LandBridge Company LLC
Q2 2018 Earnings Call Transcript

Published: 23 Aug 2018

[Operator:]

Good morning. My name is Shelbey, and I'll be your conference operator today. At this time, I would like to welcome everyone to the L Brands Second Quarter 2018 Earnings Conference Call. I would now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer for L Brands. Please go ahead.

[Amie Preston:]

Thank you. Good morning, everyone, and welcome to L Brands' second quarter earnings conference call for the period ending Saturday, August 4, 2018. 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, additional commentary and earnings presentation are available on our website www.lb.com. Stuart Burgdoerfer, EVP and CFO; Denise Landman, CEO of PINK; Jan Singer, CEO of Victoria's Secret Lingerie; Greg Unis, CEO of Victoria's Secret Beauty; Nick Coe, CEO Bath & Body Works; and Martin Waters, CEO of International are all joining us today. As you know, 2017 was a 53-week year. All of the sales dollars, margin and operating income results discussed in this commentary are on a reported basis for the quarter ending August 4, 2018 versus July 19, 2017. Comparable sales are on a comparable calendar period for the quarter ending August 4, 2018 versus August 5, 2017. Thanks. And now I'll turn it over to Stuart.

[Stuart Burgdoerfer:]

Thanks, Amie, and good morning, everyone. Our second quarter earnings per share of $0.36 exceeded our initial earnings guidance of $0.30 to $0.35 and benefited by about $0.02 from a favorable tax rate. Absent the impact of the lower than forecasted tax rate, we delivered an earnings per share result towards the higher end of our range as strong performance at Bath & Body Works and Victoria's Secret Beauty offset weak results at PINK and Victoria's Secret Lingerie. I'm not satisfied with this result and are very focused on improving performance at Victoria's Secret. As detailed in our commentary released yesterday afternoon, we are reducing our earnings forecast for the year to $2.45 per share to $2.70 per share from the previous $2.70 to $3 principally driven by a deceleration in PINK. Our guidance includes identified expense reductions as well as the previously announced investment in incremental wages and benefits for our hourly workforce of approximately $100 million. With that I'll turn the discussion over to Denise.

[Denise Landman:]

Thank you, Stuart. Turning to PINK comps decreased in the mid single-digit range for the second quarter. We saw declines in some segments of the lingerie and loungewear business. Swim which we are exiting continues to negatively impact performance by two comp points in the quarter. Total merchandise margins were also unfavorable. Comps began moderating towards the end of Q2 with the introduction of the new floor set, enabling an explosive PINK Friday event. Although, we have seen benefits from emerging businesses such as sport bras and apparel, outerwear and embellished product the lounge fleece business has been particularly soft. The back-to-school floor-set represents an important time frame for taking critical reads of all segments of the business enabling us to leverage our speed and agility models to make rapid adjustments to our go-forward assortment. In closing, we shared a decision last night that I plan to retire at the end of the year. This is not an easy decision, but I believe it's the right thing for me and part of my personal journey to spend more time with my family. I feel incredibly fortunate to have been part of the PINK brand since its inception and L Brands for nearly 20 years. It's been a privilege to lead and be surrounded by such incredible talent, thinking and creativity, it inspires me every day. I'm pleased to share that the organization's commitment to PINK remain strong and that Amy Hauk, BBW President of Merchandising and Brand Development will join PINK as CEO October 1. Amy is an experienced merchant and well positioned to lead PINK. With BBW for nearly a decade, Amy has deep roots and a strong understanding of our enterprise. I have great respect for Amy, and I know you will be in good hands as will the PINK organization. Thank you. And I'll turn it over to Jan.

[Jan Singer:]

Thanks Denise. As you read in the pre-circulated materials we have more to do to deliver long-term growth and profitability. I remain confident as what's new in the assortment is what's working and we are very focused on leveraging these learnings to accelerate our progress going forward. We see signs of progress in Illusion one of our highest AUR constructed bras and its margin accretive. It's a bra with benefit balanced with fashion and it continues to meet and beat plan. T-shirt bra also continued to see double-digit increases and building in sales on fewer frames and after three price increases. Total panty sales are up mid-single-digits and positive for the third consecutive quarter. Speed agility and fashion are fueling that book of business. And the key adjacent categories we've added back like sleep are seeing growth and are critical to creating new loyals as these categories flow more frequently and attach to bras. Again, while we've made progress in critical spaces, we still have more to do to close the gap created with changes taken in 2016, particularly the gap in key franchises and building back high value dual channel customers. Thank you for joining us this morning. I'm handing it over now to Greg Unis.

