LandBridge Co LLC (LB) 2009 Q4 法說會逐字稿

Good morning. My name is Christy I will be your conference operator today. At this time, I would like to welcome everyone to the Limited Brands fourth quarter 2009 earnings conference call. All lines are placed on mute to prevent any background noise. After the speakers' remarks, there will be question-and-answer session.

(Operator Instructions). Ms. Amie Preston, Vice President of Investor Relations, you may begin your conference.

Thanks, Christy. Good morning, everyone and welcome to the Limited Brands fourth quarter earnings conference call for the period ending Saturday, January 30, 2010. As a matter of formality, I need to remind you that any forward-looking statements we may make today are subject to our safe Harbor Statement found in our SEC filings. Our fourth-quarter earnings release and related financial information, including any non-GAAP or adjusted financial reconciliation tables, are available on our website, www.LimitedBrands.com.

This call is being taped and can be replayed by dialing 1-866-noon-LTD. You can also listen to an audio replay from our website. Martyn Redgrave, EVP, and Chief Administrative Officer, Stuart Burgdoefer, EVP and Chief Financial Officer, Sharen Turney, CEO of Victoria's Secret and Diane Neal, CEO of Bath and Body Works are all joining us today.

After our prepared comments, we will be available take your calls questions for as long as time permits. So we can speak with as many callers as possible, please limit yourself to one question. Thanks, and now I'll turn their call over to Martyn Redgrave.

Thanks, Amie and good morning, everyone. I would like to start by saying that were very pleased with our performance in the fourth quarter. The strength of our assortments combined with a disciplined inventory and expense management enabled us to significantly reduce our promotional activity.

On an adjusted basis, our gross margin rate increase 650 basis points in the quarter. Operating income dollars increased 50% and the operating income rate increased by 610 basis points. Our adjusted earnings per share, as I know you've read, increased 49% to $1.01. This strong performance was the result of our intense focus on execution, staying close to our customers, and increasing speed and agility. As we enter 2010, we recognize that the environment remains uncertain and challenging. Accordingly, as Stuart will explain in more detail in a minute, we will continue to manage inventory, expenses and capital very conservatively.

We will also continue to drive the business with an overriding focus on disciplined execution of retail fundamentals. Improving our ability to react with speed and agility, to maximize our sales and profit opportunities, is a critical priority. In addition, with the last phase of our retail operations platform technology systems implemented last year, we will begin to capitalize on benefits at Victoria's Secret and further leverage the benefits we are realizing at BBW.

Our entire organization is aligned and focused on these key imperatives. And while we've make considerable progress, we see many more opportunities to improve in many areas. Our number one priority continues to be improving the results of our core US businesses. We improved our full-year operating margins by 200 basis points to 9.9% this year and we remain very focused on achieving our goal of 15%.

Now, before I turn it over to Stuart, I would like to provide you with an update on our international businesses, beginning with the La Senza business. As we announced on last quarter's call, we completed the closure of the La Senza Girl freestanding stores in the fourth quarter. La Senza Girl has had a negative impact on La Senza's financial performance and was not aligned with our overall strategic focus on lingerie, and personal care and beauty. The cost and charges related to this closure totaled roughly $13 million in the fourth quarter.

Also in the fourth quarter, La Senza comps were down 2% in the core lingerie business. Total La Senza comps which include La Senza Girl were down 4%. Excluding the cost of the closure of La Senza Girl business, the gross margin rate increased significantly, driven by a significant increase in the merchandise margin rate which was benefited by a favorable foreign currency impact compared to last year as well as an improved assortment. As we've mentioned previously, La Senza purchases its merchandise in US dollars.

Also despite the negative comp, SG&A expense leveraged. Excluding the cost related to the cost of closing the La Senza business, operating income dollars and rate increased. For the full year, La Senza comps in the core lingerie business declined 6% and the total business, including La Senza Girl declined 8%. Total sales were $423.5 million, excluding costs related to the closure of La Senza Girl. Operating income dollars and rate increased over last year.

As we mentioned on the last call, President Joanne Nemeroff and her team are testing changes in the marketing and store layout as well as a more focused assortment. We saw very strong results from these test scores in the fourth quarter and as a result, we will be rolling these changes out to more stores in the spring. On balance, we are actively engaged in the strategy to turn this business around and we're confident that we will see improvement in 2010.

Turning to our other businesses in Canada, we ended the year with 31 Bath and Body Works stores and four Pink stores. We continue to be very pleased with the performance of these new stores. In 2010, we will open for Canadian Victoria's Secret stores in the West Edmonton Mall and the Toronto area. In addition, we plan to open five more Pink stores and 30 to 35 more Bath and Body Works stores across the country.

We also ended the year with seven stores operating under the new travel and tourism retail model. You may remember from our update meeting that these are small Victoria's Secret stores focused on beauty, and Victoria's Secret branded accessories. The stores are approximately 1000 feet in size and are operated by partners under our wholesale model.

They are principally located in airports and tourist destinations. These stores continue to deliver very strong early results with sales productivity levels in the thousands per square foot. In 2010, we will continue to work on our refining and improving the assortment offering in these stores and make sure that we have a robust infrastructure to support further growth. We plan to open another ten to 15 stores this year.

So in summary, we're building our existing base of profitable sales outside of the United dates. With our expansion plans in Canada, and the early success we are seeing in other initiatives, we believe we are just beginning to exploit the full potential of our brands internationally. Thanks and I'll now turn it over to Stuart.

Thanks, Martyn and good morning, everybody. Turning to our fourth-quarter performance, our adjusted earnings per share increased 49% to $1.01 per share versus $0.68 last year. Our reported 2009 results were $1.08 per share versus $0.05 last year. Both this and last year's reported results include significant items as detailed in our press release. I won't repeat last year's items, but this year's fourth quarter reported results included tax benefit of $23 million or $0.07 per share, primarily related to the reorganization of certain foreign subsidiaries. All results discussed on this call, exclude these significant items in both [years].

