LandBridge Co LLC (LB) 2010 Q2 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the Limited Brands second quarter 2010 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. Amie Preston, Vice President of Investor Relations, you may begin your conference.

Thanks, Stephanie. Good morning, everyone and welcome to the Limited Brands second quarter earnings conference call for the period ending Saturday, July 31, 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 second quarter earnings release and related financial information, including any non-GAAP or adjusted financial reconciliation tables, are available on our with Website 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 Web site.

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

Thanks, Amie. Good morning, everyone. I would like to start by saying that we continue to be very pleased with our performance and the progress we have made so far this year. In the second quarter, our comps increased 7% and our operating income increased by nearly 60%. Our adjusted earnings per share of $0.36 exceeded our initial expectations of $0.27 to $0.32, and nearly doubled last year's $0.19 results. By the way, this is a record result for the Company. This very strong performance was the result of our intense focus on execution, staying close to our customers, and increasing speed and agility.

We continue to believe that the environment remains uncertain and challenging. Accordingly, as Stuart will explain in more detail, we have and will continue to manage inventory expenses and capital very conservatively. We will also continue to drive the business with an overriding focus on our disciplined execution of retail fundamentals. Improving our ability to react with speed and agility to maximize our sales and profit opportunities, yield the results throughout the first half of this year and continues to be a critical priority. Our entire organization is aligned and focused on these key priorities. While we have made considerable progress, we see more opportunities to improve in many areas. Our number one priority continues to be improving the results of our core US businesses. Our operating income rate increased significantly in the second quarter and this gives us confidence that we are on track towards our 15% operating income rate goal.

We also were enthusiastic about the opportunity for the growth of our businesses outside the United States. So, 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. On last quarters call, I discussed various actions that we are taking to improve the results of La Senza, including closing the underperforming girl business, improving product assortment and store experiences, and moving the creative and merchant teams from Montreal to Columbus, Ohio. We accomplished the move in the past month, and our new Columbus-based team is made up of a great core of key leaders and associates who relocated from Montreal, and a complimentary group of team members from other parts of Limited Brands and the retail industry. Now, it will take some time for the benefits for these changes to be realized, including the benefit of the new team and to have an impact on business. But we are already beginning to see some results from our intensifying -- from intensifying our focus on bras and panties, and our store remodel tests. And we are confident that we will continue to see improvement. In the is second quarter, La Senza comps were flat and sales were $101.8 million, and the merchandise margin rate increased significantly. As a result of the costs of approximately $3 million related to the relocation of the business, La Senza's operating income was down compared to last year.

Turning to our other businesses in Canada, we ended the quarter with 39 Bath & Body Works stores and six Pink stores. We continue to be very pleased with the performance of these stores. Last week, we opened our first Victoria's Secret store outside of the United States in the West Edmonton Mall in Alberta, and we are very encouraged by the early results. We will open three more Victoria's Secret stores over the next few months in the Yorkdale, Edentown Center and Square One Malls, all in the Toronto market. In addition, we plan to open two more Pink stores and about 20 more Bath & Body Works stores across Canada in the Fall season. We also announced that we secured a location for a Victoria's Secret in London flagship store, which is expected to open in 2012. The store will be located at the prestigious corner of New Bond and Brook streets, which is a world class location. Finally, we are on track to open our first BBW franchise locations this Fall in the Middle East under our partnership with the Alshaya Group. So, 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.

In closing, we are very pleased with the progress and performance of the business over the last few quarters, but we continue to see opportunity to improve in all parts of our business and we are focused on getting even better. Thanks and now I will turn it over to Stuart.

Thanks, Martyn. And good morning, everyone. Turning to our second quarter performance, our adjusted earnings per share increased at $0.36 per share from $0.19 last year. Our reported results were $0.54 per share this year versus $0.23 last year.

As detailed in our press release, both years reported results include significant items as follows. For this year we had a pretax gain of $52.3 million, or $0.10 per share, related to the sale of a portion of our shares of Express and its initial public offerings. We had a pretax gain of $19.7 million, and a related net tax benefit of $22.4 million, or $0.13 per share in total, related to the sale of our remaining interest in Limited Stores and at a pretax loss of $25.2 million, or $0.05 per share, associated with the early retirement of $400 million of our 2012 to 2014 bond. As you will recall, in the first quarter we issued $400 million in ten year bonds and in May we used the proceeds to repurchase our earliest maturities. These three items net to a benefit of $0.18 per share. The 2009 results includes a benefit totaling $0.04 per share related to a pretax gain of $9.4 million and the related tax benefit of $4.6 million from the divestiture of a non-core joint venture.

