LandBridge Co LLC (LB) 2008 Q2 法說會逐字稿

Good morning ladies and gentlemen. I will be your conference Operator today. At this time I would like to welcome everyone to the Limited Brands second quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (OPERATOR INSTRUCTIONS) Thank you.

I'd now like to turn the conference over to Ms. Amie Preston, Vice President of Investor Relations. Ma'am, please go ahead.

Thank you. Good morning everyone and welcome to the Limited Brands second quarter earnings conference call for the period ending Saturday, August 2, 2008. 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 Second Quarter earnings release and related financial information are available on our website www.Limitedbrands.Com. This call is being taped and can be replayed by dialing 1-866-NEWS-LTD. You can also listen to an audio replay from our website.

Martyn Redgrave, EVP and CAO; Stuart Burgdoefer, EVP and CFO; Sharen Turney, CEO Victoria's Secret; Diane Neal, CEO Bath & Body Works; and Tom Katzenmeyer are all joining us today. After our prepared remarks, we'll be available to take your questions for as long as time permits. So that we can speak with as many callers as possible it's important that you limit yourself to one question. Thanks and now I'll turn the call over to Martyn Redgrave.

Thanks Amy and good morning everyone. Before I start my prepared remarks, or our prepared remarks today, I'd like to take a moment to recognize a major transition that's about to occur here at Limited Brands. As many of you know, Tom Katzenmeyer has recently accepted a new position as the Senior Vice President of University Communications at the Ohio State University. After 18 years with Limited Brands and with The Limited Brands family, Tom is moving to what in many ways is just another part of our family at OSU, and he will be working directly with and directly for the President Gordon Gee. Now, from our point of view this is an incredible opportunity for Tom, the University and frankly the whole State of Ohio. And we couldn't be more pleased for him and thrilled that he is taking this new role and while we will miss him and miss him having him here with us, in fact this is Tom was telling me this morning his 72nd earnings call in his career, so I'm not sure he's going to miss the earnings call but we thought in honor of Tom's new role that we are going to have Tom answer all of your questions. No, Tom is saying no. Anyhow, congratulations, Tom. We wish you our best.

Thank you.

Now, back to our results. As we anticipated, the retail environment continued to be very challenging in the Second Quarter. As I've said for the past year, we are facing very strong head winds that we are continuing to manage through. At this stage, we're not expecting any material change in the macro or micro economic indicators for the balance of this year and we're planning our business accordingly. Nevertheless, we're very pleased with our second quarter performance. As Stuart will explain in more detail in a minute, we increased earnings per share by 35% over the prior year and exceeded our initial expectations. We continue to manage the business conservatively with respect to inventory and expenses which has led to improved second quarter profitability despite our negative comps. At the same time we're aggressively focused on bringing compelling merchandise assortments, marketing and store experiences to our customers to maximize our upside, and we're continuing to be opportunistic whenever we see openings to move forward in this difficult environment.

Now as we did on the first quarter call, today, we will take more time with Sharen and Diane to discuss Victoria's Secret and Bath & Body Works but it's worth noting that we continue to be very much on track with our technology implementations at our MAST industry sourcing functions and with our real estate initiatives. We're also on track with our progress in the new Victoria's Secret Direct distribution center. In the second quarter we successfully implemented improvements in our material handlings and systems capabilities. We are confident that we are on the path to be able to meet all of our holiday shipping levels and requirements. However, as I mentioned on the first quarter call, we are still not at our targeted accuracy or productivity levels in this new center and we'll be continuing to work on improving as we move through the Fall season.

We also continue to put a lot of effort into pursuing the international opportunities, evaluating markets, partners and our approach and of course laying the ground work in the supply chain, logistics and other areas of our business to prepare to deliver our brands to the rest of the world. Our first area of focus is Canada and we are very much on track to open six new BBW Stores in Canada this Fall with another Fall opening in the early Spring 2009.

Now before I turn it over to Stuart I'd like to make some comments on Le Senza's second quarter performance. Our second quarter results at La Senza were consistent with our expectations. Second quarter sales were $134.5 million and comps were up 4 %. As incremental growth from our Victoria's Secret Beauty product in La Senza Canada stores offset declines in core lingerie and La Senza Girl. Operating income dollars and rate were both up significantly to last year. The rate increase is primarily driven by a significant increase in the gross margin rate as a result of fewer promotions and aggressive management of inventory. So with that I'll turn it over to Stuart. Thank you.

Thanks Martyn and good morning everyone. Turning to our second quarter performance we reported earnings of $0.30 per share versus $0.67 per share last year. This year's results includes a pre-tax gain of $13.3 million or $0.02 per share related to a $71 million cash distribution from Express. Last year's results include a number of significant items which are described in detail in our press release totaling $0.47 per share. Our earnings per share excluding these items in both years were $0.27 this year versus $0.20 last year an increase of 35%. All results discussed in this call exclude these significant items from both periods.