Our fourth quarter earnings per share of $1.01 significantly exceeded our beginning of the quarter expectations of $0.71 to $0.86 per share. This upside was driven by better comps and merchandise marketing results. To take you through the fourth quarter results in more detail, net sales were $3.063 billion versus $2.991 billion last year and comps increased 1%. The gross margin rate increased 650 basis points to 40.8%, primarily driven by significant increases in the merchandise margin rate at all of our businesses, buying and occupancy expenses leveraged as a percentage of sales.

SG&A dollars increased by $26.1 million or 5% and the SG&A rate increased by 30 basis points, primarily driven by higher incentive compensation payouts this year as last year's payouts were essentially zero. Total operating income increased $194.8 million or 50%, and 610 basis points as a percentage of sales to $585.5 million or 19.1% of sales. By segment, the Victoria's Secret segment increased by $97.6 million or 520 basis points as a percent of sales to $311 million or 17.3% of sales. Bath and Body Works increased by $85.1 million or 820 basis points as a percent of sales to $294.6 million or 29.2% of sales. And the other segment operating loss declined by $12.1 million to $20 million. Total nonoperating expenses increased by $6.2 million, driven by incremental interest expense that was partially offset by the recognition of our 25% interest in Express' fourth quarter net income.

For the full year 2009, excluding the significant items described in our press release, earnings per share increased 17% to $1.23 versus $1.05 last year. Net sales were $8.632 billion versus $9.043 billion last year, and the comps decreased 4%. The gross margin rate increased 190 basis points to 35.1%, driven by a significant increase in the merchandise margin rate that was slightly offset by buying and occupancy deleverage. SG&A dollars decreased by $119 million or 5%, and despite the negative comp, the SG&A rate improved by 20 basis points driven by our cost reduction efforts partially offset by higher incentive compensation for the fall season. Total operating income increased $140.7 million or 20%, to $858.3 million and our operating income rate improved by 200 basis points to 9.9%.

By segment, the Victoria's Secret segment decreased by $41.3 million or 20 basis points as a percentage sales to $578.5 million, 10.9% of sales. Bath and Body Works increased by $142.7 million or 600 basis points as a percentage sales to $358.2 million or 15% of sales. And the other segment operating loss declined by $39.3 million to $78.5 million.

I know there's been some interest in the drivers of results in the other segment, so I would like to take some time to provide some additional clarity. The other segment consists of our sourcing function, bath and beauty avenues, the Henri Bendel business, corporate overhead, and all of our international operations, except La Senza which is included in the Victoria's Secret segment. For the full year, roughly 85% of other segment revenue consists of mass sales to third-party retailers. Total other segment revenue for the year declined by $121.8 million or 11% to $943 million. This decline was driven by an 18% decline in mass revenue, primarily due to contractual reductions in the Express and Limited stores businesses.

The mass revenue decline was partially offset by an increase in revenues from our international operations, particularly BBW Canada. The other segment operating loss is driven by corporate overhead expense and a loss from our Henri Bendel business which is partially offset by operating income from that and our international business. The decline in the 2009 other segment operating loss was driven by a reduction in corporate overhead, resulting from our cost reduction efforts and also benefited from increased income from our international operations. Now moving down the income statement below operating income, total nonoperating expenses for the year increased by $68.8 million, driven by incremental interest expense and a reduction in interest income that was partially offset by improved performance at Express.

Turning to the balance sheet, retail inventories per square foot of cost at end of the year down 9% versus last year and down 16% on a two-year basis. We reduced our overall debt balance by $174 million this year, $158 million of which was a pre-payment of our term loan in the fourth quarter. We ended the year were $2.7 billion in total debt and $1.8 billion in cash. Free cash flow in 2009 was $972 million, a record year. 2009 capital expenditures were $202 million versus $479 million last year, and appreciation and amortization was $357 million.

Now turning to the first quarter of 2010, were forecasting earnings per share between $0.05and $0.10. This forecast reflects a comp increase of between 2% to 4% which includes our updated February comp guidance of high singles to low double digits. We anticipate that the gross margin rate will be up to last year, driven by and improvement in the merchandise margin rate. And we expect the SG&A rate to be roughly flat.

We are currently in discussions to amend our bank facilities with the objective of providing additional flexibility around restricted payments. We will announce any new terms and their impact when we come to an agreement. We expect interest expense of approximately $61 million in the first quarter, which includes an estimated $10 million in one-time incremental expense related to the anticipated payoff of the remaining $200 million under our term loans and the amendment of our revolver.

We expect roughly $7 million in other income, principally representing our share of Express and Limited stores income. Before any discrete items, our tax rate will be approximately 38% and weighted average shares will approximate [330 million] in the earth quarter. We expect to end the first quarter with inventory per square foot down in the high single-digit range.

Moving to the full year, were projecting a comp result of flat to low single digit positive. Full year gross margins will be up to last year, primarily driven by an improvement in the merchandise margin rate. We expect the full year SG&A run rate to be roughly flat to last year's. We expect full year interest expense of about $215 million, down about $25 million from last year as a result of our reduction in debt in 2009 and the anticipated repayment of our term loan this year.

We are projecting total other income including interest income of roughly $40 million, approximately $20 million above last year, driven by increased income from Express and Limited stores. This estimate assumes a continuation of the positive business trends in these businesses and that we will continue to account for our ownership in Express under the equity method of accounting in 2010. Depending on our ownership percentage in Express, subsequent to their IPO and certain other factors our accounting could change such that we would no longer be recognizing income from this investment.

Assuming all these inputs, we expect earnings per share for the full year 2010 to be between $1.40 and $1.60 per share. We continue to aggressively manage capital expenditures. We're expecting -- we are projecting 2010 CapEx between $250 million and $300 million, with roughly 70% of this spend on [utilization] in stores. We plan to open roughly 50 stores this year, mostly in Canada and close roughly 75 stores.