All results discussed on this call exclude these significant items. So, to take you through the second quarter results in more detail. Net sales were $2.243 billion versus $2.067 billion last year, and comps increased 7%. The gross margin rate increased 230 basis points to 34.7% driven by a significant increase in the merchandise margin rates. Buying and occupancy expense increased slightly as a percent of sales. SG&A expense increased by $21.7 million, or 4%, and the SG&A rate leveraged by 100 basis points. The expense increase was driven by an increase in store selling costs and marketing expense. Total operating income increased $87.8 million, or 340 basis points as a percent of sales, to $236.5 million, or 10.5% of sales.

By segment, the Victoria's Secret segment increased by $65.3 million, or 360 basis points as a percent of sales to $191.7 million, or 13.2% of sales. Bath and Body Works increased by $20.3 million, or 370 basis points as a percent of sales to $64.4 million, or 12% of sales. And the other segment operating loss declined by $2.3 million to $19.6 million. Total non-operating expenses decreased by $19.8 million, driven by an increase in equity income from Express and Limited Stores during the quarter and a decrease in interest expense.

Turning to the balance sheet, retail inventories ended the quarter down 5% per foot at cost.

Turning to our earnings outlook for the remainder of the year, a few things are impacting our results versus our previous guidance. First, our sale of Express shares and their IPO decreased our ownership to about 18%. As we noted in last quarters call, because our ownership percentage fell to below 20%, we were evaluating whether to continue to account for our ownership in Express under the equity method or whether we should move to available for sale accounting. Based on certain events in the second and third quarters, including the resignation of our board seats in early August, we determined that available for sale accounting is appropriate going forward. Additionally we sold our remaining interest in Limited Stores in the second quarter for $32 million.

The change in accounting for Express investment and the sale of our Limited Stores investment will have the following impact on our business. First, we will no longer record equity income from Express or Limited Stores in other income. Second, masked sales to Express and Limited Stores will now be recognized as 100%. This increase to sales will negatively impact our gross margin rate and positively impact our SG&A rate, but will not significantly impact our operating income rate. Additionally, we have increased our estimated tax rate to 39.5% versus 38% previously. The impact of all of these changes decreased our third quarter earnings forecast by approximately $0.02 per share and the full year forecast by approximately $0.08 per share.

So, turning to the third quarter, we are forecasting earnings per share between $0.03 and $0.08. This forecast reflects a comp increase of 3% to 5%. Our comp estimate for the quarter includes an updated view for August comps in the mid to high single digit range versus our earlier guidance of up low single digits. We expect to see other segment sales growth of between $60 million and $70 million, driven by the previously mentioned change in accounting for masked sales and growth in our international business. We expect the gross margin rate to be up to last year and the SG&A rate to be roughly flat. We expect total non-operating expense of approximately $45 million, consisting principally of interest expense. Before any discrete items, our tax rate will be approximately 39.5%, and weighted average shares will approximate 330 million in the third quarter. We expect that inventory per foot through the third quarter will be flat to up slightly. We continue to manage inventories conservatively and with discipline.

For the full year we are projecting a mid single digit comp increase. We expect sales growth in the other segment between $210 million and $225 million. Full year gross margins will be up to last year, and we expect the full year SG&A expense rate to improve versus last year. We expect full year interest expense of about $210 million, down over $25 million from last year as a result of our reduction in debt in 2009, and the repayment of our term loan this year. We are projecting total other income including interest income of roughly $30 million. Assuming all of these inputs, we expect earnings per share for the full year of 2010 to be between $1.68 and $1.83 per share. Adjusting for the $0.08 decrease from the impact of the Express accounting change, the sale of our remaining interest in Limited Stores and our increased tax rate, we have increased the midpoint of the full year guidance by $0.13 to $0.14 versus our previous guidance.

We are projecting 2010 CapEx of $250 million to $300 million, with roughly 70% of this spending on real estate in stores. Consistent with our prior view, we plan to open roughly 45 stores this year, mostly in Canada, and close roughly 70 stores. We will end the year with total square footage roughly flat to last year. The details of our 2010 store plans are included in the supplemental financial information package on our Web site. Our remaining CapEx spending will go to technology, distribution centers and home office projects.

