LandBridge Co LLC (LB) 2011 Q4 法說會逐字稿

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter year end 2011 earnings 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. At this time, I will turn the call over to Ms. Preston, Chief Investor Relations Officer. Please go ahead.

Thank you. Good morning, everyone. As a matter of formality, I need to remind you that any forward-looking statements we make today are subject to our Safe Harbor statements 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. Also available on our website is an investor presentation which we will be referring to during this call.

This call is being taped and can be replayed by dialing 1-866-NewsLtd. You can also listen to an audio replay from our website. Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO, Victoria's Secret; Nick Coe, CEO, Bath & Body Works; Andrew Meslow, Chief Administrative Officer, Bath & Body Works; and Martyn Redgrave, EVP and Chief Administrative Officer 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, please limit yourself to one question. Thanks, and now I'll turn the call over to Stuart.

Thanks, Amie, and good morning, everyone. Fourth quarter adjusted earnings per share increased 19% to $1.50 per share versus $1.26 last year, and were at record levels. Our reported result was $1.17 per share versus $1.36 last year. The sale of the third-party apparel sourcing business negatively impacted this year's fourth quarter by about $0.03. Both this and last year's reported results include significant items as detailed in our press release.

This year's reported fourth quarter results include the following. A pre-tax gain of $110.8 million, or $0.32 per share, related to the sale of our third-party apparel sourcing business. A pre-tax principally non-cash charge of $256.1 million, or $0.74 per share, related to intangible asset impairment and restructuring charges including store closures at La Senza. The intangible asset impairment charge is to reduce the value of La Senza goodwill, and other intangible assets in accordance with applicable accounting principles. Martyn Redgrave will talk about the store closures and restructuring charges later.

And the last 2011 significant item is a tax benefit of $28.4 million, or $0.09 per share, related to certain discrete tax matters. I won't repeat the 2010 significant items, which are detailed in our press release. All results discussed on this call exclude these a significant items. You may have also noticed from the materials that we have reclassified La Senza's results from the Victoria's Secret segment to the Other segment. This presentation groups La Senza with our other international businesses.

So now to take you through the fourth quarter results as detailed on page 4 of the presentation, net sales were $3.515 billion, versus $3.456 billion last year, and comps increased 7%. Total sales were negatively impacted by the sale of the third-party apparel sourcing business by about $225 million. The gross margin rate increased 210 basis points to 43.9%. The sale of the sourcing business benefited our gross margin rate by about 250 basis points. Absent this impact, our gross margin rate would have been down about 40 basis points as leverage in buying and occupancy expense of just over 100 basis points did not fully offset a decline in the merchandise margin rate.

Our fourth quarter merchandise margin rate was negatively impacted by expected increased costs. Additionally, we were more promotional than initially anticipated, principally at Victoria's Secret direct. The SG&A rate increased by 40 basis points due to the impact of the sourcing business sale. Absent this impact, the SG&A rate would have leveraged by about 110 basis points. Turning to operating income on page 5, total operating income increased $73 million to $786.5 million, or 22.4% of sales. Excluding the negative impact of the sourcing business sale, operating income dollars increased 12%.

Turning to our full-year results on page 6, excluding the significant items described in our press release, earnings per share increased 26% to $2.60 versus $2.06 last year. Our operating income and earnings per share results were both records for the Company. Net sales increased 8% to $10.364 billion and comps increased 10%. The gross margin rate increased 150 basis points to 39.3%, and was positively impacted by the sourcing business sale by about 70 basis points. Again, absent this impact, the gross margin rate would have increased 80 basis points, as buying and occupancy leverage more than offset a slight decline in the merchandise margin rate.

The SG&A rate was flat to last year at 24.4%, and was negatively impacted by the sourcing business sale by about 50 basis points. Page 7 of the presentation details our full-year operating income results. The full-year operating income rate was 14.9%, and as we discussed with you in October, we are focused on achieving a high-teens operating income rate over time. The operating income rate improved by 160 basis points driven by improvements in all three segments. I know there is ongoing interest in the drivers of the results in the Other segment, so I'd like to provide some additional clarity.

The Other segment consists of our sourcing function, mass global, Henri Bendel, corporate overhead, and all of our international operations, now including La Senza. For the full year, Other segment revenue consisted of the following. Apparel sourcing sales to third parties were $707 million. La Senza sales were $414.9 million, up 4% to last year, driven by growth in the international franchise business. Canadian store comps decreased 2%. Sales from our Bath & Body Works and Victoria's Secret stores in Canada totaled roughly $265 million, and increased by about $100 million versus last year, driven by new store openings.

Revenue from our international wholesale and franchise business, including our Victoria's Secret beauty and accessories stores and our Bath & Body Works franchise stores, was about $120 million, and increased by approximately 50% over last year. And finally, our Henri Bendel business recorded sales of about $60 million, which was about 20% above last year. 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 Mast and our international business. The improvement in the 2011 Other segment operating loss of $20.9 million was driven by increased profitability at Mast and growth in the international business.

Turning to the balance sheet on page 8, retail inventories per square foot of cost ended the quarter flat versus last year. We ended the year with $3.5 billion in total debt, and $935 million in cash. As you know, we also issued $1 billion of 5.625% 10-year notes at the beginning of this month. Free cash flow in 2011 was $840 million. 2011 capital expenditures totaled $426 million. We repurchased 2.9 million shares of stock in the fourth quarter for $117.9 million.

We completed our previously announced $250 million share repurchase program in the first quarter of 2012, and the board has just authorized a new $500 million program. In 2011, we returned over $2.3 billion to shareholders through share repurchases, special dividends, and our ongoing regular dividend. We also just announced that 25% increase in our regular dividend to $1 per share. Turning to page 11 of the presentation for our forecast for 2012, we expect earnings per share between $0.35 and $0.40 in the first quarter against last year's adjusted $0.40 result. There are a number of factors which are pressuring our first quarter results.