We'll end the year with total square foot roughly flat to last year. Details of our 2010 square plan are included in the supplemental financial information package on our website. Our remaining CapEx spending, as you know relates to technology, distribution centers, and home office products.

Turning to liquidity, we expect free cash flow in 2010 between $500 million and $600 million. Our free cash flow and cash position, along with the additional availability under our revolving credit facility, results in very strong liquidity which is more than sufficient to fund our working capital, capital expenditures, dividends, and any other for (inaudible). Thanks and now I'll turn the discussion over to Sharen.

Thank you, Stuart and good morning, everyone. I will begin my remarks this morning with a review of fourth quarter performance, then I'll address how we are positioned heading into the first quarter. We are pleased with our fourth quarter results and I am particularly encouraged by how we achieved them with strong execution of the fundamentals, and responding to the customer with speed and agility. As a result, performance was consistently positive throughout the brand. To that point, we delivered good results in both channels, bras, our best set categories, and across virtually all other categories.

Now I will address fourth quarter results for the stores channel. The Victoria's Secret stores fourth quarter comps were flat to last year, and total sales were up 1% to $1.2 billion. Our comp results improved steadily throughout the year as we corrected spring assortment issues and focused on execution. Comps improved through from negative 11% in the spring to down 4% in the third quarter and flat in the fourth quarter.

Our results were driven by strength in our bra assortment and supported by improved results in the panty category. The Miraculous Bra delivered strong results both at launch and throughout the quarter. Combined with continued growth in other push-ups styles and Pink bras, we drove bra category growth at significantly improved margin rates. This was in part due to improved to agility, including chasing an additional 400,000 units in the Miraculous Bra which contributed to fourth quarter sales.

Panties were also up to last year. Customers responded well to our assortment, and we chased (inaudible) including bright colors and panties that match bras. We presented a more focused and fashion light sleepwear assortment this holiday which exceeded our expectations and delivered significantly higher margin dollars over last year. In Pink apparel, [at least] bottoms and tops in our Collegiate programs were strong performers. Beauty sales, although down to last year, significantly exceeded our expectations at higher margin rates.

A balance of conservative inventory positioning, coupled with a strong get-set strategy, allowed us to hold ticket prices throughout holiday and achieve strong regular price sale points. Improvement in field execution created an improved customer experience and drove record conversions in the fourth quarter. This more than offset declines in traffic in 2009 against a highly promotional 2008. The merchandise margin rate was up significantly in the quarter. A strong assortment , well-controlled inventory, and chasing key items enabled us to reduce promotions and increase full price selling. Operating income dollars and rates at Victoria's Secret stores were both up significantly to last year.

Turning to performance at direct, sales in the quarter were up 3% to last year. We significantly improved in several key categories by driving more newness, innovation, and fashion. For example, in sleepwear we had more color, prints and sets which drove holiday business up double digits at higher margins. Merchandise margin rate was up significantly to last year, driven by improved assortment, tighter inventory, and fewer promotions. Operating income dollars and rates were both up significantly to last year.

For the full year, Victoria's Secret store sales were $3.5 billion and comp declined 6%. The gross margin rate decline, driven by (inaudible) deleveraged and a slight decline in the merchandise margin rate. We were able to leverage SG&A expense on a negative comp due to our expense reduction efforts. Operating income dollars declined by about 5% and the operating income rates decreased slightly.

At the direct business full-year sales decreased 9% to $1.4 billion, and the gross margin rate increased, primarily driven by an increase in the merchandise margin rate. SG&A expense deleveraged on the sales decline. Operating income dollars decreased slightly and the operating income rates increased by about 100 basis points.

Looking ahead to first quarter, we are continuing to plan conservatively in light of the uncertain environment. We will manage inventory and expenses cautiously and rely on increased open-to-buy and sourcing agility to realize upside. We feel good about how the businesses is positioned compared to how we began in 2009.

Today, inventory and expenses are well controlled. Last year, we came out of the fourth quarter with too much inventory as a result of the challenging holiday environment. Today, we have a much stronger assortment with more depth behind key items, stronger fashion, and more colors going into this year. We have re-oriented the organization to succeed as a core cultural value. We have more open-to-buy and we are positioned to take upside by puts and takes into winning styles, and we have an excellent line up of new product introductions in the first quarter.

Throughout the quarter, we will continue drive momentum with our bra launches. We will use early read of customer responses to pursue upside. Our Wildest Heart Valentine's Day theme ended last week and we moved into a spring focus store set with an emphasis on push-up bras.

In March, we will build on the success of the Body by Victoria collection and introduce three new styles, a push-up, our razorback demi, and a strapless convertible. In April, we will introduce a bra collection targeting a customer who prefers a little padding and a lighter bra. We will also continue to build on the Pink bra business throughout spring.

In panties, we will introduce more patterns and colors that match bras and we will continue to focus on key items that like the lacy program, can color multiply. In beauty, we will launch several new fragrances, including three new Pink fragrances. We will focus on gift giving at Mother's Day. In the direct channel, we will leverage the bra, panty, and Pink beauty strategies that I just mentioned and then build on those businesses with fashion and innovation in swim, dresses, and small tops.

In closing, we are pleased with our progress, but far from satisfied. We will continue to focus on execution with disciplined simplicity and speed. And of course, staying close to our customer will continue to be the priority so we can maximize our sales and profitability in the spring. Thanks and I'll now turn it over

Thank you, Sharen and good morning. At Bath and Body Works, we're encouraged by the results of the fourth quarter. We were able to deliver sales and income growth despite operating in a difficult retail environment.

We have continued to focus on our three key categories, our signature collection product line, the antibacterial business, and our home fragrance assortment which all continue to deliver improved results versus last year. Signature collection was driven by the new Twilight Woods fragrance which launched at the end of the third quarter. Twilight Woods exceeded our expectations as it was one of our most successful fragrant launches in the Company's history.

