LandBridge Co LLC (LB) 2006 Q3 法說會逐字稿

Welcome to Limited Brands, Inc. Third Quarter Earnings Release Conference Call.

[OPERATOR INSTRUCTIONS.]

Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now, we'll turn the meeting over to Mr. Tom Katzenmeyer Senior Vice President of Investor, Media and Community Relations. Sir, you may begin.

Thank you. Good afternoon, and welcome to the Limited Brands Third quarter Earnings conference call for the period ending Saturday, October 28, 2006. We appreciate you joining us on short notice, but we felt strongly it was important to hold the call this evening, given our after-market announcement.

As a matter of formality, I need to remind you that any forward-looking statements we may make today are subject to the Safe Harbor statement found in our SEC filings.

Our third quarter earnings release and related financial information are available on our website, limitedbrands.com.

The call is being taped and can be replayed by dialing 1-800-337-6551 followed by the passcode 583. You can also listen to an audio replay from our website.

Martyn Redgrave EVP, CAO, CFO, Sharen Turney, CEO of Victoria's Secret, Neil Fiske, CEO of Bath & Body Works and Jay Margolis, President, Apparel, are all joining us today. Amy Preston, VP of Investor Relations, is also with us.

After our prepared comments, we will be available to take your questions for as long as time permits so that we can speak with as many callers as possible, and I'll remind you about this later, we'd like to ask you to limit yourselves to one question per person.

And now, I'll turn the call over to Martyn Redgrave.

Thanks, Tom, and good afternoon, everyone. We appreciate you joining on such short notice. I'm going to lead the discussion here, along with our brand leaders, to cover our third quarter results and our fourth quarter outlook first. And then, at the end of our remarks, I'll spend some time discussing our acquisition of La Senza.

Now, turning to the third quarter first, we're very pleased with our results. Earnings per share were $0.06 per share compared to $0.00 per share last year, which is above our initial expectations and consistent with our revised guidance issued on the October sales release. Comps increased 10%, and total sales increased 12% to $2.115 billion.

Our gross margin increased by 380 basis points to 35.9%, which was driven by improvements in both merchandise margin and leverage on our buying and occupancy costs. Significant increased in gross margin were achieved at both Bath & Body Works and the Apparel group.

Total SG&A dollar spending increased by 18%, which deleveraged to the extent of about 180 basis points. Now, that incremental spending was driven primarily by the following. First, about a third of the SG&A increase was driven by an increase in marketing expenses primarily at Victoria's Secret, and Sharen will discuss that a little bit further in her remarks. Second, about 25% of the increase relates to an increase in store selling costs, which were leveraged as a percentage of sales. Third, about 20% of the increase relates to incremental investments in technology and infrastructure, as we've discussed consistently on our calls this year. Fourth, about 10% of the increase relates to higher incentive compensation expense, which is tied to our improved performance. And finally, we recognized an incremental stock option expense related to our adoption of FAS123(R).

Our third quarter operating income increased by $46.2 million. By segment, the results were Victoria's Secret operating income increased by $13.4 million, Bath & Body Works increased by $17.9 million, Apparel results improved by $26.5 million, and our Other segment, net expense, increased by $11.5 million.

Inventories in the third quarter ended up 22% per square foot at cost as we deliberately invested at both Victoria's Secret and Bath & Body Works. I'd like to take a minute to break that down for you. Approximately 60% of the total inventory increase relates to Victoria's Secret. At Victoria's Secret, over half of the increase in inventory is in core lingerie, about 25% of the increase relates to beauty, and the remainder is in Pink.

Now, of that, over half of the increase in core lingerie is related to our initiative to improve our in-stock position in seasonless basics. The remainder is due to incremental third quarter bra launches and an increase in our sleepwear inventory. The increase in beauty is to support proven winners, our Garden, Dream Angels and Heavenly lines, new sub-brands like Beauty Brush Color in bare bronze, and two new product launches, the Desire and Very Sexy makeup launches.

The increase in Pink relates to our expanded assortment this year, particularly in loungewear, as Pink continues to exceed our expectations.

At Bath & Body Works, going into the quarter we consciously invested in safety stock, particularly in seasonless basics, in anticipation of the supply chain systems conversion, which occurred in July. Coming out of the quarter, though, we see the opportunity to continue this increased investment in seasonless basics to support our initiative to improve our in-stock positions for BBW. Half of the increase in BBW inventory is due to increases in these categories, such as our signature collection and our anti-bac categories.