First, the first quarter is negatively impacted by $0.02 from the sourcing business sale, and by about $0.04 from increased interest expense. Additionally, we expect that we will continue to incur costs related to the restructuring of the La Senza business, such as relocation, and transition-related personnel and travel costs in the first quarter. We will also be investing to support the growth of our business internationally and these investments will precede the realization of sales and profits. The opening of the Victoria's Secret flagship store in London is an example of this.

Our first quarter earnings forecast reflects a low- to mid-single-digit comp increase which reflects an updated February comp forecast of up mid- to high-single-digits. We expect the first quarter gross margin rate to be up significantly as the sale of the sourcing business will benefit our gross margin rate by approximately 350 basis points. Absent this impact, we expect the gross margin rate to be down, negatively impacted by cost increases. We expect the first quarter SG&A to increase significantly driven by a negative impact related to the sourcing business sale of about 250 basis points. Again, excluding this impact, the SG&A rate would increase slightly as a result of investments that we are making to support the growth of the business such as the investments in international that I mentioned earlier.

We expect non-operating expense in the first quarter to be about $75 million versus $55 million last year. The increase is driven by interest expense related to the new bond offering. We expect to end the first quarter with inventory per square foot up mid-single-digits to last year. For the full year, we're projecting positive comps of between 2% and 4%. We expect our gross margin rate to be up significantly, positively impacted by the sourcing business sale by about 250 basis points. Again, excluding this impact, our gross margin rate would still be up for the year, driven by a slight increase in the merchandise margin rate, which is weighted to the back half of the year, and a slight improvement in the buying and occupancy expense rate.

We expect the full-year SG&A expense rate to be up, negatively impacted by the sourcing business sale by about 170 basis points. Absent this impact, we expect the SG&A rate to be flat to up slightly. Non-operating expenses are projected at about $310 million, consisting principally of interest expense. Before any discrete items, our tax rate will be approximately 38%. We are forecasting weighted average shares of about 301 million in the first quarter and 298 million for the full year.

I know that there are a lot of moving parts in our outlook, so I'd like to summarize some key points for you. First, the sourcing business negatively impacts full year 2012 earnings by about $0.07. Incremental interest expense, primarily driven by the new bond issuance, negatively impact 2012 earnings by about $0.13. And it due to the [recency] of this issuance, we believe that the incremental interest expense is probably not in many of the current Street estimates. The higher 2012 income tax rate versus 2011 actual negatively impact earnings by about $0.03. And the benefit of a lower share count driven by a lower starting share count and assumed repurchase activity of $650 million in 2012 is approximately $0.14. And the extra week in 2012 will benefit earnings by about $0.07.

The total of all these factors is a $0.02 negative impact to 2012 earnings. Assuming all of these inputs, we expect adjusted earnings per share for the full year 2012 to be between $2.60 per share and $2.80 per share. We're projecting 2012 CapEx of about -- between $575 million and $625 million. The increase in CapEx versus last year is attributable to increased real estate investment for Victoria's Secret in the United States. Our investment in remodeling stores and expanding square footage is increasing to allow us to properly size and position our lingerie, our PINK, our beauty and other assortments. We will also be opening about 20 PINK freestanding locations.

As we have previously mentioned, less than 10% of our Victoria's Secret locations have the full PINK assortment and there is significant growth opportunity in our lingerie, beauty, and other categories, as well. As detailed on page 13 of the presentation, we plan to open roughly 50 stores this year, and close roughly 90 stores including 42 at La Senza. While we will end the year with total square footage roughly flat to last year, it's important to note that the square footage that we're adding is significantly more productive than the square footage associated with closed stores.

Turning to liquidity, we expect free cash flow in 2012 of between $600 million and $700 million, which reflects the planned increase in capital spending. We remain committed to returning excess cash to shareholders through a combination of share repurchases and dividends. Our free cash flow and cash position, along with additional availability under our revolving credit facility, result in very strong liquidity which is more than sufficient to fund our working capital, capital expenditures, dividends, and any other foreseeable needs. Thanks. And now I'll turn the discussion over to Sharen.

Thank you, Stuart, and good morning, everyone. Victoria's Secret earned record fourth quarter and full-year profit in fiscal 2011. In the fourth quarter, total Victoria's Secret segment sales increased 10% to $2.091 billion and operating income increased 12% to $446.8 million, 21.4% of sales. For the year, total segment sales increased 11% to $6.121 billion and operating income increased 22% to $1.081 billion, 17.7% of sales. We're very pleased with this result and are confident that the keys to our success are the priorities that we have been focusing on all year.

These priorities are first and foremost our focus on our core categories, bras and panties, coupled with a much higher emphasis on getting faster and more agile. Second, we are approaching the business with optimism and we will manage inventory and expenses in a balanced way. And third is bring all our work together in a well-told brand story across channels, and telling that story through innovative product, steady newness with the right fashion, and outstanding in-store execution. I'll begin my remarks this morning with a review of fourth quarter performance at both Victoria's Secret channels followed by a brief recap of the full year, and will then turn to a discussion of how were thinking about the business as we head into the first quarter of 2012.

Our fourth quarter results are detailed on page 15 of the presentation. In the Victoria's Secret stores channel, fourth quarter comps were up 12%, with total sales increasing to 13% to $1.57 billion. This is on top of our 15% comp performance last year. This result was driven by strength across the assortment as customers continued to respond favorably to our new, fresh, and fashion right offerings. We remain agile on inventory, chasing into winners and leasing strategic bets in a controlled manner. The third quarter was marked with strength across -- the quarter, excuse me, was marched marked with strength across our core assortment from bras and panties to PINK loungewear.

In addition, a key enabler to our top line performance has been our in-store execution, and we again achieved record customer conversion for the quarter. This is the 10th consecutive quarter in which we have achieved record conversions. While our fourth quarter merchandise margin rate was down versus last year, driven by expected cost pressures in PINK and strong response to our Gift With Purchase programs, our merchandise margin dollars were up. Additionally, we were pleased with our ability to avoid unplanned promotional activity during the holiday season.

