throughout the store, but one or two sharply-focused promotions to drive traffic.

Thanks Barbara. Next question?

Lauren Levitan.

Cowen and Company. My question is also for Neil. Neil, you commented that you are testing reduced assortments. I am wondering if you could elaborate on how that works across the different store formats. Is this a SKU count reduction, or across third-party versus private brands? Can we get some sense of timing for it? And also how about how this will affect your pacing of new product intros, which I know in the past you have said you felt needed an adjustment. Thanks very much.

First, just a little bit of context. Going back over a two or three-year time period, as we began the turnaround and transformation of Bath & Body Works, as you recall, we had quite an empty pipeline of new product development. Really, what we have done over the last two years is bring a lot of new products to market, and in that process have learned a lot about what is working, what is not working.

We believe that we are now at a stage to really focus in on that learning, concentrate on making bigger statements with the brands that really have power and growth potential, and just become a little bit more focused. So I think to some extent, narrowing the assortment and getting more focused is really a natural evolution of the transformation process that we have undergone.

Specifically with regard to that principle by format, I think you will see going forward in both flagship stores and core stores more dominant statements of what we call the blue-chip brands, and culling of both underperforming SKUs and underperforming brands.

Then lastly, we are in the process of developing a new in-store navigation system, which will make it much easier for our customer to shop and navigate by category -- fragrance, face care, hair care, apothecary, home fragrance, etc.

Thanks, Neil. Next question please.

Richard Jaffe.

Stifel, Nicolaus. A question on inventory by division going forward. I would be curious to know what you think the levels will be at each division, and your willingness to invest. Obviously the Apparel brand, but at Bath & Body Works a shift in investment from third-party brands to private label, and then at Victoria's Secret. Thank you.

Richard, we will go to Martyn Redgrave for that answer.

I think the first thing to understand about inventory investment for this year is the change that is taking place in our apparel businesses because of kind of the rearchitecting of the business model that we have discussed, which is resulting in lower inventory levels. That will continue through the balance of the year despite, obviously, our expectations for substantial growth in the profitability of those businesses.

In terms of the other businesses, we are looking at making more inventory investment in the balance of the year in both Victoria's Secret and Victoria's Secret Direct to support their substantial growth. As Neil discussed, they are also in the process of rearchitecting their assortment, and so their investment in inventory will be more consistent with the kinds of investments that we have made in the past couple of years in terms of year-over-year growth rates.

Operator, next question.

Dana Cohen.

First of all, Jay, congratulations, great to see. Two questions. One is on the apparel side, particularly Express. Can you talk about -- it seems like you are to some extent trading some of the comp upside for margin. How do you see that playing out going forward?

Second, for Martyn or Len, on the corporate side I sort of was thinking about this a lot last night. I mean, corporate is up 100% in the last five years despite the fact that you have gotten rid of $2 billion of sales in terms of dispositions. Can you just give us some sense? It just seems like that line just continues to grow exponentially every year and point-to-point is costing the Company about a quarter. So why point-to-point, and how long is that going to continue to grow?

Dana, we will divide the question in half. First we will go out to Ken Stevens for the question about Express, and then we will come back to Martyn for the balance.

This is Paul Raffin at Express. Your question regarding trading margin, we are -- our, of course, last year margin performance was so incredibly low that really what we're trying to do is simply stabilize our sales trend and our margin trend to a normalized rate, really focusing on the strategy that we discussed with you guys on several of these calls, which is product that our customer wants at price points that are really realistic.

Our unit costs are down significantly to last year. Our selling price, our averaging at retails are down as we regain the sweet spot pricing particularly in our tops businesses. So really it's a margin picture for us right now that is really driving the momentum.

Paul, thanks. We will go to Martyn for the balance of the question.

I am going to try to take this on from a couple of points of view, because I know it is both a historical and a current year question, if I heard Dana correctly.

Correct.

The history part of this, I think, is connected to two things. One, clearly I am going to say I have been here for -- I have only been here about 13 months now; but three or four years ago, a conscious decision was made to shift the emphasis in terms of support functions between the brands and the center. So we did bring more focus to supporting all of our businesses from the center up to the brands. That did result in some increased investment in support functions at the center. That has continued.