Our earnings result exceeded our initial expectations driven by higher than anticipated merchandise margins and aggressive expense management. Second quarter net sales were $2.284 billion versus $2.624 billion last year and comps were down 7% against a positive 1% comp increase excluding Apparel last year. The gross margin rate increased 230 basis points to 33.3%. Excluding the impact of the apparel divestiture and related MAST sales recognitions, the gross margin rate was up roughly 340 basis points. By segment, the gross margin rate was up at Victoria's Secret and up significantly at Bath & Body Works. As a significant improvement in merchandise margin was partially offset by buying and occupancy deleverage at both segments. The SG&A rate improved by 40 basis points. Excluding the impact of the Apparel divestiture and related MAST sales recognition, the SG&A rate deleveraged by 100 basis points on the negative 7% comp. SG&A dollars excluding Apparel from last year was roughly flat year-over-year.

Total operating income increased $42.8 million to $185.2 million, excluding Apparel operating income of $6.6 million last year, operating income increased by $49.4 million. By segment, the Victoria's Secret segment increased by $20 million to $182.4 million. Bath & Body Works increased by $26.6 million to $40.6 million. In the other segment, expense decreased by $2.8 million to a loss of $37.8 million.

Retail inventories ended the quarter down 18% per square foot at cost. We completed our $500 million repurchase program in the quarter with the repurchase of 1.5 million shares for $27.4 million. Now, turning to our earnings outlook for the third quarter, we expect third quarter earnings per share of between $0.00 and $0.04 versus last year's loss of $0.01 per share which excludes a gain from the sale of Corporate Aircraft of $0.04 per share in 2007. As you know, the third quarter is typically challenging for us. It is our lowest quarter in sales volume as it lacks a significant holiday or semi-annual sale. In addition, we are investing in the third quarter in preparation for the holiday time period and it is difficult to leverage these investments on the low sales volume. We estimate that third quarter comps will be down in the low single digit range on top of last years negative 3% comp. Sales dollars should be relatively flat as an increase in sales at the Victoria's Secret segment primarily driven by Direct will be offset by a decline in sales at MAST.

We also estimate that the third quarter gross margin rate will be up. There are a couple of important things to call out that will impact our gross margin rate in the third quarter. First, it is important to note that throughout 2007, we were aggressively focusing on managing and reducing inventories. We began 2007 with retail inventories up 47% per square foot. That level declined progressively throughout the year and we ended the year down 25% per square foot. As a result, we don't expect to see the same level of merchandise margin rate improvement in the brands this Fall that we achieved in the Spring as we're now anniversarying the benefits of the tighter inventory management that we began in 2007.

Second, we are forecasting a decline in MAST sales in the third quarter of over $100 million associated with a decline in business for Express and other third party customers. The decline in the lower margin MAST business will have a positive impact on our overall gross margin rate. In addition, buying and occupancy costs which are increasing as a result of our real estate strategy will delever on the negative low single digit comps. We estimate that SG&A dollars and rate will be roughly flat in the third quarter. We expect that operating income dollars will be up in the third quarter driven by an increase in operating income at Victoria's Secret Direct and lower corporate overhead expense partially offset by operating income declines at Victoria's Secret Stores, Bath & Body Works and MAST.

Interest expense is expected to be roughly flat to last year and interest income approximately $5 million lower driven by lower cash balance. Inventory levels in the third quarter will continue to be down to last year although the rate of decline will continue to moderate as we lack last years decreases. We expect to end the year with retail inventories per square foot roughly flat to last years levels. For the full year 2008, we are projecting earnings per share of $1.45 to $1.60 excluding the $0.20 of significant items in the first half or earnings growth of 20 to 32% versus last years $1.21 result. We expect full year comps to be down in the low single digit range consistent with our guidance on our last earnings call. This implies a Fall two year comp trend of negative high single digits versus our Spring result of down 5 excluding Apparel for 2007. For the full year we expect an improved gross margin rate driven by improved merchandise margins at both brand segment s and an improvement in the SG&A rate. Although there is no impact from the Apparel divestiture to our Fall results it drives a negative impact to the full year gross margin rate and a favorable impact on the SG&A rate.

We are now projecting 2008 capital expenditures to be between 500 million and $525 million versus our previous guidance of 515 million to $540 million. The 2008 total capital expenditures will be down more than $225 million from the 2007 actual. Our project plans have not changed significantly since last quarters call and we are still projecting 7% square footage growth at Victoria's Secret, 4% at BBW, and 14% in Canada including La Senza and BBW for a total Company growth of over 6%. Sales in the remodeled and expanded Victoria's Secret stores continue to run about 20 points above the balance of Company average. The majority of our CapEx budget, roughly 75% is driven by real estate activity. About 15% of our CapEx budget relates to investments in technology initiatives. The remainder of our CapEx budget relates to home office and distribution center investments. Our free cash flow and cash position along with additional amounts available under revolving credit facilities results in varying strong liquidity, which is more than sufficient to fund our working capital, capital expenditures, dividends, share repurchases, and any other foreseeable needs. Thanks. And now I'll turn the discussion over to Sharen.