Our fourth quarter operating profit rate was up, as we offset the merchandise margin rate decline with expense leverage. Operating income dollars were up over 20% to last year. Now moving to our fourth quarter results at Direct. In the Victoria's Secret Direct channel, fourth quarter sales were up 3%, increasing to $519 million. This result was driven by strength in PINK, panties, and knit clothing.

The fourth quarter merchandise margin rate was down significantly versus last year, driven by cost pressures, increased promotion in the holiday period, and a deeper pricing in the January (inaudible). With decline in the merchandise margin, operating income dollars and rate in the Direct channel declined year-over-year. This disappointing result was largely caused by the poor performance of key holiday categories, especially sweaters and boots, and resorting to a higher level promotion than we probably needed in reaction to the first two weeks of December.

Turning to our full-year results on page 16, Victoria's Secret store comps increased 14% with two-year comps of 28% and a total sales increase of 14% with total sales increasing to $4.6 billion. While the merchandise margin rate was down versus last year, operating margins was up to last year, and operating income was up nearly 30%. At Victoria's Secret Direct, sales increased 4% to $1.6 billion, the merchandise rate was down slightly, but with expense leverage our operating margin increased and operating income increased roughly 10%. We believe the frequent innovation we delivered throughout 2011 drove results.

We remain focused on the core and fundamentals and we stay balanced in our approach. Looking ahead to the first quarter, we will remain focused on our core categories of bras and panties, on our balance between optimism and conservatism in our approach to the business, and on our brand stories, innovative products, steady newness with the right fashion, and outstanding in-store experiences. Our inventories are positioned to maximize our business and our expenses are planned and prioritize appropriately so that we can correctly invest where we believe we can improve our customer connection and our profitability.

In closing, we are pleased with our performance and our position, but we still see opportunity to better. We will continue to focus on executing with discipline, simplicity, and speed, and, of course, staying close to our customer and driving profitable growth will continue to be our top priority. Thanks. And now I'll turn the discussion over to Nick.

Thank you, Sharen, and good morning, everyone. At Bath & Body Works, we delivered sales and operating income growth versus last year's strong performance in the fourth quarter. We continue to deliver improved results by maintaining focus on three key categories, our Signature Collection product line, the Anti-Bacterial soap and sanitizer business, and our Home Fragrance assortment. The customer also responded well to increased presence of seasonally relevant fragrances and forms. Performance improved versus last year in our Signature Collection driven by our holiday collections, the launch of our new Signature Collection fragrance "Be Enchanted," as well as the continued success of "Paris Amour" that we launched earlier in the year.

The Anti-Bacterial business delivered growth in our soap and pocket back collections in holiday fragrances and forms. Our Home Fragrance performance continued to be driven by candles in new and seasonal fragrances, as well as growth in new forms and novelty in our diffuser and (inaudible) portable categories. The strong performance of our key categories was partially offset by the gift set business that was down to last year. We will continue to review the gift set business as we look to redefine our gifting strategy next year.

January comps were down to last year driven by performance of semiannual sale. Semiannual sale performance was driven by lower inventories and the decision not to buy into inventory in discontinued fragrances. In the fourth quarter, transactions were up versus last year, driven by traffic and continued improvement in our conversion rate. So with that said, let me take you through the financial results for the quarter as detailed on page 17 of the presentation. Bath & Body works fourth quarter comps were up 3%. Total sales for the quarter were $1.1 billion, up 4%, or $47 million versus last year. For the quarter, our operating income was $348 million, up $18 million or 5% from last year. Operating income as a percent of sales was 31% in the quarter, and flat to last year.

Gross margin rate in the quarter was down to last year. The merchandise margin rate declined but was partially offset by leverage on buying and occupancy expenses. The decline in the merchandise margin rate was driven primarily by cost increases and promotional activity. SG&A expenses leveraged versus last year. The BBW Direct channel also delivered strong sales and operating income growth versus last year. We finished the quarter with inventory levels down to last year. We continue to drive our inventories down year-over-year while maintaining our high in-stock positions.

Turning to fiscal 2011, on page 18, operating income was $513 million, or $49 million up -- sorry, up $49 million or 11% versus last year. Operating income as a percentage of sales was 19.2%, up 80 basis points to last year driven primarily by leverage on our SG&A expenses. Looking ahead to the first quarter, we continue to introduce newness and innovation in both form and fragrance. This month we launched our newest Signature Collection fragrance, "Pink Chiffon" in all forms. In addition, we introduced our new Signature Collection (inaudible) fragrance mist in over 20 fragrances.

We are excited about the assortment and will continue to manage expenses in inventory conservatively. Our overall focus continues to be about getting faster and better at understanding and satisfying our customers' needs, while providing them with a world-class in-store experience. In addition to focusing on products and fragrance launches, we will continue to test and read results of new product offerings and promotional strategies while maintaining flexibility in our inventory to react quickly to our customers' preferences. With that, I'll turn the discussion over to Martyn.

Thanks, Nick, and good morning, everyone. My comments this morning will focus on an update on our international businesses. As we've said many times before, we believe our opportunity for our international growth is significant given the leadership position and awareness of our brands, and the success we've seen from our early efforts. We continue to approach our international expansion with a methodical rollout and a test-and-learn philosophy.

We want to ensure that we have the infrastructure in place to deliver an excellent brand experience to customers around the world. This effort is being led by a totally separate management team in order to minimize distractions for the leaders of our domestic businesses. As we noted in our update meeting, we don't anticipate that our international business will be a significant driver of profit growth in the near term, as we continue to invest in talent and infrastructure to support our future growth. As shown on page 14 of the presentation, we opened 90 net new stores in 2011 and plan to open a net of around 115 new stores in 2012.