Turning to liquidity, we expect free cash flow in 2010 to be between $550 million and $650 million. Our free cash flow, our 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 foreseeable needs. We repurchased 2.7 million shares for $66.3 million in the second quarter, under our 200 million share repurchase program. Thanks, and now I will turn the discussion over to Sharen.

Thank you, Stuart. Good morning, everyone. We continue to be pleased with the recent progress made in Victoria's Secret. Last quarter I discussed how we have been purposely managing our business with a balance between optimism and conservatist management of inventory and expenses. I also told you that our focus would continue to be on our core categories, bras and panties, coupled with an emphasis on speed and agility. As with Q1 these priorities, together with the well told story across channels, helped us deliver must-have, fresh assortments for our customers. We did this with leaner inventories relative to sales and consequently drove improved financial performance. In addition, we once again achieved record conversion rates in our stores, in the quarter.

Now let's move to review by channel. In Victoria's Secret stores our comps for the quarter were up 13% with total sales increasing 14% to $955 million. Our results were driven by improvements in all three business units, lingerie, Pink, and beauty. In lingerie customers responded to the constant newness and fashion we are providing in the Miraculous Bra, the improved Body by Victoria collection including lace, cotton bras and improved cotton panties, the lazy panty, swim and the Naked Collection. Customers also loved the additional floor sets we introduced before semiannual sale helping to drive our regular priced sales up double digits over last year during sales. Pink also continued to deliver strong performance. Our new initiatives to grow the bra business in Pink has exceeded our expectations. Apparel offerings in Pink, such as a heritage graphic in yoga, continue to remain strong as well. We continue to see success in our collegiate and pro licensing assortment.

The beauty business also exceeded our expectations with solid growth across key categories, driven by our base business and added freshness with multiple new seasonal product introductions. The second quarter gross margin rate was up significantly to last year, primarily driven by an increase in the merchandise margin rate. The newness and strength of our assortment and well managed inventory contributed to increased full price selling while we decreased promotional activity. Operating income dollars and rates were both up significantly to last year in the store's channel.

Now, let's review performance at direct. Second quarter sales increased 9% to $391 million, driven by broad based strength across the assortments, especially in lingerie, Pink, swim, dresses and active. The gross margin rate increased significantly driven by a significant increase in the merchandise margin rate as the strength of the assortment enabled us to reduce promotional activity. Additionally, SG&A expense leveraged so operating income dollars and rates were up significantly from last year as at Victoria's Secret direct.

Looking ahead to the third quarter, we will continue the disciplines that served us well in the Spring season. First we will continue to drive product innovation and newness with emphasis on speed and agility. In addition, we will continue to monitor our inventories closely utilizing read and react strategies. Above all, we will continue our efforts to get even closer to our customers, enabling us to grow ongoing improvement in customer experience, and our financial performance. So thank you, and now I will turn it over to Diane.

Thank you, Sharen, and good morning. At Bath & Body Works we are very pleased with the results of the second quarter. We were able to deliver significant operating income growth versus last year while being significantly less promotional. We continued to deliver improved results versus last year by maintaining focus on our three key categories. Our signature collection product line, the antibacterial soap and sanitizer business, and our home fragrance assortment. Performance in our signature collection was driven by the relaunch of our body lotion in a new and improved formula, the launch of new fragrances like Forever Sunshine and the restage of our men's line. Antibacterial business continued its strong performance driven by both our soap and hand sanitizer categories, including the launch of new fragrance collections like Tropical Temptations and Fresh Nectar. Our home fragrance sales were up to last year and continue to be driven by very strong candle performance, as well as the introduction of new forms in our diffuser category.

With that backdrop, let me take you through the financial results for the quarter. Bath & Body Works second quarter comps were flat. The disciplined management of our inventory allows to shorten our semiannual sale by ten days versus last year, which is important for the positioning of our brand over the long term. We estimate the shorter sales negatively impacted be the second quarter comp by 3 to 5 points despite growing profit in the second quarter. Total sales for the quarter were $536 million which was up 1%, or $3 million versus last year. For the quarter our operating income was $64 million, which is up $20 million, or 46% to the second quarter of last year. Operating income as a percentage of sales was 12% in the quarter, and up significantly to last year. Operating income was driven by improvements in merchandise margin rates and expense decreases. Our SG&A expense leveraged in the second quarter. We also finished the quarter with inventory levels down to last year. This is our thirteenth consecutive quarter with inventories down year-over-year while our in stock positions continue to improve. The Bath & Body Works direct channel delivered strong sales growth and we continue to view the direct channel as both a revenue generator and marketing vehicle for our brands.