The antibacterial business posted gains over last year driven by growth in both of our soaps and (inaudible) categories. In January, we re-staged our antibacterial collection to include new packaging, new formulas and new forms. We are pleased with the performance of the re-staged line which continued on its strong growth trajectory. Our home fragrance [sales are up to last year] driven by our strong candle performance. Focusing on the three key categories helped us drive positive results in the fourth quarter, including delivering a Black Friday that was the biggest sales day ever for Bath and Body Works. Selling our seasonal collection at full price throughout Christmas, increasing conversing significantly versus last year, helping to partially offset traffic declines, while customers also spent more per transaction versus last year.

With that background, let me take you through the financial results for the quarter. Bath and Body Works fourth quarter comps were up 2%. Total sales for the quarter were $1 billion which is up 1% or $10 million versus last year. For the quarter, our operating income was $295 million which was up $85 million or 41% to the fourth quarter of last year. Operating income was driven by the positive sales comps, improvements in merchandise margin rates, and expense decreases in buying and occupancy. Buying and occupancy leveraged in the fourth quarter.

Operating income as a percentage of sales was 29% in the quarter which was up significantly to last year, driven by improvement in the gross margin rate. Improvement in gross margin rate was driven by the merchandise margin rate which is up significantly versus last year, driven by our cost reduction efforts and better inventory management. Our focus on inventory management allowed us to be less promotional versus last year, including a semiannual sale that was eight days shorter. The active management of inventory also allowed us to finish the quarter with inventory levels down to last year. This is our 11th consecutive quarter with inventories down year-over-year while our in-stock position continues to improve.

For fiscal 2009, operating income was $358 million which is up $143 million or 66% versus last year. Operating income as a percentage of sales was 15% which is up 600 basis points to last year. The operating income performance was driven by improvements in merchandise margin rate and expense reductions in buying and occupancy and SG&A. The BBW direct channel delivered strong growth and we continue to view the direct channel as both a revenue generator and marketing vehicle for our brands.

With that in mind, I would like to give you a preview of what our customers can expect in the first quarter 2010 and beyond, as our [newness] is up significantly to last year. Signature collection will continue to have newness later and throughout the spring. In February, we launched PS I Love You Too, which is the new fragrance in our PS I Love You franchise that successfully launched last fall. Two new fragrances, We Two Forever Moonlight Magic launched on February 19, along with all new graphics for two of our top fragrances, Sweet Pea and Moonlight Path.

We will also be launching the Orange Sapphire fragrance in March and a collection of summer vanilla fragrances in April. Our signature collection body lotion which is our largest forum will launch in April an all new improved formula. The home fragrance assortment will have new fragrance collections, the Perfect Escape and (inaudible) collections, launching candles and diffusers. Were also increasing fragrance offerings in our odor elimination category and testing new innovative forms in the passive diffuser area. For the antibacterial business, we are planning to leverage the recently re-staged packaging, improved formulas and forums, to increase our already dominant position in the antibacterial hand soap and sanitizer market. We will also launch new fragrances in soap and sanitizers, as well as kitchen odor elimination collections.

In addition to our focus on products and fragrance launches, we will continue to manage expenses and inventory very conservatively. We are cautiously optimistic about the first quarter, but are excited about our spring assortment and the visual appeal of our shops, offering newness, responding to business trends, and testing new products and promotional strategies to drive traffic and gain share.

And with that, I'll turn the discussion back over to Amie.

Thanks, Diane. That concludes our prepared remarks. At this time, we would be happy to take any questions you might have. Again, just a reminder, please try to limit yourself to one question so that we can get to as many people as possible, and you can always get back into the queue. Thanks and I'll turn it over to Christy.

(Operator Instructions). Your first question comes from Kimberly Greenberger with Citi. Your line is now open.

Great. Thank you. Good morning and congratulations on great fourth quarter. I noticed that you're looking at closings some stores this year. It looks like about 76 stores are slated for closure. Stuart, could you just remind us, I think you have very few stores that are not free cash flow positive on a four wall basis. if you could just update us on those performance metrics and what was it that led you to take another look at your fleet with an eye toward those closures? Thanks.

Sure. And good morning. With respect to store closures, two or three things I want to comment on and also in answering her question. One is that the after tax cash flow statistics for our fleet actually improved from the last time we updated them, reflecting the Q4 results. We are now at 99% of our stores with positive after tax cash flow. I think your curiosity is then, why would you guys be closings 75 stores ?

With respect to that, the thing I really want to convey is that is a very conservative estimate. I think it's likely that the number that we actually close could be materially less than that, say in the range of 40 or 50 actual stores. As you know, in a fleet of 3000 stores, you're always opening and closing some stores.

And again, it's a conservative view, and in part, reflects the fact that some malls are vulnerable and becoming marginal. Again, the 75 is a very conservative number and the health of our fleet remains very strong with the after tax cash flow results improving after the strong fourth quarter that

Thanks, Stuart. Could I just follow up on one thing you mentioned earlier? The renegotiating, it sounds like you're talking your banks right now, to loosen up some of the restrictions on cash deployment. What would be your hope in terms of what you might do with that cash if in fact are able to get those waivers?

Sure, three or four overall points on that general subject. The first is that we have been managing, as we've been talking about the business, pretty conservatively. And got to the $900 million plus in free cash flow and then the $1.8 billion of ending cash. We are in the middle of discussions with our bank group and great bank group, and those discussions are aimed at amending that facility to reduce the limits on restricted payments. Once we get through that process, as we periodically do and in consultation with our Board, we'll evaluate what the best use is for excess cash. We have accumulated a lot of cash this year and we'll evaluate that in due course in consultation with our Board.

Thanks. Good luck here for spring.

Thanks, Kimberly. That's question.

Your next question comes from the line of Michelle Tan with Goldman Sachs. Your line is now open.