Now, taking a look at each of the businesses let's start with Victoria's Secret. In 2011, we opened 7 Victoria's Secret full assortment stores and 1 PINK store in Canada, bringing the total in Canada to 11 Victoria's Secret stores and 8 PINK stores. These stores continue to do very well, and we plan to open another seven locations in 2012. We also continue to be on track to open our new Bond Street store and a second mall-based store in London this summer. As Stuart mentioned, the costs associated with these store openings will pressure our first half (inaudible) earnings. We also plan to open 3 mall-based full assortment stores in the Middle East under our partnership with Alshaya in late 2012.

Our partners opened 40 Victoria's Secret beauty and accessories stores in 2011 bringing the total to 57 stores at the end of the year. Our partners plan to open another 75 stores in 2012, for a total of 132 stores at year end. Sales productivity in these stores continue to be very impressive. So in summary, all of our Victoria's Secret stores outside of the United States continue to perform very well, and we are very enthusiastic about the global growth opportunities for this brand. Now turning to BBW, we opened 10 stores in Canada this year, bringing our total to 69.

These stores continue to achieve sales volumes well above our US averages, and we plan to open another 3 stores in 2012. We opened 12 BBW stores through our partnership with Alshaya in the Middle East in 2011, bringing the total to 18. These stores also continue to do very well. Our partners will open another 32 BBW stores in the Middle East, Turkey, Poland, and Russia in 2012.

Turning to La Senza, you'll recall that this brand operates through Company-owned stores in Canada, and under a franchise partnership model in the rest of the world. Although the business is not significant to our overall results, our Canadian business has been slower to turn around than we would have liked, and is being impacted in part by a very challenging Canadian retail environment. La Senza's comparable store sales in Canada decreased 3% in the quarter. The La Senza international business has been strong with retail sales up significantly in the quarter. Our partners opened 49 stores in 2011. Total La Senza adjusted operating income improved in the quarter to a bit better than break-even results.

In the fourth quarter, we took a number of actions to continue our efforts to reposition the brand globally and improve results. In Canada, we are in the process of closing about 40 stores at the beginning of this year in addition to the others that we've closed in 2011. These stores were oversized or in poor locations, and we expect a significant amount of their volume will transfer to our other locations. We did incur a cash charge to exit these stores, which is part of the adjusted item that Stuart mentioned earlier. We believe this is an important step in the right sizing of our La Senza fleet in Canada.

We also made the decision to move a number of the remaining La Senza support positions from Canada to Columbus. And the La Senza charge also includes the charge of this restructuring. In connection with the restructuring of the La Senza business in the United Kingdom and Western Europe, our franchise partner, Alshaya, acquired 60 of the UK La Senza stores. We're pleased to be working with the Alshaya to convert these stores to the current merchandise assortment in store design. Our franchise partners plan to open another 45 stores in 2012, and these stores, along with the 60 UK Alshaya stores, will result in a total of approximately 385 La Senza franchise stores open by the end of 2012.

Most important of all, we continue to be very encouraged by the repositioning work we are engaged in. We now have a distinct and compelling customer proposition that is globally appealing and highly scalable around the world. So in closing, I want to reiterate that our full year total enterprise results represented record-setting performance. These results were driven by an intense focus on the fundamentals, coupled with an orientation to getting faster and more agile, and staying close to our customers.

We will remain focused on what we can control and we will continue our disciplined and conservative approach to managing the business, while also aggressively pursuing every opportunity to get better. Thanks, and now I'll turn it back over to Amie.

Thanks, Martyn. That concludes our prepared comments, and at this time we'd be happy to take your questions. Please just a reminder to limit yourself to one question in the interest of time and consideration to others. And now I'll turn it back over to the operator.

(Operator Instructions) Your first question is from Jennifer Davis with Lazard Capital Markets.

Hey, guys. Congratulations on a great end to the year and a good start to the new year. I had one clarification and one question, if I may. A clarification, I thought you were going to open 2 mall-based full assortment VS stores in the UK, so I was just wondering what happened to that other mall-based store? And then in the packet it looks like you have 2 stores and selling square feet of 31,000, so just wondering the size of the flagship and the size of the mall-based store. That seems a little large.

And then my question is could you talk a little bit about beauty park, the benefits you are getting from that, what you're seeing from that? And if any of that can be transferred to lingerie and Victoria's Secret? Thanks.

Okay. Jennifer, we're going to start with Martyn about the UK stores.

Jennifer, as I mentioned, I think what we had previously said was 2 to 3 stores in the UK. And at this point, we're not announcing any additional openings in the UK. And we're really totally focused on the 5 stores that I did describe, the 2 in the UK and the 3 in the Middle East, which are all full assortment stores that we want to deliver in a very successful fashion in 2012.

And then in terms of the size, Jennifer, I'm pretty sure the mall location is between 10,000 and 12,000 square feet and the remainder would be the flagship on Bond Street.

The full assortment stores are the more traditional A mall type stores in the United States, 10,000 to 15,000 square feet.

And then for the beauty park I think we can maybe go to both Nick and Sharen for that?

On the Beauty Park, we actually were able to utilize the beauty park as we were chasing into gift sets, which we did have very good selling in gift sets in beauty, so we believe that there is a big opportunity as we continue to be able to maximize that. I think your second question is, does that have benefit for the lingerie business, as well? One of the things that we have -- as we have built are sourcing strategy and our speed models is that we actually have been able to treat our vendors in the Far East like they were in our backyard.

And so where we had been able to read and react to the business and within 15 days have product in the store. So that is our strategy. I think there is such a big opportunity as we look in the feature to continue to find ways in all of our product categories to get faster.

Hi, Jennifer, it's Nick. So the beauty park really comes on line later this spring for us so we see benefit later in the year, and it's really fundamentally about being closer to the vendor, which really helps us.

Great. Thanks, guys. Thanks, Jennifer. Next question, please?

Your next question is from Omar Saad with ISI Group.