We're also investing in other destination brands, such as Bigelow, Spa and Breathe, which accounted for about a quarter of the increase. And finally, new brands such as Patricia Wexler, Savannah B and [Aquetanica] represent most of the remaining increase.

And finally, our apparel inventories ended the quarter up 1% per square foot at cost.

Now during the quarter, we repurchased approximately 1.6 million shares of our stock for about $42 million, and we have about $66.3 million remaining on our current $100 million program.

So, now turning to our fourth quarter outlook. In the fourth quarter we're projecting earnings per share of $1.07 per share to $1.14 per share. Last year we reported $1.28 per share, which included a $0.25 per share gain related to the favorable resolution of certain tax matters, and a $0.04 per share gain from the recognition of gift card breakage. These estimates are predicated on high single-digit comps, a roughly flat gross margin rate, and an increase in the SG&A rate. In fact, our percentage increase in total SG&A dollars should approximate the third quarter growth rate of around 18%.

Now, for purposes of providing this guidance, our estimates exclude the 2005 gain from the recognition of gift card breakage and include an estimated cost of approximately $0.02 per share for stock option expense in 2006.

We expect that inventories in the fourth quarter on a cost of goods available for sale basis will be up in the low 20 percentiles versus last year, which will be consistent with our third quarter trends. This forecast reflects the increases at Victoria's Secret and Bath & Body Works that I just mentioned.

For the full year 2006 we are projecting earnings per share of $1.66 to $1.73 per share. Excluding the estimated 2006 stock option expense of $0.05 per share and the 2005 significant items of $0.29 per share, which are detailed in our press release, this projection represents a 29 to 34% earnings growth over 2005.

Now, this full year estimate is predicated on mid to high single digit comps, an increase in the gross margin rate and an increase in the SG&A rate. As I said before, these estimates exclude 2005's gain from the recognition of gift card breakage and include an estimated cost of approximately $0.05 per share for stock option expense in 2006.

We now estimate that 2006 capital expenditures will be approximately $620 million versus our previous projection of $650 million and 2005 expenditures of $480 million. Roughly $100 million of the increase to last year relates to investments to support the growth of our direct business, including investments in technology in our new distribution center, as well as our broader enterprise transformation technology projects that we've talked about on past calls.

So, with that, I will now turn it over to Sharen, who will talk about Victoria's Secret.

Thank you, Martyn, and good afternoon. We're pleased with the Victoria's Secret's megabrands third quarter results. Total sales increased 19% and operating income increased 11% to 130 million. Victoria's Secret stores third quarter comps increased 17%. We are especially pleased that all segments of the business continue to perform well, including core lingerie, Pink and Beauty.

Our operating income at stores delivered expected results. Operating income dollars were up slightly, and the operating rate declined. We deliberately and strategically invested in activities designed to increase customer awareness and market share, which drove merchandise margin dollars up and merchandise margin rates down.

First, we increased direct mail sampling efforts, as well as offered introductory pricing on Body By Victoria Ipex wireless and the Very Sexy Infinitive Edge push-up bra. These activities grew our customer base and market share while increasing loyalty and trial.

Second, we've invested in additional marketing activities across all brands to build brand equity, drive awareness and trial. These investments supported three bra launches plus two bra re-launches in addition to supporting the launch of Very Sexy makeup and our newest Heavenly fragrance, Desire.

During the third quarter we executed new bra launches, delivering impressive growth. during these launches, the Secret Embrace and Infinity Edge patent-pending technology messages were successfully highlighted across our powerful sub-brand, Body By Victoria, Very Sexy and Angels. We supported the bra business with incremental media and direct mail campaigns used to solidify our relationship with our clients and to introduce new clients to our sub-brands. Our technology advancements in the bra business, such as Secret Embrace and Infinity Edge continue to invigorate this category.

Panties successfully contribute to the business in the third quarter. growth was driven by the Angels Secret Embrace panty, the latest in panty technology, along with growth in our fashion categories as such things as Sexy Little Things and Very Sexy panties.

We are very excited about our sleepwear this year because we added a young, colorful, fun assortment with new branding elements. Our Pink business had another strong quarter, driven by positive customer response to the loungewear assortment. Pink panties and Pink accessories also performed well. We supported the Pink business with a back-to-school theme, direct mail campaign and redemptive print offers, all building brand affinity and strengthening overall brand awareness.