Thanks Stuart and good morning. I'm pleased with the progress that we've made at Victoria's Secret in the second quarter. We are reconnecting to our heritage and tying even more sophisticated, feminine, sexy story across all of our channels. We started an evolution that will lead to products that are new and better differentiated. Launches have been successful and we're taking lessons from each one to make the next even better. There are positive signs in the quarter for the total segment. Operating income was up $20 million on a $41 million sales increase. Inventory is down and merchandise margin is up. We achieved overall total sales growth of 3% in the second quarter to $1.4 billion as a result of sales growth from new and expanded stores and 7% growth in the direct channel partially offset by negative 7% comps. Total segment operating income increased $20 million or 100 basis points to $182 million.

Let's talk about our channel starting with the stores. In Q2, store comps were down 8% against a positive 4% comp last year slightly below our expectations. Sales were roughly flat to last year at $913.4 million. The gross margin rate was up to last year as a significant increase in the merchandise margin rate was offset by buying and occupancy expense deleverage. SG&A expense also delevered on the 8% negative comp. The merchandise margin increase is a result of fewer promotions and better sell-through on fashion. We also had improved margins in PINK. Operating income was roughly flat to last year in dollars and as a percent of sales. There are a couple of specific points of interest I'd like to call out from the quarter at the stores.

The relaunch of Biofit in May beat expectations. Based on the response to the initial launch we were able to react and chase that opportunity. We were pleased with results of the 350 stores of Swim test and are evaluating how to make this a bigger opportunity for next year. Beauty missed our expectations for the quarter due to lack of newness and anniversarying the clearance of Garden last year. The semi-annual sale was a success as margin dollars were up significantly driven by fewer redline units and increased sales of full price products.

Coming out of semi-annual sale we featured our July 8, floor set which included some elements we've been testing to show a softer more feminine side of the brand. There will be more to come over the next month including fabric mannequin forms, better in store navigation and other softened elements. Finally, we launched PINK's back-to-school assortment which included the co-branded collegiate line we've been talking about. We are pleased with the results of the collegiate line and excited about the opportunity for further growth.

Now let's move to the Direct channel. Sales were $423 million, up 7% to last year. Sales growth was driven by strength in Spring merchandise such as swimwear and dresses as well as bras and shoes. Operating income dollars were up and the operating income rate increased significantly. In fact, following the challenges of last Fall, VSD achieved its highest operating income results ever this Spring. The operating income rate increase was driven by significant leverage in SG&A and marketing partly offset by a decrease in the gross margin rate. Direct continues to aggressively manage the fundamentals. In addition to expense being lower, inventories level ended the quarter down to last year. The decline in the gross margin rate resulted from a lower merchandise margin rate as well as increased buying and occupancy expenses, particularly in distribution center and Internet technology costs. The decline in the merchandise margin can be attributed to promotional activity. Direct is in a strong position heading into Fall. The client file is healthy and has continued to grow and inventory is at an appropriate level. I believe our strategic initiatives are succeeding in Direct. The Swim success in stores was in part attributable to what we learned from offering it in Direct and the regional store distribution of the PINK collegiate collection is being complemented by having the entire line available online, a store associate can send our customer to the web if her nearby store features a local school but not her favorite National University. That's Q2 and before I wrap up, I wanted to share a couple things that we are excited about for the upcoming quarter.

We will feature Supermodel Obsession starting in a week. This is a line that highlights some of our most beautiful and most giftable lingerie yet. You'll also see it featured in a national advertising campaign that represents our new elevated marketing approach. We'll continue to invest in the in store experience. We're rebrandings with the fundamentals in our training. I also think you will see how our innovation pipeline is getting stronger. We'll have a story that's more about our fashion authority and beautiful colorations. The products in Fall will be fresh and there will be lots of newness. Plenty of reasons for her to come back to shop with us and we'll support that newness and continue our string of successful launches with further investment in marketing and our launch strategy. Lastly, we are very excited about our new sleepwear assortment. It's beautiful, luxurious and elegant and early Fall selling has been good.

So in closing I'd say we have some things to feel cautiously optimistic about, despite comps being down, we maintain healthy profitability. I think that it's an indication of a strong core in a tough environment. As Stuart mentioned the third quarter is typically challenging but I feel good about the progress we have made and about our plans for the Fall and holiday season. Thank you, and now I'll turn it over to Diane.

Thank you, Sharen. Bath & Body Works second quarter comps were down 8% versus a 4% decrease last year, primarily driven by continued softness in store traffic. Total sales for the quarter were down 2% or $9 million versus last year. The 6% spread between comps and total sales represents sales from our new stores. Despite the Q2 sales decrease to last year, gross margin increased significantly versus last year driven by the 2007 impact of inventory related charges associated with the write-off of excess component inventory and shrink. As a result, both merchandise margins, gross margin dollars and rate increased significantly to last year. Consistent with prior quarters we continue to experience deleveraging of fixed buying and occupancy expenses associated with a negative comp. Also consistent with Q1, SG&A expenses were flat to last year due to aggressive expense management, the deleverage due to negative comp sales trend.