Thanks, good morning. I guess my one question would be, looking at the promotional environment, which is kind of something that's been out there in a lot of areas of the retail sector the last several months, I'm trying to understand, especially given the unique positioning of the Victoria's Secret brand, the BBW, there's not a lot of competition, what's really driving the [promotionality] in the business? It is coming from the department store competitors? Is it related to the inventory situation? Help us understand if there's certain parts of the business that are more promotional than others, and given how uniquely positioned your two big businesses are, how that's coming about? Thanks.

Hi, it's Sharen from Victoria's Secret. The Victoria's Secret store business and in the Direct channel from an intimate apparel perspective absolutely was not promotional. Now how do you want to define promotion? Do we do surprise and delights with our Gift with Purchase which we feel like are great branding items, whether it's bag giveaway or umbrella giveaways? So we have not had to be promotional.

And in fact, we carry no red lines on the floor in our lingerie categories at all. We only have two sales a year in the lingerie category. In the Direct channel, we still do have an apparel business, which has been a little bit more promotional because of the competitive nature of that. And as we continue our strategy of making our Direct channel more aligned to the Victoria's Secret product, I think over time you will see that diminish.

Hi, it's Nick. I think we will continue to focus on building highly emotional products with our brands, which should help us to continue to offset the promotional activity in the marketplace. We're seeing that now in February with a good start with "Pink Chiffon" and Fine Fragrance Mist, and as we mentioned earlier, where she's really wanting to partner with us on full price. So the more we can continue to build the emotional connection with her, the better we'll be.

Great, thanks. Thanks, Omar. Next question?

Your next question is from Stacy Pak with Barclays Capital.

Hi. One quick clarification and then a question. Stuart, on the -- just wondering what the driver is as you see it of the merchandise margin gain for the year, [ex] the sourcing? And then my question is on international, when you look out further, what are you thinking in terms of the number of Victoria's Secret international stores when you look to like '13 and '14? And how are you thinking about Web versus physical store expansion internationally?

Thanks, Stacy. So we'll go to Stuart first.

Good morning, Stacy. So with respect to the merchandise margin rate, assume the forecast an improvement for the full year, there's two things that are -- maybe three things that are happening. One is in the back half of the year, we would expect year-on-year favorability related to the cost pressure that we, to some extent, and others to a greater extent have seen in the industry. So it would be that effect. And then separately, we continue to work on and we're focused on getting better at lead times, fashion, getting the merchandise right, really maximizing full price selling, and we're optimistic that we can make further improvements in those areas as well, to drive merchandise margin rate improvement. And that's where we spend most of our [mind] time is making it on the sell side, if you will, and we would expect to have further improvement in those areas, as well.

Thanks, Stuart. Martyn, for VS internationally?

Yes, good morning, Stacy. In terms of the VS expansion, I think as you've seen from us consistently, we've been a Company about taking it one step at a time. So we test and we learn brand by brand, country by country. We're staying very consistent with that discipline, and that's one of the specific reasons why we're not talking about very specific things beyond the 5 stores that we will specifically open in 2012. Obviously, we are optimistic about the Victoria's Secret brand and its appeal worldwide.

But we're going to take it one step at a time. In terms of the Web versus stores, we're a store-based retailing Company. And I think philosophically, we want to prove ourselves in store-based retailing internationally. Of course, the Web is a big opportunity as well, and we're very curious about how that will play into our international expansion. That said, our Victoria's Secret Direct business does a substantial volume of business outside of the United States today, and is continuing to grow profitably.

Okay. Thank you.

Thanks, Stacy. Next question?

Your next question is from Kimberly Greenberger with Morgan Stanley.

Great. Thank you, good morning. I wanted to follow-up on the eCommerce question. I know that in the fourth quarter it was the first time you allowed consumers who purchased online to return in the Victoria's Secret stores. And I'm wondering if you could update us on your plans to more seamlessly integrate the Web experience and the store's experience at Victoria's Secret. What are the investments that are required in order to get from here to there? And what's the timeframe that you have in mind to improve the overall experience in customer satisfaction? Thanks.

Hi, Kim, it's Sharen. We are so excited about really a seamless purchasing opportunity for Victoria's Secret, regardless of what channel that she actually shops in. We did turn on buy online/return in store this year. It is a manual process. We're learning a lot. We should have full technology and knock-on-wood, by September, to be able to have this driven by technology and not be a manual process.

At the same time, we are turning on the capability that if we're store out of stock and buy online, through our new POS system, as well. That goes into pilot in the fall season, and should be able to be fully rolled early in the spring season. We're very excited about this venture. We believe that this is a big opportunity for us to actually create more customers for life by giving them the ability to shop with Victoria's Secret how and when she wants to be able to do that.

Terrific. Thank you.

Thanks, Kimberly. Next question?

Your next question is from Jeff Stein with Northcoast Research.

Two quick ones for Stuart. First, Stuart, this sounds like it might be a year where you could actually grow expenses a little bit faster than sales, and this seems to be contrary to your longer-term model. I want to make sure that I understand if that might be the case. And secondly, the math on the buyback would seem to suggest a lower share count than you're assuming for the full year. You're assuming 298 million shares, and yet your plan to buy back $650 million worth of stock, so I'm wondering if you could address those two issues?

Sure, Jeff. On expenses, our commitment as a management team is very clear cut, and that is to grow expenses slower than sales. We believe that the operating income rate potential for the business, given the quality of the brands, is in the high-teens and some of that is going to come through expense leverage over the next several years. So that commitment is unwavering. Obviously, the views that we've put out last night, this morning, reflect a reasonably conservative sales assumptions, we believe appropriate at this point and we will work hard to chase, but we are going to ensure that we grow expenses slower than sales.

With respect to the share count, we're assuming $650 million of shares repurchased. There is dilution from option and other equity awards in that, as well. And, obviously, there are timing assumptions assumed, as well. We're assuming that the $650 million happens at a relatively quick pace in 2012.

Got it. Thank you.

Sure.

Thanks, Jeff. Next question?

Your next question is from John Kernan with Cowen.