[Greg Unis:]

Thank you, Jan. As you read in our prepared remarks, the Beauty business saw a strong second quarter performance in sales and margin with comps in the high-teens range, coming from both the stores and digital platforms. Q2 marked our fifth consecutive quarter of positive comps. Throughout the quarter, we saw strong growth from our declared priorities. Specifically, we drove growth through fashion, fueling double-digit growth in our Mist collection category and also accessories, delivering on trend newness to our customer. In fragrance, we are pleased with our continued momentum of our Bombshell franchise, and in July the successful relaunch of Teese, our number two fragrance and a top fragrance in the country. Throughout the spring, we drove growth in Bombshell, our number one scent while also successfully launching Bombshell Seduction and our limited edition scent Bombshell Summer. At the end of July, we relaunched Teese with an updated look which has delivered strong results for the month of August. Today in stores and online we launched Teese Rebel an edgy new sister to our iconic Teese. The expansion of the Teese franchise supports our focus to make things bigger and to build out fragrance collections that our customer loves. In our new PINK Beauty business, we remain very optimistic. Q2 results were strong and we will continue to invest in the business. Look for PINK Beauty to get even more exciting this season as we test new store formats, presentations and product. Overall we are very excited and optimistic about what is in store for the remainder of Q3 and into the holiday season when beauty becomes an even more important part of the overall business. We remain confident in our business model and our continued growth throughout 2018. Thank you for joining this morning. And I will now hand it over to Nick Coe to share his thoughts.

[Nick Coe:]

Thanks Greg and good morning everyone. First, let me say at Bath & Body Works we are very pleased with our second quarter results. Sales grew by 12% and operating income grew by 8% in the quarter. And that's on top of last year's second quarter record results. I'm pleased to see that the efforts we undertook in 2017 to reinvent our focus on the managements of the product life cycle had led to great product successes in 2018, creating growth and momentum in the business. True to my comments at the end of Q1 in Q2 we continue to experience pressure in buying and occupancy from our store remodels and SG&A from our wage investments. Those are not negatives those coupled with product life cycle focus and clearly brand building initiatives that are positively moving our business forward and driving growth trajectory. Investments and our associates, our direct distribution capabilities and our real estate are creating healthy businesses in both channels and in overall younger fleets of stores. These initiatives will continue to drive expense pressure in the back half but they are setting us up for continued success. In summary we are pleased with the progress and the investments we've made which are making us optimistic about the third quarter and our potential. Our business trend is positive and we are focused to delivering great assortments to our customers. Thank you. And I'll now turn the conversation over to Martin.

[Martin Waters:]

Thanks Nick. Good morning everyone. As I look back on our international business' performance in the second quarter at a high level I'd make three observations. First, the franchise businesses BBW, VSFA and VSBA are all doing well with good sales and operating income growth. Secondly, we continue to invest in China which we believe will - market for us. We continue to experience strong growth in the direct to consumer business and we opened three additional full assortment stores in the second quarter including a flagship store in Hong Kong. And finally, the U.K. business continues to be challenged. We had more work to do there under a new leader who joined the business a month ago. In the balance of 2018 our priorities continue to be continuing to scale in China improving our performance in the U.K. and continuing to build on the success of our partner of stores around the world. Thanks and over to you Amie.

[Amie Preston:]

Thanks Martin. That concludes our prepared comments. At this time we'd be happy to take any questions you might have. Just a reminder in the interest of time and consideration to others please limit yourself to one question. Thanks. And I'll turn it back over to the operator.

[Operator:]

[Operator Instructions] Our first question comes from Mark Altschwager of Baird.

[Mark Altschwager:]

I'm curious about the divergence between VS Beauty trends and the VS Lingerie. And you discussed increased promotional activity to drive traffic but with high teens comps in beauty I would suggest that maybe traffic isn't that big of a problem in the stores. So just any color on what's driving that? And then as we head into the holiday season where beauty does over indexed any thoughts on how you leverage the better product acceptance there to drive transactions across the broader assortment? Thanks

[Amie Preston:]

Thanks Mark. We'll start with Greg.

[Greg Unis:]

Yes. We've been talking about what's working in beauty has really been stemming from our strategy on testing and learning. We have a tremendous speed model behind us and our supply chain store able to achieve into the things that are working in. And ultimately it's really come from tremendous focus and really focused on fewer bigger ideas. Ultimately, it's with the customer and the brand at the center. In terms of integration of beauty and lingerie what we're finding is the customer is increasingly buying a combined basket which for us is a brand that's really a strong strategic point. And so we like how the two categories work together. And for those people who've been in our stores, you'll see that beauty and lingerie are more and more integrated together as a total shopping experience.

[Amie Preston:]

Thanks Greg. Jan you have any thoughts?