Our Beauty business also achieved strong sales growth as we launched the exciting Very Sexy makeup line and introduced Dream Angels Desire, the fourth fragrance in the Dream Angels family. Dream Angels Heavenly remained the number one fragrance in America.

Victoria's Secret Direct achieved great third quarter results. Sales increased by 20% and operating income increased significantly. Sales growth occurred across all categories and was exceptionally strong in sweaters, sleepwear, bras and dresses. Looking ahead to the fourth quarter, we plan to continue to focus on our successful strategies and core equities. I highlighted our holiday plans at our investor meeting last week, but let me just mention a few.

We moved to our holiday two-floor set last week, which featured the launch of the Very Sexy Secret Embrace push-up bra and focus on Very Sexy makeup and fragrance. Last year we had tremendous success with our Day After Thanksgiving gifts with purchase promotions. This year we have ramped up our supermodel tote and filled it with beauty items. We look forward to another spectacular promotion. We plan continued investment in media, direct mail campaigns and introductory or special offers.

And of course, we invite you to join us by watching the sexiest night on television, the Victoria's Secret Fashion Show. This year's show promises to be bigger than ever from the Kodak Theater in Hollywood and featuring the musical talent of Justin Timberlake. This year the fashion show will be on December the 5th at 10:00 p.m. on CBS.

Thank you, and let me turn it over to Neil.

Thank you, Sharon, and good afternoon, everyone.

Bath & Body Works comps increased 15% in the third quarter against a 1% increase last year. Operating income for the quarter improved by $18 million to a profit of 1 million. Overall, sales and operating income for the third quarter were above our expectations. Our gross margin rate was up significantly to last year, primarily driven by leverage on buying and occupancy expense. Merchandise margin rate was flat to last year.

As mentioned on the last call, we continued our proactive steps to manage discretionary expenses. These actions contributed to modest SG&A expense leverage over last year.

The quarter began with the strong performance of our annual hand soap event and our Back-To-School theme featuring American Girl. During the Fall Romance theme in September, we introduced new signature collection fragrances, Essential Amber and Exotic Coconut, both strong performing additions to this important collection.

The Perfect Autumn theme, which ran from late September through mid-October, was well received by our customers. The theme featured fun fragrances in our Temptations line, such as Pumpkin Pie Paradise and Pecan Passion, as well as unique fall items such as the pumpkin-filled candle.

On October 16th we kicked off our holiday season with the "Happy Fallidays" theme, which represented a more deliberate shift to a more transitional holiday set and a more dramatic perfect Christmas look following in early November. This change was based on our learning from last year, and a recognized need to have more staged newness throughout the holiday time period. Performance of the "Happy Fallidays" theme floor set was above our expectations.

In summary, the consistent third quarter performance was driven by three factors. First, new fragrances in the signature collection and Temptations lines. Second, successful growth in the home fragrance category with its seasonal appeal, which we view as a significantly incremental growth avenue for the business. Third, focused themes driven by our implementation of power retailing concepts.

On November 6th we launched into holiday with a fun and exciting holiday assortment and a store de corps inspired by key components of our holiday plan. First, the addition of more newness to the assortment across holiday to support a sustained build, and second, a focus on irresistible gifting items, our seasonal toiletry and home fragrance collection and value-conscious items.

In support of the holiday season, we also implemented a cohesive multi-channel marketing approach across stores, the Web and catalog. Our new Bath & Body Works catalogs will reach 7 million homes this holiday season. The catalog is building momentum, affirming our optimism in the power of becoming a multi-channel retailer. We view the catalog both as an effective revenue generator and a valuable marketing vehicle to build brand awareness.

With that, I'll turn the discussion over to Jay.

Thanks, Neil. Good afternoon, everyone.

Express comps were flat in the third quarter, finishing with two consecutive months of positive comps. The health of the business improved, with an increase in transactions, units per transaction and conversion. More importantly, our improved assortment, coupled with integrated and focused messaging, is driving improvements in sales per selling square foot. We set our first holiday floor set in mid-October, supporting it with a focused direct mail program and in-store marketing. So far, results have been very positive.

In addition, we were able to achieve bottom-line improvements versus last year. A better balance of fashion newness and seasonless basics, a continued focus on inventory management and cost improvements drove results.

Q4 is all about holiday. Our message starts with the "I Wish" theme tying everything together from a marketing perspective both in-store and direct to our customer. Our marketing consists of close to 11 million customer touch points this holiday season, up nearly 50% to last year. Our second holiday floor set began November, week one. This floor set will continually be updated with a timely new sweater focus, including key item chunky cables and rib sweater styles.