So, with that in mind, in the third quarter, we will continue to introduce newness and innovation in both form and in fragrances. In late July, we began our annual great American hand soap event which will run to late August. We followed that with the launch of Dark Kiss, which is our newest signature collection fragrance. We are cautiously optimistic about the third quarter, and we will continue to manage expenses and inventory conservatively. We are excited about our assortment and the visual appeal of our stores. In addition to our focus on products and fragrance launches, we will continue to test and read the results of new product offerings and promotional strategies, maintaining flexibility in our inventory so that we can react quickly to our customers needs. So, with that I will turn the discussion back over to Amie.

Thanks, Diane. That concludes our prepared comments. Before we take your questions, please just a reminder to limit yourself to one so that we can get to as many people as possible. Thanks and now I will turn the call back over to Stephanie to take your questions.

(Operator Instructions) We will pause for just a moment to compile the Q&A roster. Your first question comes from Roxanne Meyer with UBS. Please go ahead.

Great. Thanks and congratulations on a terrific quarter. It seems like you've got a huge opportunity at some point down the road for international DTC, but obviously you have to optimize the US business platform and I know it is lower on your priority list of international. I am just wondering what plans do you have in the US with your DTC platform to make it more seamless with retail as it relates to both the customer interaction, as well as one big view of inventory? Thank you.

Thanks, Roxanne. Sharen is going to take that question.

Hi, Roxanne. We have an initiative to actually make it -- our DTC in stores really looking at it from a one customer view, that it can be seamless. We will be testing some of these initiatives like return to the stores, purchasing in store, online if you don't have the stock in the stores this Fall season, so we do have a road map and if we are just starting that journey, and very optimistic about the opportunity that it will allow us to have for the customer.

Maybe Martyn, do you want to talk about the international?

Yes, I think on the international front, you have got it exactly right, Roxanne. We have said consciously it is not our number one priority. We have a very full plate agenda on the international front for Martin Waters and his management team, but you are also right to say that there's a big opportunity there. We are doing some ground work internationally in terms of Web site language, capabilities and other preparations to improve our ability to do business with our international customers. But again, it remains a lower on our agenda until we kind of get some of these cross channel and other capabilities in place in the United States. On the other hand, it does represent a very nice piece of business for us, probably $125 million to $175 million business outside of the United States for us today.

Great. Thanks Next question, please.

Your next question comes from Brian Tunick with JPMorgan. Please go ahead.

Thanks and Congrats as well. I guess more Martyn or Stuart, just a little clarity on sourcing. Clearly you have a different mix than most of your peers but how do you see any cost inflation as we move through year and into next year and can you discuss how Mast would be impacted?

Sure, Brian. Good morning and thanks for your kind words on the quarter. With respect to sourcing, I think as most know that follow our Company, our number one priority is around quality and speed and getting the right product at the right time available for sale to our customers. That is the most important thing in our business related to sourcing. A lot of discussion about cotton in China and transportation and so on, it is important to remember that a lot of our business is personal care and beauty which is principally sourced in the United States. And with that said, there are some pressures in the environment. We don't see a significant impact in 2010, and we are going to work hard to minimize that impact in 2011 as well. But our priorities really are around having great relationships with our suppliers and focusing on quality and speed. We have a great sourcing capability in our business, great logistics capability in our business, and that's where our focus is.

Great, thanks, Stuart. Next question?

Your next question comes from Lorraine Hutchinson with Banc of America.

Good morning. How you doing?

Thank you. Good morning. The announcement the Victoria's Secret flagship in London, I was just curious if this was a signal that you would perhaps roll out VS internationally without a franchise agreement, and also, was hoping to get an update on some of the other international initiatives like your airport stores.

Thanks, Lorraine. Martyn is going to take that question.

Morning again. Yes, I think the way that we have described the London flagship store site is that our first priority was to identify the right place to start in London and I think we have now done that by securing this site. We have also made it clear we have not made a decision as to how we will operate that London flagship store. It could be a company-owned operation, a franchise operation, or a joint venture operation as we have said consistently. We have the next 18 months to figure that out. It obviously does continue to signal our increasing confidence in our ability to take the Victoria's Secret brand to rest of the world and we continue to think that the way to do that is through a combination of company-owned operations for instance in Canada for sure, and then joint venture and franchise operations probably for the rest of the world, but ut we always reserve the right to think about company-owned operations in certain key geographies as well.