[Jan Singer:]

Sure, I just - a little bit. I would say that - the assortment in lingerie is very broad. Beauty is for the right reasons and should be as a category very focused and has been reset beautifully and it's getting great traction. I think that we're all really pleased with the progress. In lingerie, we are resetting franchise by franchise. We're seeing great progress on the things that we are resetting. And what Greg is saying is that the bundling together is happening. We promote together. We create awareness together. We are one brand with two different businesses. We feel really good about that. The differentiation is us building back our high value customers who buy bras in particular fragrances and that's the work that we're working right now.

[Operator:]

Your next question comes from Oliver Chen of Cowen and Company.

[Oliver Chen:]

Our question is about helping us contrast the opportunities at bras at the VS business relative to the lingerie opportunity at PINK. Just curious about timing customer reception and what we should expect in understanding the nature of those two issues would help us illuminate what's possible going forward. Thank you.

[Amie Preston:]

So Oliver, I want to make sure we understand your question. Are you asking about performance of bras at lingerie versus PINK?

[Oliver Chen:]

Yes. I was just curious about the bra opportunity at VS and how you would contrast that against the PINK lingerie opportunity and sort of helping us contrast those and if that would help us understand it better and also get a sense of timing and supply versus demand and understanding the nature of the opportunity.

[Denise Landman:]

I would say in PINK - this is the Denise speaking - that we are coming from two very different places. PINK has a relatively underdeveloped bra business which we work hard over the past several years to leverage and expand upon and have found recent successes with our incursion into the sport bra category which we continue to be excited about. That drives our penetration to levels that are certainly higher than they've been historically but the PINK business is not completely centered around the lingerie business as the VS Lingerie business is. So we start from very different vantage points. I do think secondarily the assortment architecture seeks to differentiate itself and message itself in ways that are very centric to the core population of customers that we're both speaking to and we acknowledged that we're speaking to two different sets of customers. So product differentiation, how the business has evolved our starting point versus Lingerie's I think, are fairly central to your question, and I hope that I've answered it accurately.

[Oliver Chen:]

I guess on the PINK side, how quickly can you fix it? And where do you think we should focus on as timing, and what happened here? Just more simply and directly on PINK.

[Greg Unis:]

I don't know that fix is the right word. We've been developing both core bra business through what you might be aware of as the lens of Wear Everywhere and have made inroads as I just mentioned into the Sport bra business as an essential adjacency. And there has been residual bralette volume in our base line that we're working our way through. I don't consider that baseline reference point to be an impediment to the brand's ability to grow strongly into the category in the future.

[Oliver Chen:]

Thank you. That’s helpful.

[Amie Preston:]

Jan, do you have anything add on?

[Jan Singer:]

I think Denise said most of it. I mean the percentage of our business in bras are different. Our cost is different. Our customer - it all really comes down to customer at the center. And if you're really are - product inside of who she is we come from a very different place pricing is different. So I think Denise cover unless Oliver has more questions.

[Operator:]

Your next question comes from Paul Trussell of Deutsche Bank.

[Paul Trussell:]

I’m just wanted to get some additional color on the August commentary about PINK in particular where there was a little bit of a slowdown. And if you can also just help us understand the thought process around low-single-digit comps in 3Q, just given the more difficult compare and whether or not there is an expected turn in the two year of the VS comps versus just continued strength at BBW. Thank you.

[Amie Preston:]

Thanks. We'll go to Stuart for that Paul.

[Stuart Burgdoerfer:]

So Paul with respect to August for L Brands in total and the major pieces of L Brands, August is running pretty consistent with the Q2 and recent results. So the pattern is continuing or is consistent in August to date versus recent results. With respect to our assumptions in the third quarter and the fourth quarter both with respect to comps and margin dollar year-on-year results, again implicit in our guidance are assumptions that would suggest that results are pretty consistent with recent results. Obviously the team is working hard to do better than that. But as an overall modeling comment, we're assuming a balance of year result that's generally consistent with recent actual results, both sales and margin dollars. Thanks.

[Paul Trussell:]

And then just a follow-up on that. Maybe a bit more big picture for Denise. First of all congrats and best wishes on your retirement, but I'm really curious on your view just given your tenure there and the state of the industry and how you view competition and the meaningful impact of digital. And also just what is that the young millennial customer is responding to from a merchandise and marketing standpoint? And to what extent is PINK and Victoria's Secret on top of those trends?

[Denise Landman:]

So this is Denise. I'll answer the question as best I can. It's an extensive conversation. I do not think nor do I think anyone in this room believes that PINK has lost its ability to connect distinctly with customers and drive excitement in our core constituency. We had, as I mentioned earlier, a very explosive PINK Friday moment which is celebratory to all things PINK. And that moment in my mind and for the folks that work around me in the brand has edified the exuberance that consumers feel for our product when we create these celebratory moments. The issue of how well or effectively we're competing in the market, I think from the mix point of view we're competing fairly effectively. I think there is, as I mentioned, a fleece business that due to what we believe is very much a mindset - a consumer mindset of buy now wear now which is delaying her inclination if you would to buy into my seasonally appropriate product has reflected in our fleece performance in recent times. But there are many, many healthy and emerging sectors of the business which are, in some cases on top of the market and in some cases ahead of the market that we believe we can continue to mind for true benefit from. And that's I think is distinct answer I can give you to a very expensive question.