The second kind of historical shift has been our investment spending, which began more substantially last year; is continuing this year; and will continue into next year in connection with remarks I made earlier in rearchitecting our technology capabilities across the firm, as well as investing in new capabilities and capacities for a couple of our businesses. Specifically, and the one -- the largest part of that is for our Victoria's Secret Direct business, and the distribution center, and new technology that we are building for them. So I think that kind of explains the shift historically.

In terms of this year, as I mentioned in my remarks, if you look at the first-quarter SG&A spend year-over-year, about 60% of the increase year-over-year is directly related to operating performance elements. Things like selling expense, marketing expense, and incentive comp that is directly tied, as you know, from an accrual perspective to operating performance.

Another 15% of the year-over-year increase is related to this investment spending that I just described on technology. The balance is both the stock option expense and some other what I call cats and dogs. But that does in fact explain most of the variance year-over-year.

Looking forward to the full year, we see those same factors affecting the full year, and that is why we have commented on the fact that the SG&A spend rate will be up 7% to 9% in the second quarter; and that will be more consistent for the full year.

Martyn, thanks for your thoughtful answer. Next question, operator?

Mark Montagna.

C.L. King. Just a question about the Express store count. I noticed back in February 22nd you had projected year-end count for Express Women of 257; now you are projecting 193. Trying to understand what happened there in terms of the projection.

Ken or Paul, can we go out to you guys for that?

Yes you can, Tom. This is Ken. Here is our current position. We have slightly over 700 stores today in total. Approximately 320 of them are dual gender, so they will have men's and women's in there. In addition, we have about 300 freestanding Women's stores; and we have just about 100 freestanding Men's stores. This count will change slightly but not materially throughout the rest of '06.

But was there some changes in the leases, like maybe you bought out leases, changes in terms, that enabled you to suddenly go, just within a three-month period, to change it so drastically just for the Express Women's?

No, I'm not sure. I'm sorry, I am not sure where your numbers are coming from. If it is something we put out maybe, Tom, we can get back off-line and figure that out. Because I am not -- I did not recognize your numbers, to tell you the truth.

Mark, are you talking about dual gender conversions?

No; I am talking about just Express Women. For the end of the year, with the package that you guys sent out last night, it says 193 for the end of the year count; whereas the packet that was sent out February 22 was projected at 257.

I think that may have been an error. Let us check that and get back to you.

Actually, Ken, is that because -- I think there was a change in the first quarter in terms of dual gender conversions, actually adding men's assortment into a Women's store.

We did that in 15 stores.

I think, though, the projection (multiple speakers) for the full year this year.

It's a projection for the full year, and so we have probably shifted all of those stores into dual gender now.

We'll follow up (multiple speakers).

From a lease standpoint, just to be clear though, there really -- there have been no substantial changes; and we have not been doing lease buyouts or anything like that.

Yes. We are reflecting a change in classifications from Women's to dual gender, Mark, because we are actually in a significant number of stores going to be adding the men's assortment into the Women's store without any sort of a remodel or a change in the lease.

Okay.

Hopefully that clarifies it, and we will follow up with you after the call, Mark. Operator, next question.

Brian Tunick.

JPMorgan. Question for Grace. On the fantastic results in the quarter, we were wondering if you attribute it to the number of bra launches, or did you hit upon the right product? Along with that, what kind of marketing dollar increase did you have in the quarter? Thanks very much, Grace.

Grace, we will divide that in half. We will give Mark the marketing part of it, and if you can answer the first part about the bra launches that would be (technical difficulty).

Terrific. Yes, I'm in New York, so I'm disconnected from the group. I would say that in the middle of last year we recognized that what we needed to do to sustain growth at an escalated rate was really to open the pipeline. So we really have done a lot of work in the fall season of last year, reworking our processes, putting more time and attention on innovation and multiple pathways to market. So that really gave us a lot more things to play with, more ideas and I would also say better ideas.

The result in the quarter was really the result of some of the groundwork that we re-laid last year. We actually had one additional strong product offering that we put into the calendar in February. March, we were pretty comparable to last year; and April we were pretty comparable to last year. We just had better products and a stronger marketing plan. Mark, you can answer the exact numbers question there.

I think so. The marketing increase I think strategically is trying to have brand-right traffic building. From a media support specifically behind launches, the one addition that we had was the one that Grace mentioned, which was really the Angels Secret Embrace which is the best pushup bra in the world.

We make those choices, Brian, on a situational nature or selective nature, and based on having the product availability (indiscernible) to run the media.