Great. Thanks. My question -- as we look at the sales you're talking to for February, they're very strong. It really seems like February should be the toughest month of the quarter, just given the snowstorms and everything that happened. What's driving the strength you are seeing in February ? And why don't you see that continuing through the first quarter based on

Michelle, I think we'll go to storage Stuart for the comment about the first quarter, and I will go to Sharen and Diane for some comments about February specifically.

Great.

In terms of February, as were indicating, were expecting a high single to low double-digit results. But then as we think about the quarter, we consider four or five other things. The first is that Q4 comp result was a plus one. If we look back further, we've obviously been experiencing negative comp trends for some time with the fourth quarter being the first positive in a long time.

The second is, that February is a small month and it's impacted by Valentine's Day. We believe that the environment continues to be challenging and unpredictable. We're managing the business very conservatively, and to be more specific about that, inventories at the end of the year was down 9% per foot. And that can put some pressure on sales, based on that conservative inventory position, the record lowest level in five years.

With that said, we are working very hard to aggressively chase winners. And lastly, we intend to be, and Diane and Sharen can comment on this more specifically, but we intend to be less promotional in the first quarter than we were a year ago and that's going to put some pressure on the comps well.

Thanks, Stuart. And now maybe some comments about strength in February, want to go to Diane first.

Really our strength in February is really around our base three categories . As you know, we relaunched or re-staged our anti-bac business and that has a very positive response from our customers. as well the fact that we re-staged signature last year. I'm concerned about how big that was, the anniversary.

We actually had two fragrance launches in February this year versus none last year. That has also been received very favorably from our customers. And then also we have additional fragrances launches in home fragrance as well as a much broader candle fragrance assortment this year in February than we had last year. All three of those really driving

Hi. This is Sharen. For Victoria's Secret, as you know, we own Valentine's day. And so this year, as we went into Valentine's Day, we had stronger assortments. We actually had the ability to tap into color, and then we act into color for the month of February so that goes to what we are trying to do with speed and agility.

We had the right products very focused and had more depth behind our key items as we went into February. We also had a strong bra launch coming into February with a new lace-up bra. As we think about going forward into first quarter, we have made a commitment to really be regular price. As we all know, last year we drove a lot of the business first promotion so we are being very conservative, and continuing to keep the flexibility and staying close to our customer.

Great. Thanks, Sharen.

Your next question comes from Jeff Stein with Soleil Securities. You line is now open.

Stuart, back last fall, when you held your analyst day, you indicated that to get to that 15% EBIT margin, you needed a low to mid single digit comp over the next several years. If you're guiding to a flat to up slightly this year, I'm wondering is there another path possibly to that 15% EBIT margin, if in fact comps don't materialize as you expect?

Thank you. A couple thoughts on that. The first is, we are not expecting a particularly good environment in 2010. At some point between now and 2012, hopefully the environment will get a little bit better so a little color on the comp for 2010.

With that said, in answer to your question, there are additional things that we can do to improve the operating margin in the business and these all involved trade-offs and risk. But obviously to the extent that we don't realize the sales growth that it is inherent in our plan, we'll intensify our review of expenses and the trade-offs and risks that would run with a more aggressive view of expense reductions. As you know, we've taken a lot of expenses out of business. We think we've managed expenses while in 2009 and have a good plan for 2010. But to the extent that we don't achieve our sales goals, we'll look at the other big levers in the P&L to try to get to that result.

Got it. Thanks.

Your next question comes from Barbara Wyckoff with Jesup & Lamont. Your line is now often.

Hi, everyone. Great job in fourth quarter. I have a question about the new systems. Sharen, could you elaborate on the new systems, specifically what they will do for you and Victoria's Secret? And Diane, could you give us some examples of what these systems have done for bath and body?

Barbara, thank you. As you know, we implemented our new system back in the summer. And as we think about really optimizing the system, is that it gives us the capability to really get demand signals quicker to be able to have more concise inventory in the right places at the right time. Obviously, it will take us a while to build up to truly get the total affect of the system, and that is something that were working through. Were excited about the opportunity, but yet we're just now putting our toe in the water in terms of optimizing.

Okay.

And as far as the benefit for Bath and Body Works, we saw a very large benefit in the fourth quarter. If you look at balance of inventory by store, as you know, it's a pull model versus a push model. We respond to what the customer is responding to. Our inventories in our in stock by decile are basically pretty even, whether it's a top line store or a lower line store, depending on the market. And so our balance of gift sets and some of the higher seasonal items that we typically has taken a lot of markdowns, we actually sold during regular price and had very little going into our semiannual sale in January.

Okay. Good. Thank you. Good luck.

Thanks Barbara. Next question.

Your next question comes from John Morris with Banc of America. Your line is now open.

Thanks. Good morning. Congratulations to everyone. And I've a question for Diane and Sharen. You talked a little bit about in your prepared remarks, so would like to have you guys go little bit deeper and give us a little more color as you look ahead to spring.

Where do you see the opportunity in the merchandise assortment compared to last year? Sharen, you talked about, for example, correcting some mistakes and making some improvements. But I'm thinking specifically in terms of the merch assortment categories, in addition to your remarks already on inventory. Thanks.

Thanks, John.

Hi. I'll take that, John. First of all, as we think about our spring assortment, the first thing was last year we had the wrong colors. We did not have the flexibility to react as we implemented the new system. We had to pull all the inventory forward so we did not have the opportunity to react to the misstep in color.

What's going to be different this spring? First of all, we have clean inventory. We tested the colors and assortments not only in the bra category and the panty category, but also in the sleepwear category as well as beauty. We have -- last year we had a lot less flexibility. This year we have open to buy and agility. Last year we were highly promotional. This year we have the confidence in the assortments because we have tested and reacted to that, that will be less promotional. We have less distractions in the business as we were launching and instituting a new system, as well as holding back expenses.

Then we think about the assortments that we have, we know that we have strong bra launches coming forward because we have tested them. The other piece, is and we have strong bras that we launched in the fall season , like the Miraculous Bra, that we see still has opportunity and more life in the spring season by continuing to innovate on that bra and coming back with the same relaunch program. We have really been focusing in the panty category on items -- the key items that can color multiply, like we did in lacy, taking that into cotton.