For the quarter operating income versus last year increased $27 million to $41 million driven by the 2007 impact of inventory related charges discussed earlier. During the quarter performance of our eCommerce business met expectations. We continue to view the Direct channel as both a revenue generator and marketing vehicle for our brand and collection of subbrands. Looking ahead we have a conservative outlook on the third quarter. We will continue to take proactive measures to manage discretionary spending and inventories to mitigate any top line softness.

Throughout last Fall and Holiday season we believe we lacked newness in the overall assortment and that we also missed in our gifting assortment. These factors dampened excitement throughout holiday which required additional markdowns earlier to clear seasonal merchandise and impacted the overall performance of our semi-annual sale. Leveraging these learnings we will introduce exciting new products every three weeks as we refresh our Stores starting September 3, with our Black Amethyst fragrance body care launch. Along with this new fragrance we will surround the launch with new ancillary products, new accessories and more sophisticated gift sets assorted into our key price points and packages. Similarly, each Fall floor set will launch with new products, product extensions and coordinated gift sets and accessories.

We mentioned in the last call that we would share our plans to reinvigorate our signature collection which has been the primary reason we saw year-over-year declines in the Spring season. This Fall we will rollout a new and more sophisticated passage to sign and formula improvements for our signature collection. The rollout will expand to approximately 400 stores in the Eastern half of the United States in mid November and the remainder of the fleet at the end of the Fall season. We will also have new creative and exciting marketing vehicles that bring this rollout to life through better in store navigation which will increase product knowledge and clarity.

Operationally, we continue to test and analyze results to segment our fleet by customer, market, and specific product opportunities. As you know, last Fall we ran a skew reduction test and have implemented those learning into our Fall 2008 assortment architecture. We have been testing this Spring and will continue through Fall different segment of assortments by market to expand or contract specific products and/or brands to maximize our overall square foot productivity. We are encouraged by early results and will continue to improve upon these efforts throughout the balance of the year and into Spring of 2009 and in addition the new technology infrastructure that we implemented last year will greatly aid in our efforts to achieve the segmentation initiative. We are currently in our annual hand soap event which focuses on our anti-bacterial and aroma therapy hand soap. New to this theme is our gel hand sanitizer, the extension of two signature collection fragrances into our anti-bac collection, Irresistible Apple and Velvet Tube Rose and a preview of our Perfect Autumn seasonal home fragrance collection. In early September, we move to our Fall fragrances theme where we launch our Black Amethyst fragrance. In late September we move to our home fragrance theme focused on the Perfect Autumn home fragrance collection. In mid October, we begin our countdown towards holiday.

Looking forward to Holiday and the balance of Fall season we believe that continued focus on our key priorities building on the learning from last Fall and the rollout of the new Signature collection will allow us to build momentum throughout the balance of the year and to position us to deliver a successful holiday and overall Fall season. With that I'll turn the discussion back over to Amie.

Thanks, Diane. That concludes our prepared comments this morning. At this time we would be happy to take any questions you might have. In the interest of time and consideration to others, please limit yourself to one question. Now I'll turn it back over to Tina.

Thank you. (OPERATOR INSTRUCTIONS) Our first question will come from the line of Paul Lejuez with Credit Suisse.

Hi, guys. Martyn, Stuart, now that the third quarter is more apples-to-apples, just looking at the expense line, I think you said it was flat on an apples-to-apples basis in the second quarter. What should we expect for the whole second half and I'm even thinking a little bit further out. What is a normal expense run rate in this business as we look out to '09? Can you run the business on flat expenses?

Thanks, Paul. We'll go to Stuart.

Paul, for the third quarter we're expecting a roughly flat SG&A rate. As we look further out to your point we continue to be very focused on expense management as we've talked about over the last several quarters with particular focus on overhead expenses in the home office. With that said, obviously, in terms of on a rate basis what really is important is whether we leverage or deleverage depending upon the comp. As we add stores which we're doing obviously expense dollars increase related to that store activity but we're working hard to manage our overhead very tightly and as we've talked about pretty consistently on a go forward basis we do want expenses to grow slower than sales and we're very focused on that. The wildcard at this point is what assumptions we make about the comp trend. So that's kind of where we are.

Thanks, Stuart, next question.

Our next question will come from the line of Dana Cohen with Banc of America Securities.

Hi, guys. I just wanted to clarify, you're saying that the improved profitability at Victoria's Secret complex this quarter was entirely from Direct so as you look at the back half, I want to confirm that, but in the back half of the year given the $80 million or so that was the expense related to Direct, can you help us understand if we just take Victoria's Secret in the back half of the year, should we get all of that back, offset by other things? Just help us to understand because there's so many moving pieces.

Thanks, Dana. We'll go back to Stuart.

Dana, the three or four things that I would just call out in terms of the dynamics are as it relates to Victoria's Secret Direct, we've talked about $70 million to $80 million negative impact a year ago and that skews more towards the fourth quarter than the third quarter, so I'd start with that, and in addition, there are ongoing higher cost levels running the just new distribution centers than there were in the old distribution centers, so point one would be more of a skew to Q4 versus Q3 on the VSD $80 million and the second thing is we called out in our prepared comments is in the low volume third quarter, we really have deleveraged both in buying occupancy and in some SG&A and marketing related investments that we're making to really set up for a strong fourth quarter. And then the last big variable is what we called out with respect to the decline in MAST third party sales related to the step down in the Express business that's by contract in connection with that transition services agreement so those are the big variables.