[Operator:]

Your next question comes from Kimberly Greenberger of Morgan Stanley.

[Kimberly Greenberger:]

My question is for Stuart. Stuart I wanted to ask about inventory which has been growing faster than sales here for the last three or four quarters. And I know that looked at on a two-year basis inventory is more flattish. But on a two-year basis sales are down not flattish. So if we look at both sales and inventory on a two-year basis, we'd still find inventory running kind of a well ahead of sales. And I'm wondering if there's been a philosophical change just in the way that you manage inventory or if there are other some strategies that are entering the inventory conversation that maybe we're not aware of on the outside that are causing you to want to make some of these investments if you could just sort of add some insight there that would be really helpful.

[Stuart Burgdoerfer:]

It's a big subject important subject. Four of five points I want to make. The first is in terms of where we expect to end the fall season, we're expecting to end the fall season up low single-digit and maybe a little lower than that so flat to up low single-digit that's where we expect to end the fall season first point. Second point would be our view of growing inventory at the rate of sales or slower than sales to improve turn. Our philosophy, our belief around that has not changed. Obviously with growth in international business and a lot of change in dynamic situation I'll describe it at lingerie and at PINK, Victoria's Secret Lingerie and PINK the situation given the degree of movement and it has been a little bit more challenging to manage. We are a very focused as you know to clear seasonal inventories twice a year aggressively through our semiannual sales and we've done that consistently. So in addition to the quantitative aspect of inventory qualitatively our commitment to ending seasons clean has not wavered at all. We are making important investment in the sleep and loungewear for Victoria's this fall. We think as pre-circulated remarks and Jan might comment on further on this call, we think it's an important category of growth for us and we are making investments there which creates a little bit of investment in inventory in advance of sales. But fundamentally, Kimberly our view hasn't changed as to how we manage inventory. Again a little bit more challenging given the variation and outcomes for lingerie and PINK in recent quarters and seasons, but the view doesn't change in terms of how we look at it. And we are making some important investments internationally in the digital channel and in the sleep launch business that I described for lingerie. Thanks.

[Operator:]

Your next question comes from Paul Lejuez of Citi.

[Paul Lejuez:]

Stuart, Victoria’s Secret of sales productivity over $900 a foot, including e-comm sales, I'm curious, what do you feel the right EBIT margin for a business with that sort of productivity? And it seems relative to peak, the VS business is also about 1000 basis points from peak margin. How much of that is due to lower March - margins, deleverage on occupancy or maybe SG&A deleverage? If you can maybe break that down for us? Thanks.

[Martin Waters:]

So lot in there Paul. Appreciate the question. We believe as we've talked about pretty consistently and we demonstrated when we're performing at our best and there are a lot of reasons for the decline in performance over the last few years but a business like Victoria's Secret stores and digital, high quality brand, pricing power, nature of competition et cetera we believe that that business when running optimally should be a high-teens operating income rate business. And we have that view based on our own history. And as we look at businesses like this when they're performing at their best over time. It's easy to say that. It's hard to accomplish that. In terms of where the business is running now versus that ideal level there is meaningful improvement opportunity both in merchandise margin rates and in expense leverage. You appreciate that the expense structure a lot of that relates to stores and square footage and payroll and wage rates and lots of things. But again, we've got - the biggest opportunity for us is to drive sales growth at reasonable and healthy margin rates to get back to what should be the ideal operating income rate in that base business or EBIT rate in that business. It's not going to happen overnight. It'll take a few years to accomplish. But as you know and for different reasons when we pulled out of the top performance of 2008 and 2009 driven by macro events, we've steadily and consistently improved the operating income rate both at the Victoria's and Bath & Body Works over that period of time. And this management team is focused on achieving the same result over the next several years for Victoria's Secret and the most important thing to do is to drive volume and healthy margin rates. We'll manage expenses with discipline. We'll certainly continue to look at real estate as we talked about at length. The cash flow and profit characteristics of a real estate today are very healthy but as is obvious - the sales productivity and underlying unit economics at Victoria's aren't as strong as they would have been a couple of years ago, but they remain very healthy, but a big part of the cost structure of the business relates to stores. And we'll continue to look at that as we move forward but the biggest opportunity is around volume and that's what this team is focused on. Thanks.

[Operator:]

Your next question comes from Brian Tunick of RBC Capital Markets.