Our men's assortment is focused on great lamb's wool sweaters and new 1MX stretch, solid and striped shirts. We are off to a good start to the holiday season and are cautiously optimistic about the quarter. However, it is too early to claim victory, as much of the season is still ahead of us.

At Limited Stores, third quarter comps were down 2% but operating income improved significantly due to an improvement in merchandising margins. The wear-to-work category performed very well, with successful launches of the Perfect Travel Suit in August and June Cassidy pants in September. Limited will also have new fashion sweaters updating their holiday floor set.

Thanks now, and I'll turn the discussion back over to Martyn.

At this stage of the game I'm going to close our remarks today by discussing our agreement to purchase La Senza in Canada. We've included an overview of La Senza and the transaction in the quarterly package that you received this afternoon, and the information is also available on our website.

So, first, as you know, today we announced that we have reached an agreement with La Senza to purchase all of their outstanding shares for $48.25 in Canadian dollars. It'll be an all-cash purchase. La Senza is Canada's leading branded specialty retailer of intimate apparel. La Senza operates 318 stores in Canada and has 327 stores in 34 countries under license. They operate through two main banners, La Senza Lingerie and La Senza Girl. La Senza's sales for fiscal year 2005 were approximately $364 million U.S., and recent earnings results have been very strong, up 92% for the first six months of the year, and street projections are for a 40% increase in EPS for the fiscal year ended in January 2007.

We're very excited about this opportunity. La Senza is a great strategic fit with our intimate apparel businesses, and their international infrastructure, real estate expertise and operating model will also be great assets to us as we look to enhance our capabilities to meet our strategic growth initiatives internationally.

La Senza expects to continue its strong growth through five key initiatives, which include, first, the continued new store growth of La Senza and La Senza Girl stores both in the mall and in power centers in Canada. Second, continued expansion of select high productivity La Senza Lingerie stores in mall locations. Third, the continued rollout of La Senza's Express concept, primarily in mall locations. Fourth, the continued brand extensions of new product categories, such as La Senza Spirit and La Senza At Home. And finally, continued international growth driven by new store growth in existing markets and entrée into new markets.

La Senza has a strong founder-led senior management team that has been with the business for over 20 years on average. Irv Teitelbaum, the Chairman and CEO, and Stephen Gross, Vice-Chairman of La Senza, who together started the original company 40 years ago under the brand name [Suzie Shear], will remain in their respective positions. In addition, Laurence Lewin, the President and COO who co-founded La Senza in 1990, will also continue in his current role. We look forward to operating the business with its current management team and, for the immediate future, in the manner in which it has been operating.

The proposed transaction has a total equity value of approximately $628 million U.S. This is equivalent to an enterprise value of $568 million U.S. after taking into account the cash, securities and debt on La Senza's balance sheet at the end of the second quarter. The offer price represents a premium of 47.8% based upon yesterday's closing price of the La Senza shares on the Toronto Stock Exchange, which was $32.65 Canadian.

We have executed a hard lock-up agreement with Irv, Steve and Laurence together with all of the other holders of multiple voting shares, which together represent 48% of the total shares outstanding. We expect that the transaction will be modestly accretive to our EPS in 2007 subject to the final purchase price allocation determinations.

We expect to mail a takeover bid for the offer to La Senza shareholders shortly, and the proposed transaction is expected to close in mid-January 2007. If at least two-thirds of the shares are tendered, we will accept them and then complete the acquisition, as I said, in mid-January is our target.

We plan to finance the transaction through $400 million in debt and approximately $240 million in cash, and we have a commitment for bridge loan financing for the debt, and we will arrange a long-term financing take-out soon.

And finally, both Moody's and Standards & Poors have reaffirmed today our current credit ratings after having reviewed the transaction.

Thanks, and now I'll turn it back over to Tom to wrap up.

Thanks, Martyn. That concludes our prepared comments. We are now ready to take questions from the audience. Operator, you can give me the first question.

[OPERATOR INSTRUCTIONS.]

John Morris.

Wachovia. I guess the question would be regarding the thought process behind the purchase of La Senza. On a go-forward basis in the growth, I mean, clearly keeping the brand name, and it sounds like you're pretty committed to the growth. I'm thinking back to the period when Victoria's Secret co-existed side-by-side with Cacique and the approach to dual branding that you had at that time. And thinking about, if you can compare and contrast this pair to that pair on a go-forward basis in terms of strategic thinking and in terms of location and future growth. Thanks.