Hi, guys. Wanted to follow back up on one the merchandise margin question, don't mean to beat a dead horse, but for Bath & Body Works, obviously, that merchandise margin was down in Q4. How do you see that evolving? Obviously, that's not a concept that is really going to benefit from the cotton pull back, but how should we think about merchandise margin within that Bath & Body Works concept in 2012? And then one quick follow-up.

Okay, John, we'll start with Nick.

Okay, yes, John, it's a good question. Our focus will be -- our business model is set up really to drive full price selling. So as we see costs increase in terms of resin, fuel, et cetera, that will be our set as we continue to drive our percentage of business in full price. That's where the beauty park comes into play for us, being closer to our vendors, and continuing to drive as much business as we can into fashion, where she's really reacting well to us, with the brands that she's really reacting well to, being the three that we talked about earlier on. So it's really about pushing full price selling to offset that.

Okay. Great. And then, Stuart, just a maintenance question. Now that you've got an extra $1 billion in debt, or will have an extra $1 billion of debt on your balance sheet, is there a cash cushion -- is there a higher cash cushion that we should think about in terms of a safety net?

I appreciate the question. Our thinking on that hasn't changed much over the last 12 to 24 months, and what would talked about previously and remains our view is that we -- all things equal -- we should start of the year -- should start the year with about $600 million in cash to fund our working capital needs as we go into the holiday season in October to November, and that would assume that we don't draw on the revolver.

So we ended the year with just over $900 million in cash, we borrowed $1 billion after that, and we'll use our judgment as we go through the year, and in consultation with the Board about how to best deploy excess cash, and whether we want to fully approach that $600 million or not or even contemplate using the revolver to some degree, it's there and we pay for it. So we think about that within our possibilities, as well. But it's a judgment, and it's based on a lot of factors, as you would imagine, including what's going on in the world and the performance of our business and so on. But back to your original question, our view has not changed about the minimum cash we should have to fund the working capital needs of the business and, again, that's about $600 million to start the year.

Thanks.

You're welcome.

Thanks, John. Next question?

Your next question is from Jennifer Black with Jennifer Black & Associates.

Good morning, and let me add my congratulations. I wondered if you, Nick, could talk about the price increases that you've taken on the Signature line, and also the lower dollar amount to get free product? I wondered if the customers noticed and what the response has been? And then, Sharen, I wondered if you could talk about your plans for shapewear and VSX? Thank you.

Thanks, Jennifer. So it's really about wherever we've introduced fashion, or whether we've upgraded the product, whether we've improved it. We've tested and played with different prices, so we've actually seen a positive reaction, it's not been an issue. We've actually seen a positive reaction to that. And then, I'm sorry, I missed the second part of your question. The first part was around price increases. What was your second part?

The lower coupon amount, the lower amount that you get in free product? I know it's a small amount, but it does eliminate some of the Signature lines.

Yes. We haven't seen an issue associated with that on either end.

Okay. Great.

Hey, Jennifer, it's Sharen. On the shapewear question, shapewear is now in all stores. It is kind of a replenishment fashion business. I think that it is just a steady business that we have today. When I think about VSX, or Victoria's Secret Sport, very excited about this concept, and as you know within some of our tight real estate as we continue to invest in our real estate and expanding and optimizing the Victoria's Secret space, as well as in keeping PINK into freestanding space, this will give us an opportunity to continue to expand this category. We do have two freestanding stores, and have piloted Victoria's Secret Sport in about 45 stores, and very, very positive about this concept.

Will you expand the number of doors this year?

As fast as we can get the real estate to do so.

It looks great. Thank you.

Okay.

Thanks, Jennifer. Next question?

Your next question is from Roxanne Meyer with UBS.

Great. Thanks. Let me add my congratulations on a terrific quarter. My questions are around PINK. I'm just curious, if you can remind us what percentage of total Victoria's Secret sales are PINK right now? How big do you think it can actually get as a proportion of Victoria's Secret over the next few years? And then as you look to put PINK into more and more of your stores, noting that it is only in its full entirety in 10% of the chain, how do you think about the ultimate opportunity as you continue to remodel or relocate Victoria's Secret stores?

Okay. Today, depending on the real estate demands in the store, it can be anywhere penetrated from 10% of the store to 20% of the store. We believe PINK, as you know, hit over $1 billion last year. We think that there's an opportunity to more than double the PINK business with the right real estate plays. And when you think about what percent of the business it could be to total Victoria's Secret, we think there is such an opportunity for the Victoria's Secret to grow, as well.

As we started playing around with the PINK concept, we took space away from Victoria's Secret, so we don't -- we're not really optimizing Victoria's Secret today and we're not optimizing PINK today, therefore, the big investment in terms of our real estate strategy as we go forward into 2012 and into 2013. So we're very excited about both businesses having the opportunity. It's very important to our long-range strategy for PINK as well as for Victoria's Secret. So I think this year we've proven a lot by -- our real desire is to have enough continuous square feet across the mall to have PINK and Victoria's Secret right next to each other. So if we can work that, that's perfect, if not, we will have separated stores.

Great, Sharen, thanks. Thanks, Roxanne, Next question?

Your next question is from Janet Kloppenburg with JJK Research.

Good morning, everyone, and congratulations on a great year and a great quarter. For Sharen, staying on PINK, I was wondering if you could talk a little bit about the timeline for deeper penetration of the full PINK line in the Victoria's Secret domestic store base? And I was also wondering if you could talk about your launch schedule and your price points, both versus last year? And for Nick, I was wondering if you could talk about the gift set performance during the holiday season and your thoughts on that product category as we move into holiday '12? Thank you.

The first question is that we will have most of the freestanding PINK stores opened up by this summer, which will give us -- allow us to actually within those key malls have the full breadth of assortment in the PINK freestanding store, as well as optimize on the Victoria's Secret side of the business. I am very excited about the launch lineup that we have for this spring season. One of the things that's coming out next week is actually relaunching our number one bra, which is Very Sexy.