Great. Thank you.

Our next question will come from the line of Tom Filandro with SIG.

Congratulations. Good quarter in this tough environment and I'd also like to wish Tom the best as he approaches this next phase of his life. He will be greatly missed on the Street on both a professional and personal level so thanks Tom.

Thanks Tom.

Diane sort of touched on this but I'd like do ask it both of Diane and Sharen. As you plan the holiday season this year, we have a shorter selling season and no doubt shoppers will be focused on price more than they have in prior years. Can both Diane and Sharen sort of give us a view on how you combat those two issues from both a marketing and merchandising vantage point please?

Sure. Thanks Tom. We'll start with Diane.

Well, as I mentioned during my remarks and actually on the last call, we have a much more newness this Fall in Holiday than we had last year. We have focused our assortment specifically our gift set assortment into key sellers, key price points which are much more value oriented than they were a year ago, as well as the fact that we have a pretty exciting Black Friday which I can't share with you but we have a very exciting Black Friday offering and then we have a couple of different options for the month of December about how we're looking at the business and we can drive either promotional or non-promotional based on what happens in the early part of the season. So we actually feel we're in a really good position to react to macroeconomic trends.

Sharen?

Tom, basically for Victoria's Secret one of the things as you look at our inventory levels today and being on the conservative side, we have a very strategic testing strategy in play, both using the stores and direct, to go after those holiday items so that we have the ability to read and react and to chase into the things that we feel strong about working. We also have a lot more newness in our fleet in terms of our giftables as well as in the Beauty category and how we're actually looking at transitioning that two weeks prior to Christmas. We've made some strategic marketing investments and changing in our circulation strategy both in the direct channel and the store channel to beef up our Black Friday as well as how we can approach between Thanksgiving and the Holiday time frame. So I think that we feel pretty excited about the things that we are doing. We have a very cohesive holiday statement this year and I think that the giftable assortment as well as the reinvention of our sleepwear assortments will bode well for us for holiday.

Thanks, Sharen. Next question?

Our next question will come from the line of Barbara Wyckoff with Buckingham Research.

Hi, everyone. I'd like to ditto what Tom said to Tom Katzenmeyer and to the Company. Congratulations. This question is for Martyn and Stuart. How are you looking at potential acquisitions in either the lingerie or personal care business which will complement what you do in Victoria's Secret and Bath & Body Works? Or are you exclusively focusing on rebuilding the margins in Victoria's Secret and Bath & Body Works with that overlay of international potential?

We're going to go to Martyn, Barbara.

Good morning, Barbara. The way I would answer that question is to repeat our number one priority, the main thing is less calls which is our core brands in the United States and so the distortion of time, effort, resources, capital that we're putting to our core businesses will continue and will be our priority. We're always looking for opportunities and we're always shopping for things that might fit into our core brand portfolio in the United States, product oriented things in particular, but that's not what I call a major priority inside the US. Outside the US as we look at the international opportunity, we are looking at different ideas around either acquiring into, joint venturing with, or partnering within a franchising sense companies that are either directly in the product space that we're focusing on or have very significant retailing capabilities or real estate development capabilities in the key markets of the world, so I wouldn't preclude acquisitions in the rest of the world space.

Okay, thank you.

Our next question will come from the line of Todd Slater with Lazard Capital.

Thanks very much. Tom, we are going to greatly miss you.

Thanks, Todd.

Question about the mid point of your guidance for the year assumes sort of $1.13 in earnings in the fourth quarter which is about a total Company EBIT rate of 17% which is below last years 17.8% yet you're cycling big VS markdowns due to bloated inventory, the distribution nightmare, you've got a lower MAST mix which is positive for margins so I'm wondering if you think that Bath & Body and VS could actually have on an apples-to-apples basis down margins on a segment level in the fourth quarter and then Martin I saw you registered the Victoria's Secret trademarks in Russia and there are rumors you signed a deal, joint venture partner there, I'm wondering if we should expect something in Russia or the Middle East as your first efforts outside of Canada internationally and how far along you are in UK, Continental Europe, Asia and South America.

Thanks Todd. We're going to go to Stuart for the first part of your question.

For the fourth quarter in terms of what's in the middle of our guidance range, I see slight improvement at the consolidated level for operating margin and excluding VSD, I would say yes and BBW roughly flat. Roughly flat for the fourth quarter.

Thanks Stuart. Martyn?