We had a focus about panties that match back. We've done a much better job this season to have panties that are exact match backs and it's easier navigation. We think our sleepwear assortment, we've tightened up and focused and narrowed that assortment, which now we can go back in selling coordinates and outfits back to the bra and panty categories. I think -- as well is with Pink, we continue to see momentum in that business.

I think all in all, as we have our positioning the business for the spring season, although internally we have a lot of optimism, we are very cautious. We remain very close to the customer in order to tap, read, and react with agility. If you think about it in terms of the mantra that we have, it is to execute with simplicity, discipline, and speed. And I think that were seeing that work that we really started in the first half of last year paying off

Comprehensive. And Diane, opportunities over last year?

Sure. When I look at our business, it is really just continuing what is already strong. We've learned a lot this past year by simplifying our focus on our big three categories. As we look forward in to the spring season, we basically had two big fragrance launches last year. This year, we have six. Antibacterial re-staged .

Last year we did not do very many fragrance launches. We have a significant amount of different collection of fragrance launches in the antibacterial businesses this spring, as well some real fashion type opportunities in our hands sanitizer categories. In home fragrance, we really are getting the whole assortment consistent across the fleet. This year, it's about offering two different fragrance families. Last year it was basically was about half of a line. That's significantly up from last year as well as building on innovation in our diffuser category, which we really didn't have

Thanks very much.

Thanks, John.

Your next question comes from Marni Shapiro from The Retail Tracker. Your line is open.

Hey, guys. Congratulations on a great quarter and good luck with spring, in case I forget. I would just love some updates on some of the smaller projects that have been going on in smaller brands around. If you could just talk a little bit about Henri Bendel, you opened a few stores, but I don't see any for 2010. I don't see any Pink standalones really in the US. Is this just a Canadian concept at this point?

I was curious what you guys were doing web C.O. Bigelow. Have you made decisions about that as well? If you could just touch on that. If you would remind what the plan number of the travel and tourism stores were for 2010. Okay, Marni. I'm going to parse these out a little bit. We will go to Martyn first with Bendel and travel and tourism.

I think the update on a number of things I probably could just tick through. In terms of the status of the C.O. Bigelow concept, we have reduced the number of stores in the pilot for that concept to around three. It is three, and were continuing to work on positioning of that concept. On the Henri Bendel concept, we have now ten stores open, and we're very encouraged, actually, by the early results of those ten stores. They had a fabulous holiday, and a fabulous result, both for the Fifth Avenue store and the concept stores.

We consider it to be a very important pilot of a new concept. And while we're showing on the new store openings schedule that were not planning to open more stores in 2010, were very focused on leading that pilot -- positioning it for profitability and growth in the future. But we think we've got the right number of stores up and running right now to work it. Les is very engaged personally in that concept. What was the other ones?

Travel and tourism.

And also Pink. I was curious if this is strictly going to be a Canadian standalone concept now or if there are plans to open new standalones in the US eventually.

It's Sharen. We have ten free standing Pink stories today in the United States. In fact, were opening up our SoHo store which opens next week, which were very excited about. We continue to learn from these free standing Pink stores. Were continuing to line for opportunities with free standing Pink stores as well in the US.

On the Canadian front, we have four opened and we're planning on opening another five in 2010. We are continuing to focus on the Pink free standing store concept in Canada, particularly in its positioning as a brand relative to our La Senza brand. As you heard in my remarks, we're also opening the four Victoria's Secret stores this year in Canada. That will be a continuation of introducing those brands to Canada and also validating our capability to do so, in terms of delivering our brands to a foreign country.

The last question you had was T&T. As of the end of the year, we have seven stores now open. Since the update call, we've opened another shop in Mexico City and one in Singapore. Those early pilot stores continue to exceed our expectations. We're optimistic about the sales productivity. We're also very focused on getting the assortment and the merchandising right because it is a new concept. It's not something that we really have done before. So again, we're are being cautious about expanding it. We did say we're targeting to open another ten to 15 stores in 2010.

Excellent. Thank you, guys and good luck.

Thanks, Marni.

Your next question comes from Lorraine Hutchinson with Banc of America Merrill Lynch. Your line is now open.

Good morning. With Canada such a crucial geography for you going forward, I was just hoping to get a more detailed up date on La Senza on what strategies and the re-vamp of that brand are working and what's not working. And then how will you position the new Victoria's Secret stores versus La Senza in Canada?

Will go to Martyn.

Good morning, Lorraine. As I mentioned in my remarks, we're very focused on the La Senza business as one of our core brands now. We've formed a very strong partnership between Les, Martin Waters, our head of international joined [Emra] the head of La Senza business in Canada and her team.

They've been working diligently on testing and learning about the different positioning, brand positioning, assortment positioning, store design and construction, options that would allow us to even further strengthen that position of that brand, create what we call a clear blue water of brand positioning between the VS brand and the La Senza brand in Canada as we introduce VS. And really get that brand positioned as another one of our core brands that we then could repossession internationally, potentially even bring into the United States.

Thanks, Martyn. Next question.

Your next question comes from Howard Tubin from RBC Capital. Your line is now open.

Thanks. A question for Sharen. Could you talk about the Pink brand in its entirety for a second? Do you see continued opportunities to grow that further?

We do see a lot of opportunity to grow the Pink franchise today. A couple of things is that, one of the things that Pink has really not been in is in the bra business. That is truly a focus for us. If we think about Victoria's Secret and being best at bras. Lots of opportunities to grow the bra business.

As you know, we have a partnership with the colleges, in terms of what we call the CLI program and that continues to be strong in different [traders] for Pink. I think that we continue to look at opportunities within the Pink franchise, continue to see more and more growth coming from Pink as we expanded the bra category, continue to maximize the CLI. And then at the core of Pink is the [hope, lease, and knit program] and we continue to see that apparel business be strong.