The second piece of this is really our customer relationship marketing strategy, similar to what Neil mentioned. It is really a highly strategic customer contact strategy, which engages our clients across all of our subbrands, or reengages our clients to really create more loyal clients on an ongoing basis.

For the first quarter, our marketing as a percent of sales deleveraged slightly. The marketing investments we have made in the first quarter have met our expectations.

Just a quick glimpse of the second quarter, we would continue to expect to do the same type of brand-right traffic building activity, and would make those choices on a selective and situational basis, and would expect then to delever marketing in the second quarter.

Are the number of launches supposed to be up versus L-Y in the second quarter?

Our second-quarter activity really is -- right now, Brian, we are in a Sexy Sport launch which is primarily bras driven. We will have a bra launch in the first half of June. Then we will follow that with a semiannual sale, which will be the same like the time as last year. Then late July will be a PINK focus similar to last year.

Okay, thanks very much for the insight.

Thanks, Brian. Next question?

Neely Tamminga.

Piper Jaffray. Congratulations on a great performance. I had a question for Paul or for Ken over at Express. Clearly if you look at evolution of the brands, in the Limited organization, you see that they go from single branded to multibranded. I am wondering how you are looking for Express to participate in that same evolution, thinking longer-term at this point.

This is Paul again. Jay and I, Ken, Les, we have all been talking about how that does hold some interest for us. Initially, our foray into that arena is primarily in the form of using outside resources to develop house brands for us, particularly in the Denim Lab area. Our concept is really to both have our own X2 jeans brand which we are relaunching for this coming back-to-school, and to also engage some superior outside product innovation to provide for us a third-party brand that will appear to the customer to be premium in nature. So that is initially how we're focusing on it.

We are also as a result of the tremendous success of our Editor Pant, looking to extend and lateralize that into becoming in fact a subbrand within the box. So certainly taking some of the best practices that we have seen in sister divisions and applying it as appropriate to the Express brand.

Thanks, Paul. Next question.

Jeff Black.

Lehman Brothers. I had a question on the impact on 2Q margins given the accounting changes. I guess we want a better understanding, if you can give us one, of how much clearance inventory we have going into the second quarter.

On the Victoria's Secret and really in particular the BBW side of things, what did you learn from the recent semiannual sales in terms of changes we might see implemented in the June sales this year? Thanks.

We will go to Martyn for that question.

In terms of what we are projecting in the second quarter, I would not characterize there -- as there being any significant shift in either our going into the quarter philosophy about seasonal sales, with the exception of Express. Because clearly in the first quarter, they did not have as much distressed inventory, therefore not as much on sale in the first quarter. For the second quarter they are still planning the same kind of sale cadence. But obviously, it is very early in the quarter to make the call on how many units they will have going into sale in June and July time frames.

Jeff does that answer your question?

Yes; in terms of clearance, though, would you say we have more, less, similar at Victoria's Secret and Bath & Body?

I would say similar.

Okay; that does answer it. Thank you very much.

You're welcome. Next question, please.

Margaret Mager.

Goldman Sachs. My question is about your gross margin outlooks and how well you did with Victoria's Secret in the most recent quarter. Do you think that kind of improvement can -- is possible as you look out over the course of this year in that business in particular?

I just want to follow up on the last question about the launches. Is that, in fact, what you think kind of made Victoria's Secret turn the corner? Because it seemed to be wobbling a little bit last year. It never really became problematic, but now it has come back super strong. Just wondering what really invigorated it in the first quarter and moved the margins up, and can that continue over the next three quarters? Thanks.

We will divide that question in half. We will go to Mark Weikel for the margin part, and then we will go out to Grace.

Our primary focus is really around operating income dollar growth. We are satisfied with our rate of operating income and gross margin rate, and are not really focused on increasing the rate as much as the dollar growth. For the first quarter, our gross margin rate improved slightly.

I will just add to that. In terms of when you are looking at the segment results, we did have a substantial improvement at Direct as well, which drove the overall segment improvement.

Okay. What was the main reason for Direct improving substantially?

This is Len Schlesinger. It was largely a function of being able to be right on the front end in selling more full priced goods.

And you think that -- is that a story that continues throughout the year?

It certainly is the economic logic of the Direct business. Based on the quality of our merchandising strategies and CMR strategies, we would hope to continue to see that. But it's always a number that is pressured.

I think the biggest issue goes back to Mark's earlier comment, which is we don't anticipate, expect, or organize the business to generate substantial improvements in gross margin across the segment.