[Brian Tunick:]

I guess, I wanted to hear a little more about your comfort on your Q4 guidance. Maybe if Stuart could maybe talk about how you're thinking about gross margin rate in Q4 versus Q3. And maybe Jan, you could talk about what are some of the biggest initiatives whether its changes in marketing, product, store environment that you think will help stabilize the business embedded in your fourth quarter guidance. Thank you very much.

[Stuart Burgdoerfer:]

So Brian, obviously, we spent a lot of time looking at the third quarter and the fourth quarter range of outcomes. Obviously management believes that we'll put out an appropriate range for the business. I wouldn't describe our views around margin dollars or margin rates as in any stretch heroic or unrealistic for either the third of the fourth quarter. I realize you're asking about the fourth quarter, but we believe the realistic - a couple of inputs in the rate that I would remind you of. One is that the outsourcing part of the business has gone out and have done some work with our vendor partners to get some benefit that will benefit the fourth quarter. And apart from that the margin rate assumptions are relatively consistent with recent results on a year-on-year basis and a multi-year basis. So we feel that we put out a model that should be achievable sure if we execute well.

[Jan Singer:]

Yes. So fourth quarter is what you asked about Brian, right? So we have a few critical bra launches as we always do in fourth quarter around specifically T-shirt and Dream. Of course, the panty business is the usual really the heavy hitter for us. But what is important is that Stuart mentioned earlier, the sleep and lounge category adding adjacent categories like sleep and lounge and even sports fashion has been a really important investment and growth driver something that we've been working on all year. And the casual side of the sleep business has had double-digit comps attaching to bras up to as high as 40% of the time. It's bringing in a new customer over 20% of the time week-on-week. And we have an existing customer who's coming back more frequently. We feel really good about the adjacent categories and what they do to the core of the business. It's a really big part of us building back the high value of customer profile as well.

[Brian Tunick:]

And if I could just…

[Amie Preston:]

Go ahead, Brian.

[Brian Tunick:]

I was just curious marketing and the messaging, it seems to be a topic out there. Just curious if Jan and the rest of the organization, how they're looking at the marketing message today at Victoria's Secret versus the last couple of years and how you're making changes to that. Thank you very much.

[Martin Waters:]

The brand, as I’ve said, we're not exactly where I think we need to be. However, we've debated this rigorously as a leadership team and management group. And it's been decided that we had a focus and we are transactional traffic driving marketing that transitions into the results that we're all looking for.

[Operator:]

Your next question comes from Ike Boruchow of Wells Fargo.

[Ike Boruchow:]

So, Stuart I want to kind of dig into the answer you gave to Paul's question. Obviously you think VS is a much higher business than what you're seeing today. So I guess at a higher level VS is seeing ongoing declines in profitability and margins. I kind of just wanted to ask about how you view the cost structure of the brand, and how you think about balancing investment spend versus protecting profitability. And I guess what I really mean by that is when the brand was hot you guys had a lot of investment behind the brand to capture to volume. But with the top line pressure, now did you rethink some of the larger global investments things like Fifth Avenue flagship, Bombstreet potentially partnering back in China even the fashion show. I'm just kind of curious what were you kind of looking at to kind of keep those margins higher than where they are today from a balancing investment.

[Stuart Burgdoerfer:]

Thanks for the question, Ike. It's a big subject as you appreciate. I mean what this business is about both at Victoria's Secret and frankly at Bath & Body Works and what Les has done over - more than 50 years running the business is to make investments, whether it's in the store design, in the merchandise, in the experience with customers that create emotional content. And from that emotional content, you generate pricing power that the products is got to be great and the emotional content of that merchandise along with the environment in which it sold the marketing of it, et cetera, it's got to be special unique different that creates that got to have it emotion for customers. So that's a fundamental philosophy of how we think about our business. Obviously evaluating whether you're getting paid for the range of investments that you described and those were just examples is the work on the work. And what I would wanted to know is that we have had historically and given recent results are having more intense debate about evaluating whether we're getting paid for that range of investments but - or the wide range are the types of investments that you're asking about. Obviously there's a lot of business judgment involved in evaluating that. We test things where we can. We make some decisions based on vision and intuition as you would expect. Oftentimes the greatest value is created in things that aren't obvious in terms of the return on investment. But a big question we look at it intensely, regularly, periodically. Obviously with some of the shift in the business, I understand why you're asking the question and you can be sure that myself, other leaders in the business Les are also looking at all those investments and just challenging are we really getting paid for them or not. And generally speaking this business is relatively short cycle again versus other industries so we are able to adjust. So things like stores that we're now opening in China are smaller than the initial stores that we opened as an example. Or you could take the Bath & Body Works remodel program where we tried several different iterations before we came up on a store design that really drove incremental sales and profit. So big subject often multi-year in nature requires iteration testing learning adjusting, and I think we haven't always gotten all those things exactly right but I would want to assure you and those listening to the call that those things get rigorous evaluation as part of running the business. Thanks.