On the TNT, what we call travel and tourism, or TNT front, we continue to test and learn about the positioning of that brand which is a high bred brand obviously, more beauty and accessories focused, airport oriented, but we are also experimenting with department store shop within shop and high speed type locations. And we are continuing to be very encouraged by the results. I think because it is a new concept to us, we are trying to be very thoughtful about how we position that concept and, quote, get it right before we dramatically expand it. All signals remain positive, and we plan to give a much more full update on the travel and tourism concept, as well as the other international updates at our update meeting in October.

Thanks, Martyn. Next question?

Your next question comes from Todd Slater with Lazard Capital Markets. Please go ahead.

Hi, it is actually Jennifer for Todd. My question is on international Martyn, I know you would be upset if it wasn't. Can you talk about how many Bath & Body Works franchises you think that Alshaya will open this year and how many you think that they can open in the Middle East? And when you think you will feel ready to roll out Victoria's Secret franchises maybe with Alshaya? And then also when in 2012 do you expect to open the London Victoria's Secret store? Thanks.

Sure, I will take a shot at it. Let me start by saying again what we have said consistently, our number one priority for international development remains Canada. So, not only the repositioning of La Senza in Canada, which will expand or extend into our international franchise system for La Senza, but also the 50% expansion of the balance of this year of our BBW Canada business, the introduction of four VS stores, and a couple of Pink stores. So, that remains number one.

Number two really is this BBW Middle East expansion through the Alshaya Group franchise agreement. We are planning to open six stores by then end of this year with the Alshaya Group, those are all in process. But when I say the end of this year, the end of the fiscal year because in the Middle East with the holidays being different we actually would be opening stores in late December for instance. The travel and tourism concept is next, and beyond that our ability to expand the Victoria's Secret brand would come after that.

In terms of the London store, we are actually working our way through literally the store design and construction aspects of that store. We do not have a scheduled opening date at this stage. But probably first half of 2012. Did I hit all of the questions?

I think you did. All right. Thanks.

Thanks, Jennifer.

Next question?

Your next question comes from Marni Shapiro with The Retail Tracker. Please go ahead.

Hi, congratulations. The stores look great. I was curious if you could just -- Victoria's Secret is obviously on a run and very focused on bras and panties and Pink, but if you can talk about some of the smaller categories within Victoria's Secret. You always seem to be testing a lot things. So, just an update on VSX on the color cosmetics, you tested shape wear and then just anything on sleep wear as we head into the back half of the year becomes more important in the fourth quarter, just an update there as well?

Hi, Marni. Hope you can hear me okay. In terms of the things that we have been testing out actually is rolling to 150 stores for this Fall season. So, we are excited about the opportunity that we have and the results. And we are just continuing to be conservative about rolling that as we go forward.

Shape wear was also a success story for us and we continue to add shape wear to more of our stores as we go forward in the Fall season. When we think about the sleep wear category and the lift that it brings, and the importance it has to our business in the time frame, we actually have been testing through our direct channel and our store channel to actually identify the patterns that are winners so that we can actually then read and react and be more precise with the inventory around these key patterns. We are excited about the results that we have seen so far, although it is still early. So, we want to make sure we continue to balance that optimism with conservatism and make sure we continue to have that flexibility as we get closer to the holiday time to really make things bigger.

Great. Did we hit everything for you, Marni?

VSX.

In the VSX we still remain passion about the VSX category. We have gone through some rebranding. We actually -- in the stores that we have VSX in, so the comps are up about 44%. And as we continue to build upon the core, and continue to get growth from the core, this will allow us then to take more of an aggressive stance in some of these newer categories.

Excellent. Thanks. Good luck.

Thanks, Marni. Next question.

Your next question comes from Stacy Pak with SP Research. Please go ahead.

Hi. Sorry. So, Stuart, I think you said inventories for Q3 should be flat to down slightly. So, I guess just wondering is there any sort of change in your inventory approach and are both divisions -- how do both divisions look at the end of Q3? And then the bigger question I have for both brands is could you walk us through how system benefits are going to help each brand in the second half and how you intend to manage your inventory in the second half? Thanks.

Okay. Well, we will start with Stuart.