John, we're going to go to Martyn for the questions about La Senza.

That's a great question, John, and I may not be able to address all aspects of it today, given the stage of the transaction that we're at. We see La Senza as one of the leading intimate apparel retailers, obviously the leading one in Canada and one of the top leading brands on a worldwide basis. So, I would say it is very different than Cacique in the sense that it is a well established, very successful and profitable and well distributed brand that we think will be very complementary to the other intimate apparel brands that we operate and, obviously, Victoria's Secret, the megabrand.

We also see it as a platform for us in terms of learning. And as Les described in our investor conference last week, we have been looking for the right opportunity to establish a platform for learning about international expansion and learning about operating outside the United States. And both the tenure of the management team, the success that they've enjoyed, the brands that they have built, as well as the fact that they have had a lot of success in the international franchising game and have established a very strong platform there, we think all of those are very complementary to our capabilities and give us, as I said, a very strong partnership opportunity, and also a great business to partner with.

So, I think the basic answer I'm trying to give is this is in no way, shape or form comparable to Cacique.

Barbara Wycoff.

Hi, Buckingham Research Group. Question about La Senza, the girl. Is that a teen business? I'm not familiar with it. Is it a tween business? Are you going to keep it running as whatever it's running as now? Are those stores going to be converted to lingerie? What exactly is happening with that?

We'll go back to Martyn.

Barbara, I'll take that one as well. La Senza Girl is a tween brand type of 7 to 14-year-old girl-oriented brand with an assortment that is both intimate apparel and apparel-based. It has 84 Canadian mall and power center stores today, some of which are combo stores, I think 28 of which are combo stores with La Senza Lingerie.

As I said at the outset, we're entering into this partnership with La Senza to continue the growth of their business in the way they had planned to grow it, and La Senza Girl is a fundamental part of their business model and their business presence in Canada. So, at this stage of the game, that is our intention, is to partner with them to continue to grow that brand.

Mark Montagna.

Mark Montagna, C.L. King. Just wanted to get clarification on fourth quarter SG&A. I wasn't totally clear. Is it going to be equal to the Q3 dollar increase or the Q3 percentage increase?

Mark, it's Martyn again. What we were referring to is the percentage increase. Q3 was 18%. We're looking for something similar to that in Q4 on a dollar basis.

And then just a quick follow-up with Express. Was wondering if you could just give us some quantified results in terms of direct marketing, like for the third quarter. What kind of hit rates are you getting with it, and how much is it up versus last year?

Direct marketing, you don't mean catalog. We don't have an Express Catalog.

Do you mean CRM?

Yes, the CRM.

I think it's up 40% from a year ago.

Oh, in terms of the response rate.

[That's in] our response rates.

Randal Konik.

Randal Konik, Bear Stearns. Just two quick ones. Just on La Senza, if you think about the operating margins of the business as you studied the business model, is it something you think the business model shows it can have operating margins similar to that of Victoria's Secret today?

And then, secondly, just again on the fourth quarter guidance, when you gave us original third quarter guidance, it was predicated on high single digit comps, up gross margin, up SG&A. is there anything different about your fourth quarter guidance, or is it just conservative heading into -- ahead of Black Friday?

Randal, we're going to go to Martyn for both pieces of that question, first part about La Senza operating margins, and can they be as strong as Victoria's.

If you've not studied La Senza, I'm sure you're in the process of studying it, and you will see that their operating margins are lower than Victoria's Secret's. We're very much in the process of learning about their business and their business model, and I could not predict for you today that we could achieve exactly the same operating margins that Victoria's Secret achieves in the United States. But, obviously, we will be looking to partner with the La Senza management team to try to find any and all opportunities where we can share learning and add value. And obviously to the extent that that produces improved profitability, we will be seeking to accomplish that.

Randal, can you repeat the question?

You were going real fast.

Now, just on the fourth quarter guidance, just if you'd do a historical look at third quarter guidance when you originally gave us about flat year-over-year, then you came in about $0.06 for the quarter. That guidance was originally predicated on high single digit comps, up GM and up SG&A. If we think about going into the fourth quarter with your brand momentum strong, is there anything different about your guidance for fourth quarter, or is it somewhat conservative, in your view, ahead of Black Friday?