[Operator:]

Your next question comes from Chethan Mallela of Barclays.

[Chethan Mallela:]

BBW the business has been strong for some time but comp acceleration over the past couple of quarters has still been notable. And I think the double-digit comp growth in 2Q was the first time at that level in a couple of years. So can you just kind of frame what's primarily responsible for the improved trend? How much is idiosyncratic versus just kind of a better industry backdrop in general? And how do you think about the growth rate for that business over the midterm?

[Amie Preston:]

Sure. We'll go to Nick.

[NickCoe:]

So I think, the first part of the question is we feel very good about the categories that we're in being in beauty and being in home. And they are dynamic categories as you can see in the industry so that's a positive thing for us. Secondly, as I mentioned in our opening comments the amount of work that we took on during the latter part of 2016 and the majority of 2017 where we're really investing in the product and trying to reposition a lot of the products that we had and that has manifested itself in I would say a healthy comp. As we continue to roll products out and programs out post 2017 we can see the trajection of business continued to grow so we still - from the latter part of October 2017 into Q4 Q1, Q2 we've seen that continually grow. So as we look forward, I think, it's more about us continuing to stay as close as we can to the customer , continue to refine the assortments to reflect what's going on in the market and what we're learning and hopefully maintenance of the current comp performance that we've got.

[Operator:]

The next question comes from Michael Binetti of Credit Suisse.

[Michael Binetti:]

Jan, I think, you mentioned a strong focus on building back the customer file quite a bit in the last few quarters, but you also commented today, I think, briefly on rebuilding a gap with dual channel customer. I was wondering if you can discuss a little bit how to marry those two comments and what you're referring to when you mentioned the dual channel customers specifically. May be just bigger picture remind us of some of the metrics around that customer and how valuable they are for the franchise relative to your total customer book.

[Jan Singer:]

The short answer is the same commentary the building back the customer file refers to the high value dual channel customer.

[Michael Binetti:]

Nick, if I can sneak one in - is with the remodels. Could you give reminds us of KPIs you look at to measure the rollout of the White Barn doors maybe and how those are progressing relative to your plan with any numerical example you might be able to offer to help just kind of reorient us from some of the goals you mentioned before.

[NickCoe:]

And I think part of our performance in the existing real estate activity that we took on and the new real estate activity. So the real KPI that we look at is what kind of growth are we seeing in the first second and now into the third year and we continue to see a very nice lift in that first year and continued performance in the year two and year three. What I really want to reiterate is the agility that we have and so we continue to read very, very diligently the results of those investments we're making in the stores. And if that ever slows down we have terrific agility in terms of being able to slow that pace or stop that pace. Now as we go into a number of years of doing this and by the end of the year we'll be well north of 600 and we continue to see a return on investment that we like. And so we'll continue to invest. But for the moment we feel like if that's not happening we do have the agility to broaden that. So continually evaluating that performance is a high priority of ours.

[Michael Binetti:]

Stuart can I sneak one in you guys have remained very committed to a very, very high dividend yield despite I think the operating results coming in below some of your this year. I know you've worked hard to moderate CapEx down a few times along the way but could you help us in how you think about holding steady the approach of the capital deployment in contrast the variances you've seen in the operating plans?

[Stuart Burgdoerfer:]

Important subject obviously, important source of return for shareholders. Obviously the payout ratio is abnormally high. The yield is very high. We look at it regularly management does. We have the appropriate conversations with our board. Obviously a lot of our earnings and our cash coming to fourth quarter, we have conversations about this regularly. But importantly as we have more insight into holiday results we're comfortable with the dividend today have the free cash flow to support it but it's obviously something that should be looked at periodically and we do. We're comfortable with that. We expect to one way to deal with the payout ratio is obviously to increase earnings that's what we're focused on. Earnings increases will drive obviously an increase in the share price and get dividend yields in relationships like that in a more normal range. But with that said our operating performance has lagged our expectations over the last several years. So we look at it periodically in a rigorous way. That will continue. We're comfortable with it based on what we know at this point and we'll continue to look at it. Thank you.

[Operator:]

Your next question comes from Roxanne Meyer of MKM Partners.

[Roxanne Meyer:]

My question is about the right number of Victoria's Secret PINK and BBW stores just giving us perhaps an update to how you see the portfolio evolving taking into account on one hand expanded categories and also - but also you've seen some rapid growth in DTCs. So how does that change if at all your view on what the number of stores and even the size of the store should be? Thank you.