So, Stacy on inventory, for Q3, inventory per foot will be flat to up slightly. In answer to your question which is more about mind set and approach and discipline, as you know, inventories have been down for three years. And we have had a good spread and will continue to have a good spread between sales growth and the change in inventory. There's no change in mind set whatsoever, we are just now coming on three years of reductions, and striking the right balance between having the product for her when she wants it and the on going levels of inventory.

I would also tell you, that while we have made a lot of progress on our new inventory and our mind set remains very disciplined, we are working to get even better at it as it relates to our ability to read, react, chase, reduce lead times, et cetera, and our level of engagement on that in terms of the management team and group of leaders is more intense than it has ever been. So, no change in mind set. Really a law of what we are lapping and anniversarying and there will continue to be an appropriate spread between sales growth and the change in inventory. In terms of details by brand, we don't get into that frankly, but there are dramatic differences between the brands.

Thanks, Stuart. We will start with Diane on the systems question.

As far as the systems, this has actually been -- 2010 will be our third year of being up and running on the systems. So, our biggest benefit this Fall is really about the -- we reduced all of our lead times pretty significantly and we have done -- we are currently continuing to do a lot of testing and reading and reacting. So, keeping inventories lean is more about a mind set within the organization and speed initiatives that it is really the system.

Sharen?

It's not about the system. It's really about the processing and the thinking that goes into that really enables the system.

Great. Thanks you guys. Thanks, Stacy. Next question?

Your next question comes from John Morris from Bank of Montreal. Please go ahead.

Thanks. My congratulations to you as well. And the question really I think for Sharen and Diane, for each of the brands, the opportunity for holiday, fast forward a little bit to Q4, you sort of touched on some things, but particularly with respect to product and merchandising perspective. So, Sharen, I think particularly at Victoria's Secret stores be coming up against the Miraculous launch, so maybe you can talk about the opportunity compared to last year, that will put you in a position to help comp against that. And then the same for Diane at Bath & Body Works, particularly with respect to your business really being very strong from the product launches and the newness and what is it about those and how do you keep that going? Thanks.

Thanks, John. We will start with Sharen.

When we go into the holiday season this year, we will already have within our base bra business so much newness that we did not have compared to last year. As you know today we are launching our -- this month the Incredible Bra. We have the new and improved Body by Victoria. So, when we just think about the base business and the growth that we are getting in the base business, it is very exciting, which makes us more optimistic about the holiday.

We also have two new -- or two launches coming up, one in November, which is going to be for the extensions of the Miraculous as well as one in October, which last year although we had a minor launch in October, we did not put any TV behind that. This year we will have a launch in October, fully supported by media. I think as we look at all the categories and really making sure that we have a well told story in the match back panties that we have been working on as we think about our key items and making big bigger and really focusing that inventory, we are cautiously optimistic about the holiday time frame.

Thanks, Sharen. Diane?

I would just reiterate we are really are also cautiously optimistic about the holiday time frame and we continue to really move the same direction for the fallen holiday that we have for the past 18 months and that is just about continuing to test and react. We continue to test in the Spring and in the Fall for different opportunities for us to grow our key categories, and we will continue to be focused on signature, antibacterial soap business, as we as the home fragrance businesses. Our newness this Fall is really more than double last year. So, we feel good about that.

Diane, some opportunity on gift sets I think this year compared to last year in terms of being better in stock.

Actually, our gift sets were very well in stock last year and we didn't have to clear any before Christmas. So, we were pretty profitable on our gift set business last year. So, we are planning that business pretty conservatively, but we are looking for other ways to reinvent gifting which you will see in the stores in the fourth quarter.

Great. Looking forward to it. Thanks.

Thanks, John. Next question?

Your next question comes from Jeff Stein with Soleil Securities. Please go ahead.

Okay. Stuart, I think you mentioned that buying and occupancy was up as a percent of sales in the second quarter, and if I did hear that correctly, I am a little bit surprised on the 7% comp you would see that. So, can you talk about leverage point on B&O and why it is going up so much in a, what should be a favorable real estate environment for you?

It is fundamentally -- Jeff, it reflects two things. The investment in international, fundamentally opening stores in start up periods where there's not a lot of sales yet to match those occupancy costs. That's the biggest driver. And then separately, we made some investments in our US stores, in terms of some minor remodel-like activity that was a little higher than normal to improve the look of our stores in the United States that drove a little bit of anomaly in the quarter as well. So, it reflects international and some additional reinvestment in our US stores.