Todd, let me just comment a little bit more broadly on international because I know it's on a lot of peoples minds. As I said in the prepared remarks, our test ground for international expansion of our brands is Canada, so we're putting a lot of time and effort in learning about how to deliver our brands outside the United States in the form of the BBW store launch that will take place in September and October of this year. We're also building the management team as I've talked about before. We just in the last couple of weeks a new leader, Ralph Jansen who has joined us from Triumph International out of Hong Kong has started with us so he has the intimate apparel background combined with Martin Waters as the head of our international business who has the personal care and beauty background from Boots International. So a few other key team members in place to prepare us to do this work outside the United States as well as with the leverage of our international experience from our La Senza international team, building and testing capabilities in terms of how we do all of the work that it takes to deliver a brand well outside the United States, and yes, we are narrowing our list of potential franchise and joint venture partners. I can't comment specifically on Russia. We're registering our marks all over the world to make sure that we're prepared to have our brands be present in different markets of the world and I'm not really in a position to make any other announcements at this stage.

Thanks Martyn. Next question, please?

Our next question will come from the line of John Morris with Wachovia.

Thanks. Add my congratulations too and best wishes to Tom. Diane, question for you at Bath & Body Works I believe is the launch line up this year versus last year and your effort to introduce more newness, how will this launch comparisons look in terms of numbers in the back half on a year-over-year basis, and how, I guess how does that square with your efforts towards the skew reduction program? In other words are we going to get more launches but fewer skews and the signature collection rollout slated for mid November, did that get pushed back in terms of timing? I had in my notes I thought maybe it was October so is the timing the same and then if you can comment on the pricing for the rollout for Signature? Thanks.

Okay, we'll start with a number of launches. Actually the amount of newness that we have in our seasonal product as I mentioned in the last call is about double last year. Our core assortment SKUs have reduced over year-over-year and I think, I believe our seasonal SKU has actually increased so net we're probably slightly up in the Q4 as about as far as new products. Our Signature collection, we are testing earlier which is probably what you have in your notes we're testing earlier in the Columbus market at the end of September and our pricing overall in Signature while we're making changes to different products and formula upgrades we actually are increasing the pricing.

Increasing it by how much?

Oh, anywhere from 5 to 15% depending on the item.

Great thanks.

Yes.

Our next question will come from the line of Steve Kernkraut with Berman Capital.

Hi, guys. Let me congratulate Tom again and hopefully you'll be at the Analyst meeting this Fall so we'll be able to all say goodbye to you personally.

Thank you, Steve.

But one question, more philosophical. When you guys just spoke to the Apparel business the thesis was that with Victoria's Secret, Bath & Body Works, you'll be less economically sensitive, less fashion sensitive and therefore have consistent results and so far that hasn't been the case. So I just wanted to kind of revisit that thesis and to see what your thoughts are here and whether or not you still think with these two brands that you'll be able to with the long term deliver consistent results in spite of economic or fashion cycles.

Thanks, Steve. We're going to go to Martyn.

Yes, and I think the core to the strategy that we've been driving against over the last two years has been to focus on BBW and Victoria's Secret as two brands that we think can be world winning brands and are in fact U.S. winning brands today, both the characteristic of the products, the assortments, the basics that are part of the lines that give us I think more resiliency as well as the kind of fashion that is part of the core brands, the emotional functional and technical content of these brands, we think are the right way to focus, obviously diminishing our focus on Apparel is part of that strategically and driving now these brands into the rest of the world is we think a huge upside growth opportunity so obviously the headwinds that we face that I've discussed over the last year are persisting and we I think are demonstrating the kind of disciplined management that you would expect of us in the face of those headwinds and positioning ourselves I think for the recovery that will come because all of these things do turn at some point and we think we're at a very, very strong position both from liquidity, balance sheet, brand and positioning of the assortment point of view to goal get back to the kind of winning performance we've had consistently over the past years both in terms of sales growth and operating income margins.

Okay, I mean you guys have been excellent defensive players as you've prove with reduced inventory but you think the strategy will improve when the strategy improves and you could win with those two brands?

Absolutely. I think there's a lot of growth left in these brands and a lot of -- there is evidence by our real estate initiatives in both brands the way that the new Stores at BBW as well as the expanded stores At VS are performing.

Look forward to seeing you. Okay thanks.

Our next question will come from the line of Kimberly Greenberger with Citigroup.

Thank you and I will bid my fond farewell to Tom as well. I have a question on the comp guidance here for third quarter. I'm assuming that the August guidance for a decline of mid to high single digits stands and I guess that implies September and October will be more like flat to only down slightly. Is that simply a function of easier comparison or is there something that you're specifically doing in the merchandising effort at VS and BBW that you think will drive that improvement in comps?

So Kimberly, we're going to go to Stuart for the general answer and then if Sharen or Diane want to add anything in terms of what you might see in September and October.

So Kimberly, we are comfortable with what we put out for August to answer the first part of your question, and then as you point out, the comparisons are easier in September and October which really does square up kind of our view for the quarter in relation to our guidance. So it's just basically how the math works and we're comfortable with the August guidance we put out previously.

At Victoria's Secret, we have a little bit of shift in our launch cadence, which actually we have a very strong launch in September compared to last year as more of a weaker launch so I think some of that you'll see affected as well as we started in terms of the repositioning of the brand you'll see more of that happening later in August and really starting to roll in September and October.