Then Margaret, I think you had a question on launches. Do you want to repeat that quickly for Grace?

I just wanted to make sure that I understand it, that there was a previous person asking the question about the launches. Is that what really drove the business in the first quarter? How do you see that playing out over the course of the year? Will there be increased launches? What really stimulated Victoria's Secret versus a little bit patchier performance last year?

What I would say is the performance last year was in part, and no excuse, but based on the fact that we had a very strong prior year. The learning that we took out of it is we didn't spend enough time focusing on how big the next new ideas had to be, and how many ideas we had to have for consideration in order to continue to climb the ladder of growth. So I would say there was just a major process and attitude change about playing a stronger game of offense.

Based on the fact that we have more ideas and more arrows to shoot out, we are escalating our communication and launch strategy, and we are getting acceptable returns.

But we also have had a good improvement in our panty business. Remember, we talked all last year about how it was a little lackluster. So as we have been putting out these new bras, we also have strong panty performance. We reintroduced our casual sleepwear assortment back to all stores and are getting a strong response there.

Our customer contact strategy is driving more people into the total store, which is benefiting all the categories in the store, whether it is lingerie or whether it is PINK or whether it is Beauty. So we're actively engaged in innovation as well as actively engaged in bringing people to the party. Fortunately, this season they really liked the assortment in all categories.

You're an amazing franchise, Grace. Good work. See you.

The one thing I would add to or expand on what Grace said is that PINK continues to exceed our expectations in the quarter. So that subbrand is doing well, primarily driven by sleepwear and the panty assortment.

We have also continued to do more business in the Intimissimi franchise. And I think Beauty has done a good job of engaging the customers through a really aggressive launch strategy which the customers have responded to.

Okay. Thank you.

Let's take the next question.

Stacy Pak.

Prudential. Could each of the divisions talk briefly about how they are going to approach the fall season differently from last year? Whether it is execution, set timing, launches, pricing, fashion marketing, whatever they think is going to be the key to beating last year's numbers for the fall season. Thanks.

Stacy, we probably won't give too much guidance on the fall at this point in time. But why don't we get some introductory comments, and we will start with Neil.

Obviously for us, the big question is how we are organized for holiday. We have taken a very different approach this year given our performance in 2005. It is really a year-long cross-functional planning effort for us. We took the learnings that we talked about in the prior call and have really gone after those in a very aggressive way.

So you will see our timing be more holiday in October rather than overtly holiday, number one. Number two, you will see the launch of the Bath & Body Works Perfect Christmas Book, which we are very enthusiastic about and believe that that can really help elevate and market the brand at that time of year in a big way.

We expect the Web and direct channel to be a powerful driver not just of the direct channel, but drive the store. Then lastly, we are focused on making fewer, bigger, better statements and an easier shopping experience; and hope that when we add all that up we will have a pretty different result this year than we had last year.

Why don't we go to Mark Weikel for a comment about Victoria's? Then we will go out to the folks at Express.

Thanks, Tom. For fall and holiday, we're frankly going to focus on the fundamentals. Part of that really is about planning and executing flawlessly our bra launches. Another piece we will continue is something that Grace referred to, and that is really driving brand-right traffic building. We will continue that as long as that makes sense for us.

We still have a huge opportunity of further leveraging the [Bega] brand, and as Neil indicated this is really a year-long effort that all of us worked together to really maximize. I believe that will be a big play for us this year, and plan also to continue to expand the PINK assortment architecture as much as we can. The Beauty launches that are connecting and engaging with our clients will be another piece of our fall strategy.

Then let's go out to Express.

At Express, our Women's fall continues our relentless efforts to define and cater to the Express girl with every selection of merchandise appealing to this young, sexy, fashionable female, really while continuing to focus on fundamentals and engage our speed model.

We will provide a constant flow of newness and wear-now merchandise initially focusing on knits and denim, and as the season progresses shift our strategy towards more seasonal products with a studio party focus.

In Men's our strategy for fall is to evolve the lifestyle mix that connects with the 28-year-old male in casual, going out, and wear to work. This would include category dominance in our shirt, graphic tee, denim, and jacket businesses.

Thanks, Paul. Stacy, it's a great question. We will talk more about it in August on the August call, and I hope you will all join us November 7 and 8 for the update meeting here in Columbus. Let's try to get a couple more quick questions in here.

Dana Telsey.