[Stuart Burgdoerfer:]

I'll try to take that and others may want to jump in but as we talked about pretty consistently in our communications. The first point I'd really want to register is that we actively managed the subject you're asking about and we are opening and closing stores every year. In the information we put out publicly there is a forecast of store activity this year, and it's being actively managed. We shared a slide at the investor meeting a year ago that showed our activity over a 10-year period where we opened, my memory more than 700 stores and we closed more than 500 stores. So it's being very actively managed. As you know our sales productivity is high, not as high as Victoria's as they were a few years ago. They're continuing to grow and be high at Bath & Body Works. You know that our cash flow and profit profile in our stores are very strong. And with that said, we're not unaware of what's happening with mall-based retailing in an overall sense. But with that said, those retailers that have strong brand, strong offering, strong execution are doing very well in malls and again within our own business. Bath & Body would be an example of that. Victoria's Secret Beauty would be an example of that, so it is very actively managed. We'll see how it plays out over time, and we'll continue to manage it actively year-by-year looking at the current version of our schedule. Victoria's Secret is going to close about 20 stores in North America this year, and it's going to open about three. So there's some net production. But it's actively managed, and it will be a function of performance. It's performance based. That's how we evaluate the initial investments and that's how we evaluate decisions as to whether to close doors or not. We obviously understand sales transfer and cannibalization and all those dynamics and consider those things as we actively manage the real estate portfolio. So big important subject, got a very strong team that is responsible for it within the enterprise and we have a lot of experience working with it. Thanks.

[Operator:]

Your next question comes from Jamie Merriman of Bernstein.

[Jamie Merriman:]

Jan, I think this question is for you. You talked pretty positively about some of the products that you've relaunched like the Sexy Illusion bra, like the T-shirt bra. Can you just update us and give us a sense of timing for some of the initiatives for maybe second half of this year into next year? I think Body by Victoria's is one. And then as you move beyond that, are there other big legacy businesses that will still need relaunch? Thanks.

[Jan Singer:]

Well, we continuously update each part of the portfolio. So BBW as recently as this month has been relaunched with color and fashion. We're continuing on the innovation of that bra. It's a very important franchise, and we're very thoughtful and mindful about how we manage it. But going into the fall, as I mentioned, it's bouncing our portfolio again the acceleration and the success we're seeing in panties, which is we're super excited about is the business that's we saw new goods, superfast, sometimes weekly. And we continue to see again new customer acquisition as well as existing engagement and moving up the funnel of the deal. The adjacent categories I mentioned, in sleep and lounge and sport fashion, if you will sport performance are really important to build back again that not just the file but the business in a long term sustainable way. So that's what's on the docket.

[Operator:]

Your next question comes from Marni Shapiro of Retail Tracker.

[Marni Shapiro:]

Could you talk a little bit or dig a little bit into lounge business at PINK and Victoria's Secret. It seems over the last several season, there's been a little push and pull between the two brands. Are you seeing the customer gravitate to which ever looks better so maybe one season it's Victoria's Secret, the next season it's PINK? Or do you think these are separate issues at Victoria's Secret and PINK?

[Jan Singer:]

I will say that we're not in the coat lounge business per se the way PINK is. We're in the free business for sure which is different fabrication, different silhouettes, different content and different fashion. Our coat lounge effort is a much smaller part of the business. We are not in fleece in the way that PINK is in fleece and Denise I am will speak to it. So I don't see them as trading off each other. We have a very different handwriting again and different target consumer, a different end purpose and different pricing structure. I don't know Denise if you want to add to that.

[Denise Landman:]

Yes, I would agree that not unlike the commentary specific to bras they're hopefully and discernibly differentiated. I think the thing I would emphasize specific to the fleece segment of our lounge business which is currently under some pressure is in our minds are attributed to this buy now, wear now phenomenon that has fairly rapidly affecting the buying habits of our age cohort. And so we're adjusting into seasonality based on these consumer insights and feedback that we get from the consumers that we're in constant contact with. But I would say overall the lounge business continues to be a relevant category to the college age consumer and a category of interest. It's just silhouette reference points, fabric reference points have to be seasonally accurate and then the appropriate quantities to drive the velocity that the business requires.

[Operator:]

Your next question comes from Susan Anderson of B. Riley FBR.

[Susan Anderson:]

I guess as a follow-up on the profit margins at the VS business there's been a lot of new competitors pop-up in the space. So I guess do you guys think the bar has been reset in terms of where these margins should be? And then also we've had a mix shift in the bralettes and sports bras which are still part of the mix which are lower ticket and potentially lower margin. So does that also reset the business?