It is new and improved, it is absolutely fabulous. The fashion is great as with also launching Very Sexy, we're actually coming out with a Very Sexy Touch fragrance line to complement that launch. As we go in March through the spring season, there is a lot of newness in our launches, a lot of new fashion in our launches, therefore, continuing to keep all of our franchises very relevant as we go through this spring season.

Is the launch schedule comparable to last year, Sharen?

Yes, it is comparable. We actually are adding one launch in the summer timeframe.

Thanks. And on the price points?

The price points on the bras are anywhere from $42 to $50 depending on the level of fashion in the Very Sexy franchise. And then as we get into the Angel franchise, they really go from anywhere from $39 to probably $48. So it's still mostly in our better price points.

Are you skewing towards the better price points?

I would say between the fashion and the complexity of the bras and really working on our fit, they will be over the $40 price point this spring season.

Thanks so much.

Now I just want to say one other thing, though. I think that it's important that those launches are over $40, but we do have in our business a good, better, best strategy. And we are not walking away from our good strategy, nor are our better strategy. We just have more emphasis this year in the Victoria's Secret side around the best, as well as on the PINK side, we have a lot of strength in the good price point. So I just want to make sure that we don't leave the impression that we're not going to have a balanced strategy of good, better, best.

Thanks, Sharen.

Thank you, Sharen.

Nick, gift sets.

Yes, hi, Janet. So we're still very much hindsight in the performance of gift sets to understand the ins and outs and the opportunities associated with that. My point of view is we probably need to and we will take a more holistic point of view towards what role does gifting play in the store for her during that time period, because clearly it's a high traffic time period, clearly, she still comes to us for gifting and she still sees us as important in that. I think what's also interesting for us is when we look at and break down our business during that timeframe, we also saw our three brands actually over index and perform particularly well. So how do we take some of the existing stuff that we've got that's working well and how does that work and play within the whole gifting arena?

Okay. Thanks so much.

Thanks, Janet. Next question?

Your next question is from Paul Lejuez with Nomura Securities.

Hey, thanks, guys. Stuart, back in '07, I think it was '07, you guys had a store program where you were increasing the size of Victoria's Secret stores. Can you just review for us the detail of that program? Just including the resulting returns on capital of those projects, what happened to store productivity? And, I guess, how does that differ from what you guys are doing today with the expansions? Thanks.

Paul, I'm going to start and Sharen may want to add. With respect to the expansion of stores in the '07 timeframe, certainly as we would have -- any of us would have evaluated it, externally or internally in '08 or '09, it wouldn't evaluate very well because we had under performance in the business, some due to our own issues and some due to the economy. As the business has improved substantially over the last three years, as we've looked at those locations, they're doing extraordinarily well. So the productivity, the profit per door, et cetera, those investments have proven to be very good investments.

And then what's different about, and again, Sharen may want to elaborate on this, what's different about the investments that we're making now and the initiative as we think about it today, is that we are concentrating it more in key geographic markets to ensure that we really have -- we get the best operating result in addition to the changes in real estate and the optimization of the space as Sharen mentioned earlier for PINK, lingerie, and beauty. So the '07 program, certainly as we look at it today, very good. First year or two out of the box, wouldn't have looked so good. And as we play forward here, we think we learned some things about how to do it even better, frankly, and we're applying those things to the investments we're making now. Sharen, I don't know if you want to add --

Yes, I think the one thing that I would add, I just think we're in such a different place today than we were in 2007. I think that we probably put the real estate in before we had fully baked the entire assortment and concept, and now we are absolutely confident that where we need the additional space, what concepts are going to go into the additional space, how we're going to utilize it, market it, so I just think we're just in a totally different place than we were back in 2007. So I'm thrilled with the results that we're getting in the early stages of the stores we've been able to go in and expand our space and right size both Victoria's Secret and PINK.

That's helpful, thanks, good luck.

Great, Thanks, Paul. Next question?

Your next question is from Jeff Black with Citigroup.

Yes. Just a clarification, really. On the expenses, Stuart, on the buying and occupancy and SG&A both, how do we look at the comp levels needed to achieve similar levels of leverage that you did this year? Don't those hurdle rates go a little higher? Or are there offsets that you want to talk about so we can understand that better? Thanks.

Yes. The most summary level answer to that question -- and we appreciate that it's, actually as you work the details it gets more complicated, is that it takes a low-single to mid-single-digit comp absent actions to leverage our expenses. So if we think about the general growth rate and our occupancy expenses, the general growth rate and selling costs and overhead costs, they are in that low-single-digit, 3% or 4% kind of range.

There are certainly unique things, we mentioned in the first quarter, for example, investments related to the La Senza transition in the international business that in a shorter period of time might skew that general point of view of it. But certainly on a full-year basis, it is that low to, 3 to 4% kind of growth rate. With that said, and hopefully as you've sensed from us previously, and as I reiterated in an earlier comment, we've got a lot for leverage to pull and we use a lot of judgment to pull them. We want to approach the business in a balanced way, but if we had a prolonged period of less sales growth, we would reexamine a lot of things. And, again, our commitment is to grow expenses slower than sales.

Understood. Thanks. Good luck.

Yes, thank you.

Thanks, Jeff. Next question?

The next question is from Barbara Wyckoff with CLSA.

Hi, everyone. Good job. I guess for Martyn and Stuart, how should we be looking at CapEx going forward beyond this year, 2013, 2014? And then for this year, could you give us an idea of where the spending is going to be for new stores, remodel, systems, et cetera?

Sure. I'll respond to that, Barbara. The CapEx level kind of prospectively is in the $500 million to $600 million range. As mentioned earlier in this call and when we had our meeting together in October, the key driver of increase in CapEx between 2011 and 2012 is that investment in the United States related to the remodeling and expansion of Victoria's Secret stores along with some increase for additional PINK freestanding locations where we can't get the adjacent space that Sharen mentioned earlier.