And for us again, it's about the amount of newness we have our Black Amethyst that launches on September 3, and our early preview tells us that should be a good fragrance as well as home fragrance launches at the end of September and home fragrance is actually doing extremely well right plow and our initial reads on our early autumn fragrances are doing quite well and then we have in the month of October building on another one of our core brands with a new launch and accessories around it that has been doing quite well so we feel very good about Q3 overall.

Great you guys thanks. Next question?

Our next question will come from the line of Brian Tunick with JPMorgan.

Good morning. I guess for Sharen, maybe talk a little bit about the VS Beauty business maybe sort of what kind of drag that was to the comps and sort of who is working on it now to improve it? And then maybe Martyn and Stuart could talk about the plans for the cash flow now that the current buyback is completed and is there a debt-to-cap ratio you guys are focused on?

Great. Thanks, Brian. We'll go to Sharen first.

In the Beauty business we just didn't have anything in the pipeline as we came into this Spring season, and we were down in the high double digit increases -- decreases in Beauty as well as last year we went up against the restage of our Secret Garden program. Sashi Batra who joined us earlier this year, we have a much more robust Beauty pipeline as we go into the Fall season. We have some new fragrance launches, color, bath products, we actually are doing some home fragrance as well which we feel very optimistic about it and the whole objective is really to raise the level of sophistication within our Beauty to be more aligned with the total brand.

Thanks, Sharen, we'll go to Stuart for the question about cash flow.

Brian, on that, we do generate good free cash flow in the business and have sound expectations for 2008 for free cash flow. As you know, we have a record for returning excess cash to share holders over time and it's done very significant activity in that area over the years, and management and the Board periodically look at capital structure alternatives and that process is ongoing. We do not target a specific debt-to-cap ratio. We obviously understand the ratios and look at them but we're not overly focused on a particular number as the guiding principle, and that's kind of where we are. We also are obviously aware of the environment that we're operating in as most are and we combine all those factors and have periodic discussion amongst management with the Board.

Thanks Stuart. Next question?

Our next question will come from the line of Jeff Stein with Soleil Securities.

Butchered that one. The range of 145 to 160 that you're providing that is kind of a big range with most of it, it looks like coming in the fourth quarter so I'm just kind of curious, is it skewed more heavily to one of your two operating units or is this just kind of a very broad range due to a very uncertain macro environment? In other words what are you counting on to get to the high end of the range versus the lower end?

Thanks, Jeff. We'll go to Stuart for that question.

Two or three points. So one, we did narrow the range a bit as we updated the year guidance, would be the first point to make. Second point I'd make is as you know we make the majority of our money in the fourth quarter so that drives a fair amount of the range. In terms of what the key drivers are as to whether we'll be at the low end of that range or the high end of that range the most important driver is sales and that will be a function of the environment of promotional activity by our competitors and others, our reactions to that, how compelling our assortments are with consumers. Those are the key drivers which will affect sales for sure and also affect merchandise margin rates obviously based on the level of promotions that we ultimately execute in the business, and then the leverage of the expenses falls from there and the management of expenses within the season in the time period will obviously be actively managed as well but the key driver of the range is sales.

Thanks, Stuart. Next question?

Our next question will come from the line of Lorraine Maikis with Merrill Lynch.

Thank you, good morning. When you look at the Bath & Body sales decline in recent quarters, do you think the customer is trading down here and how did you take that into consideration when making the decision to raise prices? And then if Sharen could just comment on the bra launch schedule for the rest of the year and how you expect that to drive comps?

Thanks, Lorraine. We'll go to Diane first.

We've been doing a lot of testing and pricing this Spring season our overall Signature brand has been if you buy three you get one free so we've been trying a lot of different things to lower the overall buy in to generate more business and actually have seen some success in some of the areas where they don't have to spend $30 to get our Signature collection. That in itself has been working. And all of the new fragrance launches that we have been put into place, we have put out at the higher retail to kind of test elasticity of the consumer have not seen any resistance at this point.

Great. Thanks Diane. Sharen on bra launches?

Basically we have four bra launches this year compared to really four bra launches last year and we kind of classify our bra launch as A launches and B launches and this year as we look at the bra launches that we have four A launches versus last years 2A, and 2B, so as you know we just came in at the July, August Biofit relaunch, which met our expectations. We added sizes. We added colors, the new fashion colors worked very well, and so we're pleased with that. In September we come out with our new IPEX, new and improved, against last years the reversible flip bra which was not successful. We come back in October with a lace offering and then we have in November a brand new uplift bra which we're calling the New Miracle.

Great. Thanks, Sharen. Next question?

Our next question will come from the line of Marni Shapiro with The Retail Tracker.

Hi, guys. Tom, congratulations even if you are going to Ohio State. We wish you the best of luck and I'll miss you very much. If you guys could talk a little bit about Victoria's Secret and Bath & Body Works in the beauty business I'm curious what you're thinking about Victoria's Secret Beauty and the point of view there as you upgrade and make or take a more pretty point of view on the lingerie and the in store experience what happens to the body product which has tended to be a little bit more aggressive sexy the way the brand has been and if you could also talk about at BBW, I noticed the PINK product in BBW but again as you take the BBW brand more sophisticated with these new launches what does that say for the inconsistency then of having a brand like PINK in the store?