Well, Randal, I know you heard from us last week. We remain just as optimistic as we were in our expressions last week, and nothing has changed about that optimism that we feel about the fourth quarter. In terms of our guidance, we're high single digit comps, single-digit comps, and the overall guidance in terms of profitability increase in the fourth quarter, we see that as consistent with the optimism that we have going into the fourth quarter. And I think that's probably the best way for me to frame that at this stage of the game. I think the basic message is the game is just starting for the fourth quarter, and we feel comfortable with the guidance that we're providing.

Dana Telsey.

As you look at the La Senza acquisition and last week's basically thoughts that perhaps international could be more appealing, do you go international with La Senza perhaps beyond Canada, or does this help provide you experience to go abroad with Victoria's Secret or something like that? Thank you.

Dana, our initial focus for this acquisition is to take full advantage of the learning and to support La Senza in their growth plans working with the current management team. We're very, very pleased with the fact that we're forming this partnership with all of the leaders of that business joining with us to continue its growth.

Beyond that, I expect that we will be able to take advantage of the platform and that we will be clearly looking to address opportunities to both extend the La Senza brand on a global basis, and also, as we've indicated in our analyst discussions last week, to find the right way to kind of crack the code on international expansion of Victoria's Secret.

And should we take it that, given that you're acquisitive with this acquisition, are there potentially more acquisitions like this in the pipeline for you overseas?

We have no other current plans that I could discuss with you today.

Todd Slater.

Lazard Capital Markets. Well, congratulations on a really intelligent strategic acquisition. This makes a lot of sense on a lot of levels.

My question is on your modest accretion expectation in '07. By the way, if you could just comment on it, we're getting an estimate of about 8.7 times on an [EBIT] to EBITDA basis in terms of the acquisition price based on 65 million of projected EBITDA this year. But, what are you assuming in terms of synergies, perhaps touching on the key components, purchasing and back office real estate distribution, all that stuff? And also, what are you assuming in terms of amortization expense annually, and could you comment on the asset value? I think there were 318 or so owned Canadian stores. Thank you.

Well, let me comment on the way that you will look at the value of the business and in terms of how you would analyze what we're paying for the business. So, we're not in a position obviously to provide any guidance on La Senza's earnings for the total year. That's their job, not ours, at this stage.

Based upon what's available in terms of street estimates, we would look at the deal as -- by the way, the analyst reports that we've looked at would indicate that their EBITDA would be Canadian dollars 67 million, EPS of Canadian $2.10. That's analyst reports, not La Senza numbers, which would put the enterprise value at around 9.5 times EBITDA. And I think this growth trajectory that they're on is something that we can all debate and discuss, but we see it in a very positive light.

The accretion, the way we've looked at it is basically without the benefit of any synergies or other potential value creation opportunities that we might be able to find in the partnership between La Senza and ourselves. We do see the deal as modestly accretive in 2007 and, obviously, much more positive going forward. So, that's the way we've done that number. In terms of the potential synergies, obviously we will be pursuing all of the areas in which we can partner with La Senza to add value to their business. Clearly in the store scene and supply chain arena there would appear to be some obvious opportunities.

We're also interested in learning from them. They do some very unique and different things in Canada and the rest of the world than we do, and we will be very open to learning from them as well, which may add value to our business.

Can you just comment on the quantified type of synergies you see in that assumption?

At this stage we're not prepared to do that.

Is there significant amortization expense number annually in there?

There is an estimate of an amortization expense but, as I have mentioned in my comments, we're very early, and we have not done the work we will have to do on purchase price allocation.

And on the value of 318 owned stores, any sense of that?

I can't really comment on the value of it other than the fact that it's obviously the 300-plus stores are a fundamental part of the value of the deal itself. I put management first, stores second, in terms of value.

Lorraine Maikis.

Merrill Lynch. Thank you.

Because La Senza has primarily expanded by licensees, should we assume that this is how we should expect to see Victoria's and maybe some of your other concepts expand globally?

Lorraine, Martyn again. No would be the answer to that question. As we discussed in the meeting last week, we're examining a variety of alternatives for, again, what I call cracking the code on international expansion for both Victoria's Secret and Bath & Body Works. In a classic framework, you would be looking at acquisition, which we've just announced, joint venturing, franchising or, in fact, company development. And I think it would be fair to say that we will consider and evaluate all of those alternatives to determine exactly what the right opportunities would be in the right geographies. But, again, our first priority right now is to successfully partner with La Senza on this acquisition.