About, as a general point of view, and it's been true for us for a long period of time, between 60% and 70% of our capital investment goes into stores. Relates to stores. Real estate related activity. New stores, remodeling of stores, the technology associated with new stores, et cetera. Than the next biggest category is technology, and then we do have some spending on distribution logistics, as well, to add capacity where needed and update things where needed. So that's the general overview for CapEx.

Again, on a multi-year forward basis, I think the appropriate range right now to use is between $500 million and $600 million. And, again, as we demonstrated in 2009 if things happen in a world -- in our business where we need to adjust, a big part of how we run this business is we try to make judgments based on what's going on in the business. The $500 million or $600 million assumes continued positive growth and profitability in the business, which we expect, by the way. But my point is that if things happen in the world, we can adjust that as you'll remember, we pulled it back to just over $200 million. And some of the increase this year is also a bit of catch-up, frankly, from that period of time, as well.

Right. Okay. Thank you.

You're welcome.

Thanks, Barbara. Next question?

Your next question is from Michelle Tan with Goldman Sachs.

Great, thanks. Sorry if I missed this in the earlier part of the call, but I was wondering if Sharen or Stuart, you could give us a little more perspective on what kind of average unit cost increases you've seen in the Victoria's Secret business in the back part of this year and how much you're actually seeing as you look forward to fall of '12?

So, Michelle, I'll take a crack at it and, again, Sharen may want to add something. But as a general point, we have seen increases, they were concentrated in fall of 2011, with some carryover into the spring of 2012. As you would expect, and as I think is intuitive, those costs -- the effect of those cost increases and the nature of those is moderating and we would expect to have some favorability with respect to that in fall of 2012.

We haven't, Michelle, gotten specific about the percentage and so on. It varies so much, by way of reminder, 40% of what we sell his personal care and beauty, so that's got different characteristics to it. There are differences between the PINK business where we have seen the greatest proportion of cost increases and other parts of our business. But the most important thing as we see it is that effect will moderate as we go through the year and we would expect some favorability in the fall.

Stuart, if we were trying to ballpark it, are we probably getting in the range if we think about the kind of cost increases, decreases, that an apparel brand would see that's reasonably cotton-based and just putting the ratio of your business that's within PINK onto that percentage, as kind of a [guesstimate] and assume that the rest of the movement in Victoria's Secret and BBW is pretty minimal? Or is that too simplistic?

Well, it's, probably at the end of the day is a little too simplistic because, as you know, even within the PINK business, they have a loungewear business, which would track generally with other apparel categories, but they have important and significant parts of their business that are bras and panties, as well, along with other categories. So I suppose there's a way to model and make assumptions about anything. We've tried to give you kind of our overall sense of it and, again, the most important thing, as it relates to merchandise margins, is our opportunity to continue to improve full priced selling through great fashion, chase shorter lead times, great marketing, great display, that's what our business is about.

Okay. Great.

Thanks, Stuart. Thanks, Michele. I think we're going to do two more here, operator. Next question?

Your next question is from Ike Boruchow with JPMorgan.

Hi, thanks, guys. Calling in for Brian this morning. Stuart, just a quick question, when we take a step back and look at Victoria's Secret and the ongoing opportunity in the US, can you remind us, when was the peak -- or all-time high productivity for Victoria's Secret in the US? And at that time, how much PINK was in the store relative to how much PINK is in the store today?

The peak sales per foot or real estate productivity, Ike, was in 2006. And at that time, PINK with a pretty small portion of the business, obviously.

Okay. And today? I mean, can you -- we're just trying to get a sense of how much opportunity is there in the core Victoria's Secret --

The sales per foot this year, Ike, will be best ever for Victoria's Secret, and Bath & Body Works is approaching it's best ever, as well, which coincidentally was also in 2006. And as you understand, real estate productivity is a math function. It's a numerator and a denominator, right? And we believe there's not a natural -- there are certainly, at some level, natural limits, but the productivity, for example, in the beauty category is very, very high. And we believe that we certainly can exceed prior levels on productivity.

With that said, the reason that our capital spending is up is we're starting to reinvest more aggressively in remodeling and expanding stores to drive the balance there, but I wouldn't want people to think simplistically that, oh, Victoria's Secret has gotten to its productivity, so that means that there is some natural limit on sales growth in the business. We really don't see it that way.

Okay. Thanks, good luck.

Thank you.

Thanks. All right, last question, operator?

And your final question is from Dana Telsey with Telsey Advisory Group

Hi, how are you, everyone? On sub-brands driving sales, that was a big topic this past year for Victoria's Secret. How do you think it for it for next year? Are there any new sub-brands that we should be watching? And then for both businesses on the online opportunity, how do you see it for the US opportunity? And could that be a margin driver going forward? Thank you.

In terms of the PINK beauty lingerie business is that for this year, we see growth opportunity in all three of those businesses. And I think we've been discussing a lot today that, number one, is there's just a lot more productivity we can get out of some of our existing stores. And then we also know that we have a real estate expansion program that benefits both the PINK, the beauty, and the Victoria's Secret lingerie business. We have a very robust Direct business. We have an opportunity, as we talked a little bit about earlier, is how do -- the two channels have totally been separated for many, many years.

The opportunity of making them one view of the customer, how are we going to take care of the customers across channels is going to be a big win and a big unlock for Victoria's Secret. And when you combine those two together in terms of how we market to the customer and how we leverage to the customer in my view it will be transformational. Probably more of a liability for the Direct channel in the beginning, but in the long run, I think Victoria's Secret as a brand will benefit.

Great. Nick, comments on your Direct business?

Yes, I think it's still, obviously, it continues to be an opportunity for us for this year. And I think not only from a business, but equally important for our opportunity to tell the brand story in another channel other than bricks and mortar, and connect with her where she wants to connect, whether she wants to connect with us online or whether she wants to connect with us physically in the store. So an opportunity on both levels.

Great. Thanks, Nick, thanks, Dana. That concludes our call this morning, and we thank you, again, for your interest in our business.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect your lines.