Great. Thanks, Sharen. Next question.

Your next question comes from Jeff Black with Barclays Capital. Your line is now open.

A couple of questions. For Martyn, we talked about the store strategy for international and in Canada and in the airports. When might we see a licensing phase of this? What does the footprint look like in your mind three years out? And as an add-on for Stuart, can you just give us some color on how mass might impact the gross margin across the first half, given the benefit we saw last year. Thanks.

Thanks, Jeff. We will start with Martyn.

Good morning, Jeff. In terms of the international strategy, as you know, we gave a very full update at the update meeting in October. And Martin Waters presented what we call the six-point agenda and strategy. Just to reiterate, because it does impact how we think about the next steps. Our core focus in the international front is the La Senza brand and its positioning and growth in Canada and beyond.

The new businesses that were introducing to Canada, BBW, Canada Pink, and VS in Canada, the pilot test and roll-out of this travel of tourism concept, and then yes, the franchising model. In other words, what we discussed in the October meeting, was to begin with the franchising model focused on Bath and Body Works. And while we're not in a position really of announcing anything specific today on that front, I would say that we've made a lot of progress. That were on track to meet the goal that we discussed in the update meeting of announcing something this year.

Thanks, Martyn. Stuart, on mass?

It doesn't have a material effect in terms of mix shift in the first half. As we've had to step down in sales related to Express Limited stores over the last 12 or 18 months, it's had an effect as we've talked about, but that's essentially leveled off and is not as significant a margin impact.

Excellent. Thanks. Good luck.

Thanks Jeff. Next question.

Your next question comes from Janet Kloppenburg with JJK Research.

Good morning, everyone and congratulations. I had a couple of questions. First on the February comp, I know you're talking about being less promotional. But I was wondering how the promotional cadence was at each brand during February, higher or lower versus last year.

And also for Sharen, I was wondering how you felt about the inventory levels on your best-sellers right now, the Miraculous Bra, the lacy panty program. Will they be able to carry you through to meet the strong demand going forward, let's say in March and April? And for Diane, if you could talk specifically about when the antibacterial business began to ramp and from the influence of the swine flu scare. And how you'll counter that as you go up against those what we might call extraordinary comparisons. Thanks.

We'll start with Sharon. Two pieces, promotional levels in February and then inventory.

We actually were not promoting any pricing promotions -- we did not do in the month of February. We did do a surprise in July in terms of our partnership with Godiva -- with Godiva candy which was personalized during Valentine's. But if you're talking about any true pricing promotion or red lines or clearance, none of that happened in the month of February.

And what about last year, Sharen?

We did take some pricing action last year, the anniversary. We took a T-shirt bra down to $29.50. There were some promotions that we did anniversary from last year.

You had a more profitable month as well, in terms of margin?

We're looking at improvement in margin in February, that is correct. When you think about some of our key items, such as the Miraculous, yes, although we did take to the 400,000 units in holiday, we did come in to February a little light in Miraculous. We are now back in stock in Miraculous. And we have really strategically worked with our sourcing and manufacturing partners that we have a constant delivery flow to meet the customer demand.

As well is the lacy, we're in very good position right now with the lacy, and it's something that we're continuing to monitor. And really, really focus on how to stay in stock in those top items. But if we get down and lose a little bit of business because of how we're flowing, we're going stay cautious about our inventory to maximize it. If we lose a bit of business, that's okay, because I'd rather miss a little bit then be too long in inventory.

Great. Good luck.

And that first question for Bath and Body Works, I think was about promotional levels.

Inventory, specifically.

Right. Basically, we done with last year -- we have a lot less clearance. Last year we were clearing our old signature collection which we are up against so we had less clearance than last year. And then, as far as the swine flu, when it really hit us -- when a business really took off, and specifically at the stores around our hand sanitizer category was in April. And what we've done to offset that is, we have fragrance launches happening in March and April in the antibacterial category -- and home category of kitchen odor elimination and antibacterial. As well as the fact that we have a fragrance launch, the Summer Vanilla in the signature in April which we did not have any fragrance launches in signature last year.

Great. Thanks and good luck.

Thank you. Next question please.

Your next question comes from Todd Slater from Lazard Capital Markets.

Good morning. Let me add my kudos. You made some really good progress on the operating margin front, hitting about a 10% rate, but still well below your past peaks obviously. How heroic do we need the economy to be to hit your 2010 guidance?

It doesn't seem like you need much of the tailwind. I'm curious what your assumptions are in terms of the external environment. And it doesn't also sound like there's any assumptions that you're baking in for the huge royalty income opportunity, just begging to be monetized for this whole franchise venture. It sounds like you're still not considering anything on that front.

With respect your questions, Todd, with respect to an assumption about the environment in 2010 that's underlying our views, we're not assuming any significant improvement in the environment. Were assuming an environment that continues along the lines that were experiencing today. And with respect to impact of international in 2010, with respect to franchising or licensing, we don't have any material amounts in the 2010 numbers with respect to that.

Thanks. Good luck.

Thanks, Todd. Next question.

The next question comes from Brian Tunick with JPMorgan.

Thanks. Congrats as well. Stuart, two questions for you. First, if you could help us understand the profitability in the other segment, Bath and Body Works Canada versus mass. Where are the operating margins between those two businesses ?

And then the second question, on Victoria's Secret direct, it sounds like most retailers think that the online our direct business is 800 to 1,000 basis points better than their store business. It doesn't sound like Vicky direct is as high versus the stores. Is there any inherent reason why that can't

Let me try to take those questions. With respect to profit rates within the other segments, Bath and Body Works Canada business, as you would expect, is a higher profit rate business than the mass business. If you thought about mass and thought about others in that business that you're familiar with, we're familiar with, our margin structure is similar to that business. There's not a lot of capital in these businesses and that's left the operating margin rates are lower. With respect to the Bath and Body Canada business, while it's not yet at its ultimate potential in terms of margin rate, it would be more analagous to a well performing bricks and mortar business.