Thanks, Marni, we'll go to Sharen first.

Great as you know, one of our foundations in our Beauty business has been our fragrance business which is really what we would consider a prestige fragrance business, and this year, as we continue to look at the fragrance business, and how we are positioning that we think that there's a lot of opportunity for growth not only in this Fall season but also as we look out into the future. There's so many new things that are happening in skin care that we today are not really in and that we have a lot of things that we're working on both from a skin care and body care positioning. We're not looking at actually getting out of the Garden collection. It's just that we're looking at really holding that growth flat and basically layering on the new things that are happening in the Beauty industry today. We are not even in the home fragrance business that we believe has such a big opportunity. If you think about Victoria's Secret and the loungewear that we're doing with the new sleepwear it's a natural adjacency for us to be looking at. There's also new things and new technologies that can tie back to what's happening whether it's lace and silk. I don't want to tip my hand too much but a lot of things coming forward for us for the Spring season. So we're very optimistic about the beauty business and really we'll be putting our toe in the water for this Fall season and I think for the Spring season the line up looks pretty strong.

Does this suggest a move into also the skin care and anti- wrinkle treatment as well is that what you're saying or not that route?

I think that that is a future opportunity for us, but there are some other body products that we will be introducing in the Spring season and I think you'll see from us a very small focused line of performance skin care.

Great. Thanks.

Thanks, Sharen, Diane?

At Bath & Body Works we have struggled gaining additional share with the younger consumer, so part of the reason for putting PINK into Bath & Body Works is one, it's a powerful brand and secondly to really test our opportunity to drive in the younger consumer to overall shop which has been very successful. So I don't really think it is offset to the sophistication level that we're doing with the rest of the store.

Thanks, Diane. Operator I think we have time for two more questions.

Our next question will come from the line of Dana Telsey with Telsey Advisory Group.

Best of luck, Tom. On Victoria's Secret, there have been discussions of a bit of an image shift to maybe more English or feminine type of stature. Where are you on that? How do you see that progressing? And also given the success of PINK, has your expectations for the potential of PINK changed along with any of the margin structure given it is a lower margin business and then to Stuart any update on real estate costs and product costs given the sourcing side and he outlook for 09? Thank you.

I think we're making progress on the femininity side. I wouldn't put the word English within that. Hopefully all of you will get an opportunity to look at our national advertising campaign that actually hit Vogue and Elle and [W] this, as we speak in terms of the new fashion magazines which I think really is a great indication of where we're going. With the softer elements that are coming in and looking at the mannequins that we used to have and actually replacing those with a softer feminine bust forms really taking the mannequins out of the windows so helpfully that if you have an opportunity within the next four weeks, you'll start seeing that as we roll those elements out to the store. The other piece is that when we put together the color palettes instead of having them so differentiated now we have the opportunity with the color palette to play off of each other that you can go anywhere in the store and buy a bra and find a matching panty. So I think that the whole femininity and sophistication level of what we're doing I'm very optimistic about.

And on the cost side, with respect to costs associated with real estate we haven't observed a major change there in terms of where we would have been six or 12 months ago in terms of cost per foot or underlying cost. As it relates to product cost, we are seeing some increase related to transportation of fuel. We think we've accounted for that properly in our views that we shared with you. And as it relates to product cost itself, various efforts that the business has made to reduce cost through smart sourcing and good strategic relationships with vendors, those activities have largely offset cost pressure as it relates to merchandise.

Thank you.

You'd also asked a question about the success of PINK. One of the things that we had implemented was a strategic sourcing initiative around the PINK product and that we are seeing benefits from that as we continue to work. As you know that when we launched PINK we were pretty much basically manufacturing that in our traditional manufacturing base which is really more about functional bra expertise versus some of the fashion so we have been working through sourcing and quality and I think that you'll see some improvement and we saw some improvement in that as we came out of the Spring season.

Thanks, Sharen. Operator one last question.

Our final question will come from the line of Mark Montagna with C.L. King.

Hi. Just a question regarding Victoria's Secret. You have I guess five clearance stores and outlet centers and then eight regular stores and outlet centers. Wondering how those eight stores differ from your regular mall stores and is this a strategy to grow Victoria's Secret in outlet centers throughout the country and if so does that perhaps somehow change the in store strategy, the regular Victoria's Secret Stores?

Basically, what we did was that we have opened up six clearance center stores to really what I would say just flush out excess inventory. Our regular stores that are in clearance centers are regular priced and do very well. We are continuing to watch that and I don't see us right now within the next year, I'll just go out to the next year, opening up any more clearance centers to flush inventory. So it is, that's all it is and so we're being very strategic about that but we happen to do very well regular priced in some of these clearance malls that we have regular priced stores and we'll continue to have regular priced within those stores.

So do you see that base of regular priced stores growing in the outlet centers?

Not so much in the strategic real estate or view that we have today, that is not where we're focusing.

Okay, thanks.

Thanks. That concludes our call this morning. I'd like to thank everyone for your continuing interest in Limited Brands.

Ladies and gentlemen, this does conclude today's teleconference. You may all disconnect.