Richard Jaffe.

Stifel Nicolaus. Just a follow-on question with La Senza. How will you lead that business? Will you fold them into Columbus? Will they be part of Victoria's Secret? Will they report directly up to you, Martyn, or to Les? How do you anticipate the integration of these businesses and the fit presumably with the Victoria's Secret business?

Richard, the business will remain a standalone business managed by the current management. Again, it's founder-led with Irv, Steve and Laurence, actually goes by [Laurie], with the tenure that they have and the leadership team they have in place, we will partner with them. The business will report to Len Schlesinger, our Vice-Chairman and Chief Operating Officer. We do not intend to integrate it into our U.S. business or our U.S. business management teams any further than what I just described.

No distractions at all, and maybe some synergies longer-term?

Absolutely.

Kimberly Greenberger.

Citigroup Global Markets. Could you comment on the percentage of the intimate apparel market in Canada that La Senza owns? And as they evaluate their opportunity for growth through La Senza Lingerie and La Senza Girl in Canada, what is the potential there? And do you have any initial thoughts on what you think that the learnings are going to be for Victoria's Secret as Victoria's Secret studies the La Senza business? Thanks.

What we can report on market share from what we have available to us in the Canadian market is that we estimate that La Senza has a 15% overall market share of intimate apparel in Canada, but has also a 38% market share in the core 15- to 29-year-old demographic, which of course would be a similar demographic to the Victoria's Secret business in the United States.

And initial thoughts on learnings?

I think that one of the interesting dimensions of the La Senza business that we are anxious to learn more about is their off-mall business and the way they operate their off-mall business in Canada. Their mall business would be I think similar to ours and, again, we'll be looking for the right synergies or value creation opportunities between our businesses. I'm not sure I would comment further about learnings that we would expect to derive from La Senza.

And then, just any comment on the store potential for both the Lingerie store and the Girl stores?

We expect, as I described, that their continued expansion both in terms of La Senza Lingerie and La Senza Girl stores will continue in a way that's consistent with the expansion that they've been experiencing the last couple of years. And then, outside of the Canadian market, there's a lot of untapped expansion potential in the international marketplace.

Stacy Pak.

Prudential. First, on the fourth quarter, can you tell us what your guidance assumes in terms of BBW's operating margin recovery and VS total operating margin relative to last year? And then, second of all, with regard to La Senza, what does this mean, if anything, for your relationship with Intimissimi? Do you have plans to put any of your U.S. brands into their stores or vice versa? And can you repeat what you said, or did you say, their ultimate store potential Canada and internationally? Thanks.

The first question about BBW, as you know, we don't give specific guidance about margins or profitability by business. But, I would comment that we are expecting each of our businesses to contribute positively to the profit growth that we're projecting for the fourth quarter.

Martyn, what I'm asking there, if you don't want to give a number, fine. But, in the guidance that you gave, are you sort of anticipating that BBW recovers from last year, or can you just sort of talk about it qualitatively if you don't want to talk about it quantitatively?

Yes, qualitatively, and I don't know if Neil wants to add to the answer, but -- in fact, I might let Neil take a shot at that since I've been doing too much talking here, because I think you're really asking more of the business and strategy positioning question. I'm really not going to be able to help you that much with the numbers.

So, I think, Stacy, what I would say is, given the momentum that we've got in the third quarter, our ability to leverage SG&A, keep our margin rate flat, I think we're on a pretty good path and comfortable that the path that we're on is a good financial model for us that will deliver against our expectations.

The big issue, as you would expect, is that we're very early into the fourth quarter, and we have a very big seasonal buy, and an awful lot of the margin rate that we maintain through the fourth quarter will depend on seasonal sell-through. And we're still very early in the fourth quarter. So, that's kind of the wild card, if you will, but I would say all of the vital signs in terms of traffic, comps, SG&A leverage, margin rate, and just a healthy business overall I think would give us a positive outlook, to your question.

Right now I think that, in terms of really almost dittoing what Neil was saying, if you look at the momentum that we have in the businesses and really across all the business, whether it's Pink, Beauty, Victoria's Secret stores as well as Victoria's Secret direct, and also on some of the early indications that we have in our bra launches. We are excited about our sleepwear business as we go forward, so that we are optimistic as we go into the fourth quarter. We are going to still be investing in our marketing spend, but we do believe that there's opportunities to get paid back on that.

And then, Stacy, I think you had a question about Intimissimi, yes.