Thank you.

You're welcome

Next question, please.

The next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.

Good morning, everyone and congratulations. As you think about the Pink brand, seems like it has more extension possibilities, what do you see as stores, products, and the margin opportunity there? And also, the launches this past year, that have been so successful in both businesses, what learnings in either business do you take away that will enhance the launches going forward to continue to drive the top line? Thank you.

We have been pleased with our growth in the Pink franchise, and as you know, we have some free standing Pink stores today. When we think about the strategy for our Pink brand, we still see the leverage point of doing more side by side with the Victoria's Secret brand. When we think about the category extensions, the one focus which we really got after this Spring season is really in the bra category. We continue to have growth opportunities there, in servicing a new customer, and actually acquiring different customers. We have been very pleased with our collegiate and pro licensing, which is a point of differentiation and really cuts to the heart of that customer, and we think there's even more opportunity in that category, both in the stores as well as in our direct business.

The other category that has been growing nicely for us is in the Pink beauty category, whether it be in the bath and body products or whether it be in the lip products. So, we also see that within our beauty category that we have opportunity for growth.

So, when we think about the launches and what we have learned, I think that we have always had a rigorous testing program, in terms of making sure our wear tests were done. Now we have actually extended that to do color testing earlier so that we can read and react into the best colors. We have also pulled forth the floor sets by about two weeks in a few stores so we can actually get the interaction with the customer to improve our selling and engagement with our customers. We plan on taking that board and continue to get better and better about that.

One of the key things that is we constantly look at is what is in our innovation pipeline and we have a robust pipeline, and very excited about it. Some times we have so many good ideas within our pipeline we don't have enough launch spaces to be able to do all of them, but that's the real key focus is focusing on the innovation pipeline, focusing on making sure that we can test and the wear tests are done with excellence, and then how do we bring that to our stores and customers earlier that we can make sure that we can perfect or get close to perfection in terms of that selling experience. And we have more opportunities.

Great, Sharen. Thank you. Next question?

Your next question comes from Laura Champine with Cowen and Company. Please go ahead.

Hi, you know what? I am sorry. We left Diane out of that last response. So, we will hold off on going to Laura. Diane, sorry. Can you --

That's okay. Hi Dana, just to your question on the learnings about our launches, we have actually learned a lot through our testing vehicle. We actually have a couple phases of our testing that we do and we test the fragrances for customer acceptance and then once we get the customer acceptance, for all of our major launches we do how high is high tests with full marketing in stores, in a segment in stores, to really see how big the opportunity is. We do it far enough in advance and because of our speed initiatives it doesn't have to be that far that we can react in time for the launch and sustain, and our business has become much more of a fashion business, and our seasonality of our fragrances are much bigger part of our business. So, we are doing -- the testing is really helping us to be as accurate as we can be.

That's great. Sorry about that, Diane. Okay, Laura?

Good morning. I had a question on SG&A rates. It looked like with the guidance for Q3, it is going be up in the high single digits. We hoped for a little slower pace of growth in Q4. Is there something in Q3 that is driving that SG&A expense higher, and do you think that, that growth rate does slow down as we enter the holiday period?

Laura, it is Stuart. It will slow down in the fourth quarter. The third quarter, as you know, is a smaller quarter on a retail sales basis. And we make a lot of investments in preparation for the fourth quarter. So, it will be up a little bit on a percentage basis versus the prior two quarters and we will see more leverage, if you will, or less growth on a percent basis in the fourth quarter. So, it's really more about timing in the Fall season.

Great. Thank you.

Thanks. Next question?

Your next question comes from Erika Maschmeyer with Robert W. Baird. Please go ahead.

Hello, good morning. Congratulations. This is for Sharen and Diane, could you talk about your expectations for your promotional cadence in the back half in Q3, sort of the number and length of promotions compared to last year, and also, any thoughts on the competitive environment?

I think that the environment is still in, in my view very unstable. And I think that is why we want to approach the back half with some conservatism. When we think about our strategy to be more regular priced and less promotional, you will see, as we have done in the Spring season and continue to do in the third quarter, really having less promotional and relying more on a regular price, fashion newness that we have been bringing in.

And at Bath & Body Works we are approaching the Fall season like we have last Spring and las Fall actually, and that is planning our promotional cadence to be flat and then reacting in season either upwards or downwards if we need to and we actually shortened our January semiannual sale last year, so at least we are not comping that.