With respect to your question about the margins level, the operating margins levels in direct versus stores, the direct business is more profitable today on a rate basis than the store business. But I think your question is further why isn't it even more profitable? That's in part because direct bears marketing expenses associated with the catalog that obviously drives revenue more than direct business, but also it benefits the overall brand. That would be, to me, the other factor to really consider with respect to the relative profitability of direct to the stores. To be specific, direct bears the full cost of the catalog marketing for the brand.

Thanks, Stuart.

Your next question comes from Dana Telsey with Telsey Advisory Group. Your line is now open.

Congratulations. Miraculous has been so successful, what do you see as the drivers of that launch and applying that to others? How can what you learned from Miraculous help other launches be more successful? And on Bath and Body Works, what do you see as the opportunities to drive sales and margins in 2010? Is it more price, or is it product in terms of sales and margins? Thank you.

One of Victoria's Secret's skill sets is the fact that new launches are a fundamental of what we do. And although Miraculous was very successful and we're very proud of it, it was not our most successful bra launch ever. And one of the things that we do is, every time we launch a bra , we actually go out, we pull it forward, we test it. We learn from it, we listen to the customer. And we apply all of that rigor around every launch that we do. And I think that when you -- as one of the fundamentals with the new launches -- also what has to go with that is new merchant flow to pass and react. I think therefore, the combination of the power on power then drives the sales end process. But, we always can keep getting better

Thanks, Sharen. And Diane?

It's really all about the product, Dana. It's about newness, innovation, more sophisticated fragrances, testing and reacting, and really building the business in a basic retail 101 way versus a lot of price adjustments.

Thanks, Diane. I think were going to try to get a couple more questions in here, operator.

Your next question comes from Stacy Pak with SP Research. Your line is now open.

Hi. Thanks guys. Stuart, can you comment on transactions in 2010? Or maybe the brands could? Do you think you have that figured out? Would you expect transactions to be positive in 2010? Could both brands comment on AUR and cost on 2010, where you think those will trend. And then Stuart, is there anything more to say about expense opportunities going forward? Thanks.

We'll start with Sharen and Diane.

In terms of how we -- thinking about the transactions today, for the spring season, we really expect the transactions to be flat. As you know, last year we were highly promotional. This year we want to do more regular price business. That is our strategy. We look at traffic, probably being a little flat to down as well, but we expect conversion to be up.

And we have put a lot in play in terms of the new selling strategy within the stores and in store execution, which we started to see the results of driving that conversion in holiday. The combination of the new selling models and store execution, plus with the new assortment and the launches, we do believe that we will see conversion up. I think that from an AUR perspective, we will probably see the AUR slightly up and cost are pretty much flat to last year.

Thanks. Diane?

As far as Bath and Body Works, transactions will be probably flat to slightly positive as well. Also, we look at our AURs to be flat.

Thanks, Diane.

What about the cost, Diane?

It's basically flat to slightly down.

Okay. And Stuart?

Yes. Three or four things, Stacy, on the expenses. The first is that we hit our goals in 2009. We've set some pretty aggressive goals in '09 and we hit them. The second thing I would reiterate and it's not new perspective, it is just a continuation and reinforcement of it which is we are absolutely committed to expenses going slower than sales, and to leveraging those expenses. It's an important component of the path of 15%. We as a management team are very committed to that.

Lastly, as you -- two more points, we will continue to pursue tough-minded expense management 2010. Nothing major to describe, other than ongoing discipline there as an overall point. And then, and puts it in some earlier Q&A, if we don't get the sales growth that were all working very hard to do. And we're very confident that based on the power of these brands, we can realize -- we'll reevaluate the opportunities for more significant expense actions that may be possible, recognizing that those present their own trade-offs and risks.

Great, Thanks and good luck.

Thank you.

Thanks. Next question.

Your next question comes from [Roxanne Meyer] with UBS. Your line is now open.

Thanks. Let me add my congratulations on a terrific fourth quarter. I'm just wondering what incremental investments you may be making in the business in 2010. Or possibly just what other assumptions you've got built-in that keep you from thinking you're not going to leverage SG&A at all, even slightly on a flat to positive comp this year.

We'll go to Stuart for that.

We are modeling within our guidance a slight leverage on the low single-digit comp. And there are specific -- significant investment that are implicit in the numbers that we think require a description or a comment. There is a little bit of inflation in the business. We did not have a merit increase for example in 2009. At this point, we're planning on one in 2010 for our associates. But there's nothing major to describe.

Okay. Thanks.

Thanks, Roxanne. And we have time for one more question.

Your final question comes from the line of Tom Filandro with SIG. Your line is now open.

Thanks. I know you've heard it, but fantastic job on optimizing the season and the financial performance. My question is more for Sharen, but Diane as well. As you guys continue to see strong full price selling and moving to seats and market initiatives, and continuing on the lean inventory tasks, have you considered any adjustments to this semiannual sale events? Will you have to produce product for those events? Any comment on that would be great. Thank you.

We are constantly looking at that semiannual sale. Every year, we actually took a few days off of the semiannual sale in the fall season, in January. As we continue to look at the inventory, the only thing that would keep us to have any level higher than last year is if we are exiting a big bra program. But we are going to stick with the strategy that we started in the fall season, about keeping red lines off the floor. Therefore, we're going to keep clean inventories on the floor so that we will continue to be flat or down, even though were not going to be selling red lines during this season.

At Bath and Body Works, our semiannual sale was down significantly in January. Were also planning it for significantly fewer days in June, just based on how we have planned our business. But we typically buy into the semiannual sale anyway. We have our classic fragrances that we carry year round online that we buyback into for semiannual sales, as well as our hair products that we don't carry in our sales stores year-round. We offer it as a service for our customers.

Great. That concludes our call this morning. I would like to thank everybody for joining us and thank you for your continued interest in Limited Brands.

This does conclude today's conference call. You may now disconnect.