Either Sharen or I could answer it. But, the simple answer and posture that we're expressing this evening is that we do not expect the La Senza acquisition to have any impact on our current plans for growth of Victoria's Secret in the United States, which would include Intimissimi.

And any intention to bring the VS brand into La Senza stores, or vice versa?

We don't have any current plans that we could discuss with you tonight.

Paul LeJuez.

Credit Suisse. Could you just tell us how fast La Senza is growing? Which countries outside of Canada are the majority of its franchise stores? And where do they make their money? Is it on the franchise business? Is it on the home country of Canada? Can you just break that out for us? Thanks.

When you say growth, you're talking about the number of stores growth?

Yes, square footage growth, where they've been growing. Is it forecasted to accelerate going forward, decelerate, hold constant?

They've been growing principally through their core Lingerie stores, La Senza, and also through the Express stores, which is a smaller footprint store that is more distorted to lingerie only. And we are expecting that they will continue to grow in their -- and I think they've announced publicly their intention to grow at a rate of 20 to 25 stores per year between those two business models.

The Maple Girl business has also been growing, but I would characterize the new store growth projections -- their expectations as more modest, something more in the range of 4 to 5 stores per year.

In terms of their business mix, the vast majority of their business is Canadian based. The international franchise business contributes to both revenue and profit, but is a relatively small portion of both. Again, I would refer you more to what's publicly available about La Senza at this stage.

Brian Tunick.

It's Evren Kopelman with JP Morgan. A question on the apparel business. The profitability of that division this quarter, was it ahead of your expectations, and what are the primary drivers of the improvement?

And then, secondly, some of the specialty retailers that have been reporting earnings today and yesterday have been commenting on soft business trends month-to-date in November. I was wondering if you'd like to comment on what you're seeing. Thank you.

In terms of the apparel businesses for the third quarter, their growth and profitability was in alignment with our expectations. In terms of November, we really do not comment any further than what we have already provided as guidance for the month in our October sales call.

Dana Cohen.

Bank of America. One question on La Senza, then a [inaudible] on the quarter. One of the things that came through loud and clear last week was that Les is grappling with the profitability issue outside the United States. And while obviously La Senza makes good money, the profit margins aren't anywhere close to the lingerie business in the U.S. So, how do you think about that? Does that mean that you're willing to take lower profitability outside the U.S., or how should we be thinking about that?

And then just second, can you just tell us what was going on with the tax rate in the quarter?

On the first question about profitability of La Senza, as I said earlier, they're both EBITDA and EBIT margins are lower than ours. Whether that's the model for the rest of the world, it'd be hard for me to say it is or it is not. I do think it's fair to say that, on a broad geographic basis, you probably would not have the same level of profitability in terms of margins outside the United States that we enjoy inside the United States.

In terms of the tax rate, we do view our base effective tax rate as around 39%. The anomaly of the tax rate in the quarter is more of what I call the law of small numbers, a small change in one of our reserves throws off an unusual percentage for the quarter. But, it's really the law of small numbers, given our level of profit in the third quarter.

[Henry] Ikenson.

Harry Ikenson from Soleil Securities. Just one or two more items on the acquisition. Could you give us a little bit of sense as far as how the price points compare versus the price points at Victoria's Secret, and also the size of the stores? Thank you.

Harry, in terms of price point, for basic bras and panties, their price points would average something around maybe 10 to 15% below ours in the United States on a comparable currency basis. They have a broad assortment, as we do, but generally would average at a lower price point.

I don't have enough comparative information on some of their loungewear or sleepwear or apparel-oriented parts of the assortment.

How do they differentiate themselves? You differentiate Victoria's Secret brand by new technology and a great marketing and top of five brand awareness in the world. But, what are they doing to be able to grow so quickly with their brand in Canada?

I would characterize their differentiation in the Canadian market as somewhat similar to ours, not quite as -- again, not at the same price points, but very, very similar in positioning, maybe a little bit broader assortment. The La Senza Girl business is a different business. But, in terms of the La Senza Express and La Senza Lingerie businesses, I characterize them as positioned in a very similar way to the way Victoria's Secret is positioned in the U.S.

And then besides the store, I think you only mentioned the Express store being smaller. But, what's the size of the other stores?

Their average footprint, gross selling, is around 3,000 square feet versus an average size for VS in the United States of 5,500 square feet.

That concludes our call with Martyn Redgrave this evening. We appreciate you all tuning in and hope you have a good rest of the week.

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