[Martin Waters:]

Susan, I'll just jump in. Where I started and many of you have heard us talk about it this way a company that we admire a lot is Inditex. And particularly, there's our business but they run a strong portfolio and they run for sustained periods of time at high-teen margin rates. Their cost structure is different which relates back to an earlier question. But in terms of intensity of competition I can't think of a more competitive set of segments in retailing than the ones in which they operate and through very strong execution on their part over very long periods of time, they run at a high-teens operating income rate. And so if I think about that set of circumstances in comparison to the environment in which Victoria's Secret and PINK operate in I think when we're executing our business extremely well including again back to some of the questions about making sure that we're trading off investments appropriately there's no reason why there might be to some degree an increased level of competition vis-à-vis the segment for example that's ours competing. And I think we're in a much better sort of categories with a much stronger relative competitive position. And so again, we're of a view that when we're really running this well and we realize we've got a lot of opportunity to get there and it's our job to get us there that we have the potential to get back into the high teens rate which we've been at before even with a little bit more competition in the industry. So that'd be my take. Jan you may have something to say.

[Jan Singer:]

I mean I think the thing about the expansiveness of this brand and the assortments that we offer online (inaudible) push-up bras so there's choices in the portfolio. It's important to be in balance. An example that you're mentioning about the price architecture due to the landscape result, let's say T-shirt for a second which originally was an opening price point bra we've taken four price upon that bra and we continue to see unbelievable builds week-on-week. So it's an interesting phenomenon. It's a casual bra. It definitely speaks to the landscape you're talking to. Yet every time we keep putting out I will call fashion content on that bra she continues to pay us more for reselling out of the most important styles on it. And even when we look at BBW and we're starting to deal with it and adding fashion again to that bra franchise within the younger consumers pay us for that work. So it is an interesting time and things are moving but we are on top of it.

[Operator:]

Your next question comes from Simeon Siegel of Nomura Instinet.

[Simeon Siegel:]

Stuart or Nick what percent of the new BBW stores are side-by-side or shop-in-shop? And I guess, where relevant, how much of the remodels - how much of those remodels added to comp? And then is there any help on where the PINK margins operate currently? Thanks.

[NickCoe:]

The majority actually shop-in-shop and as a go-forward point of view on that that tends to be where we would want to get continue the investments into it. So we're actually happy with both, both side-by-side and shop-in-shop operationally and the ability to manage the store is probably more efficient and probably more customer friendly from a shop-in-shop perspective and that tends to be where we will continue the investment at the moment. But as I said earlier on we're pretty fluid in terms of how we read those and how we manage them but that's pretty much the answer.

[Amie Preston:]

And I think that has not been a meaningful contributor to comp right? It's less than a point I think.

[Stuart Burgdoerfer:]

Simeon on PINK margins they are - they remain very healthy but are down versus their peak but remain very healthy. We don't get into fine detail about margin rates by - at that level of detail. But in an overall comment they're very healthy margin rates. They're down somewhat versus their peak but remain healthy. Thanks.

[Operator:]

Your final question comes from Janet Kloppenburg of JJK Research.

[Janet Kloppenburg:]

Congratulations to Denise, --brand leadership has been remarkable and has taught us a lot. And also welcome Amy who I think will do a great job at PINK Couple of quick questions for Denise. We've often talked about the logo business at PINK. Can you talk about that in light of the fact that logo is working universally? And maybe if there's some updates necessary for the PINK logo. And just for Jan in the businesses of strength, can you talk about margin direction there maybe in panties and the new bra introductions and sleepwear? Thanks.

[Denise Landman:]

Yes. By local you're referring to our collegial business?

[Janet Kloppenburg:]

No. I’m talking about all the PINK logo products.

[Denise Landman:]

Sorry. The Logo segment of our business literally defines it.

[Janet Kloppenburg:]

I know.

[Denise Landman:]

And what we're experiencing lately, which as well I take as a sign of brand validation is increasing engagement with more expensive brand iconography. So you would be familiar with the PINK dog as another discernible brand reference point selling very well. So the attachment rate to love PINK, PINK logo, logo manipulated in a myriad of creative ways and the inclusion of more expensive iconography has not met with consumer rejection far from it.

[Amie Preston:]

And Jan?

[Jan Singer:]

Janet, just one more time with your question. I’m sorry. I don't think I heard the whole thing.

[Janet Kloppenburg:]

I know you have a lot of new products that are working very well. I'm just interested in whether you're seeing margin gains in those categories. For instance, in the panty category which you turned rather quickly, are you able to see the rebound in margins back to historical levels? And on the new bra introductions, are you seeing margins comparable to, let's say, legacy Body by Victoria or Very Sexy? Thanks.

[Jan Singer:]

So on the businesses that I talked about, we are talking not just top line sales but also healthy margin in line with sales. I can't speak to historical levels because these items didn't exist back in the day, but panties certainly is tracking to where we've been and we're excited about that. Same with the T-shirt Bra and Illusion is a new book of business.

[Amie Preston:]

Thank you. Thank you all for joining us this morning and for your continuing interest in L Brands.

[Operator:]

This concludes today's conference call. You may now disconnect.