TAG. Can you talk a little bit about, in terms of the financial management, how you are making the new systems you are implementing for inventory levels by division? How will it slice and dice inventory levels better? What benefits do you expect to see?

On the real estate side, with the focus on the top 160 program, what about -- the top 160 malls program, what about the malls beneath that, Bs and Cs? What are you doing to rationalize or enhance that real estate, and how are you looking at it? Thank you.

We will go to Len first for the real estate question.

As you know there's 1,046 malls in the United States; and we have chosen obviously to concentrate a fair amount of distorted energy on the top 160 for the very simple reason that the economic performance of those malls and the customer bases in those malls wildly exceed both the quality and spending power in the rest of the United States.

That being said, we still have an amazingly powerful business in the A-, B, and B+ malls. We are devoting more and more energy to the repositioning of our brands in that space.

So the overwhelming majority of the work that is going on in the top 160 is very much merchandising oriented. We are making sure that that work is not denigrating the involvement in and the focus on where we are making an enormous amount of money, which is in the rest of the mall population.

And Martyn?

I think in terms of the investment that we are making in the new systems, as you are correct to say that a substantial portion of that investment is going into what we refer to as the demand chain, which you might refer to as the supply chain. The clear objective of that investment is to accomplish one of our critical strategic imperatives, which we refer to as speed and scale.

So we think of the payback mainly in terms of being a lot faster at everything that we do; so shorter cycle times to bring product to market; shorter cycle times to read, chase, and replenish; being more right about the assortment at kind of a segment and store level; being able to resort differentially to different stores. All of those kinds of capabilities that we're building, we think will just make us a lot more responsive to the customer, and clearly more efficient from a cost, logistics, and manufacturing perspective.

Just the other comment I would make is in terms of the benefit stream. I know that is one of the things that you're always curious about. We are investing in building and implementing these systems as we speak. Bath & Body Works is going to implement a major tranche of those systems through the balance of the year. The rest of our brands next year. So we hope to see the benefits from those investments flowing beyond that.

We will have time for two more questions, then.

Todd Slater.

Lazard. My question just revolves around the expense issue. I hate to beat a dead horse, but that is really the big change in our second-quarter model. So I understand the DC expansion, some of the other things you talked about. Maybe you could just get a little more specific about some of the systems upgrades. Is it catch-up? Is it -- what is new in the system? Is it expected to drive sales or have a return on investment?

Then as an ancillary, can you just help us understand the incremental dollar spend for the second quarter and year, so we can calculate the real trend line, let's say, in the core expense growth? Because it is likely not 9%; but I'm just curious. Thanks.

We will go to Martyn for that.

Yes, again, a couple components. I think that the easiest way to look at our first-quarter results, again, is the way I described earlier in terms of the percentage breakdown of the dollars year-over-year. So a lot of that dollar increase year-over-year is going against supporting the improved operating performance.

15 to 20% against these new investments. And as you know, from an accounting perspective, part of that is the current expense of the teams building those systems, and part of it is depreciation on systems that have already been built and implemented.

As I look forward to the balance of the year, and it is consistent in the second quarter as well as the balance of the year, that same kind of increase in spending will flow through the balance of the year.

Another way to look at that which may be helpful is in terms of the 30 basis point change in SG&A that took place in the first quarter. If I look forward to the balance of the year, I would look for a consistent kind of change in the balance of the year.

Thanks, let's take one more question to wrap up the hour.

Paul Lejuez.

Credit Suisse. Just wondering if you can share with us how much PINK added to Victoria's Secret comps. Also, how did the 93 stores do that had the expanded assortment of PINK? How did they do relative to the chain? What are the plans going forward as far as additional rollouts of PINK?

We will go to Mark Weikel for that.

Two pieces of that. PINK continues to meet our lofty expectations on its budgeted amount, and is currently adding probably about 3% or 4%, 3% to 5% to the total store likes.

The second piece of that is the question around the additional stores that had the expanded PINK assortment. The additional group of stores, they have only been in for literally 30 days to 45 days; and they are performing in a similar manner to the first group of 43 stores we talked about last fall. So they're also meeting our expectations.

Is that above the rest of the chain?

It is.

Is the plan going forward for additional PINK rollout?

Our plans going forward are wherever we can expand the assortment in the space we have available, we will continue to explore that.

That concludes our first-quarter earnings call. I want to thank everyone for tuning in this morning. I hope you have a good rest of the day.