Very helpful. Thanks so much.

Thanks, Erika. Next question?

Your next question comes from Randy Konik with Jefferies. Please go ahead.

Yes. Great. Thanks. I guess a question for the brand heads, if you look at Bath & Body Works and the Victoria's Secret comps on a one and two year basis, you are -- as a category you are out comping some other categories, and most of the categories in the mall. So, from a top line perspective, do you think this is more of a product-driven cycle, or replenishment cycle with your customer? You talked about newness and so forth. So, I am trying to get a sense of do you think it is product cycle related or replenishment related with the consumer?

Hi. It is Sharen. Randy, I think right now we are in a product related cycle. I think that customers are looking for newness and all of our new deliveries and how we are turning our inventories within our new deliveries, that is what the customer is responding to. By really focusing on having the newness, what you are creating is more customer trips, more customer response and more customer engagement, and I think that is not going to change within the environment for the foreseeable future.

And I don't really have anything to add. It's the same thing in Bath and Body Works that Sharen just said.

I guess if I could, have you ever seen -- when was the last time we saw a product cycle like this?

Randy, to be honest with you, I think that it has always been here. I think that if I look back on the mistakes that I have made, it is not pushing hard enough on our fashion flow, on our turns and really adding newness. Obviously the biggest risk that you have, or the biggest moving piece is always going to be your assortment, but if we are going to be in a fashion business then we have to get really good at it. That's why the speed initiative, the read and reacting, the testing that we are doing really helps us to be spot on with fashion, limit the risk and make things better. I think that if I look back on Victoria's Secret, is that we got too stale in that at times and so I don't think it is a new phenomenon, I just think that we are getting better at it.

I think the same is true at Bath and Body Works. I think our customer has really pushed us over the last few years to be better and to offer more newness, and when I look at the month over the Spring season, our best month was when we had most of the newness. So, that will continue.

Thanks, Randy. Next question?

Your next question comes from Michelle Tan with Goldman Sachs. Please go ahead.

Great, thanks. Stuart, I was wondering just to follow up on the occupancy deleverage question, can you just give us a sense of how we should think about occupancy growth going forward? What kind of leverage point on sales do you need, and which kind of factors that you called out will continue into 2011?

The leverage point on occupancy as a general rule of thumb and on an annual basis is reflecting some of the investment in international and ramp up in international is probably in that low single digit to maybe the high, again annual basis of 4%-is to maybe at the outside 5%, as we are wrapping up international -- as we are ramping up international. So, that's how we think about it. That's how I think it's going to play out in the near future and again, some of this in terms of in the quarter is timing related in relation to small sales associated with that international growth.

Okay, so something more like 5% for the second half?

Yes, some where between 3% and 5% is probably a good way to graph it.

Perfect, thank you.

Thanks, Michelle. Next question.

Your next question comes from Jennifer Black with Jennifer Black and Associates. Please go ahead.

Good morning. Let me add my congratulations. I know that you are doing a test, and this is for Diane, at Bath and Body Works for a loyalty program where -- and I know there is a couple different tests going on. I wondered how they are going. It seems like that could be incredibly additive.

Hi, Jennifer. Yes, we have actually some multiple ideas out there on customer loyalty programs, and where a couple of the programs are getting great results, but I think it is probably too early for us to make any judgments on this program and I will try to update you more at the analyst conference in October.

Okay. Thank you.

Thanks, Jennifer. I think we have time for maybe one last question.

Your last question comes from Janet Kloppenburg with JJK Research. Please go ahead.

Hi everybody, congratulations on a nice quarter. Sharen, I was just wondering if you could talk about marketing programs for (inaudible) I know less, but I was (inaudible) or up, and how might you be spending them differently? Thanks.

Janet I am sorry, you really broke up in that question. I think you were asking about marketing, but I didn't get.

I asked if I -- I know that you are going to be less promotional, but I am wondering if marketing dollars will be flat to up to last year and how they might be spend differently versus last year, for both brands. Thank you.

In our marketing, it is slightly up to last year. There is really two places. It is all about in our in store experience where the customer -- where the products meet the customer, as well as, as I you stated earlier, we are putting TV, which we do not have in the month of October this year.

Great. That concludes our second quarter call. Thanks everybody for listening in and for your continuing interest in Limited Brands. Thanks.

Thank you, this concludes today's conference call. You may now disconnect.