LandBridge Company LLC
Q2 2017 Earnings Call Transcript

Published: 17 Aug 2017

[Operator:]

Good morning. My name is Dorothy, and I will be your conference operator today. At this time, I would like to welcome everyone to the L Brands Second Quarter 2017 Earnings Conference Call. I will now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer for L Brands. Please go ahead.

[Amie Preston:]

Thank you, and good morning, everyone. Welcome to L Brands’ second quarter earnings conference call for the period ending Saturday, July 29, 2017. As you know, we’ve released detailed commentary last night which is available on our website. 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, lb.com. Stuart Burgdoerfer, EVP and CFO; Nick Coe, CEO of Bath & Body Works; and Martin Waters, President of International, are all joining us today. Additionally, we have the Victoria’s Secret brand leaders joining us for the first time on the call today. Denise Landman, CEO of PINK, who is joining us from another location; Jan Singer, CEO of Lingerie; and Greg Unis, CEO of Beauty. As a reminder, all results that we discuss on the call today are adjusted results and exclude the 2016 special items outlined in our press release. Thanks. And now I’ll turn the call over to Stuart.

[Stuart Burgdoerfer:]

Thanks, Amie, and good morning, everyone. Second quarter earnings per share decreased 31% to $0.48 per share, exceeding our initial guidance of $0.40 to $0.45. The earnings upside was delivered through expense control and non-operating income gains; the comp decline of 8% was below our initial forecast for a mid-single digit decline. Looking forward to the remainder of 2017, we expect continued solid performance at PINK and Bath & Body Works, and continued improvement versus our first-half results at Victoria’s Secret Lingerie and Beauty. Given our below expectation second quarter sales result, our comp forecast for the third quarter is a more conservative low single-digit decline versus our previous view of up low single digits. We have strong brands that lead their categories, with close connections to our customers. While store traffic, particularly at Victoria’s Secret has been challenging, we believe a large part of the decline is related to the exit of swim and a pullback in promotional activity versus last year. Our online businesses continue to be strong, with a 11% growth in go-forward categories at Victoria’s Secret and 16% growth at Bath & Body Works. Our stores have high sales productivity and 99% of our stores are cash-flow positive. We have confidence in our upcoming product launches, and we will continue to leverage our speed and agility capabilities to read, react and chase. We will also continue to manage inventory, expenses and capital spending with discipline. With that, I’ll turn the discussion over to Denise

[Denise Landman:]

Good morning. My name is Denise Landman. I’m the CEO of PINK and I’ve had the privilege of leading this brand since 2002. This morning, I have some brief comments regarding our recent performance. Building off of a successful spring 2017, led by bra and panty performance, the PINK brand management is currently focused on delivering the world-class experience, both online and in-stores for all of our back-to-campus shoppers. Back-to-campus, one of PINK’s perennial milestones as a brand really exists for multiple reasons. Number one, it’s an opportunity to build an on-trend wardrobe of intimates, lounge and accessories for collegiate girls across America. It’s a critical brand engagement opportunity fortifying our customer’s affinity for the brand. We leverage our agility and read and react, which is a core competency of PINK, enabling us to assess based on current performance those opportunities that are scalable and mitigate any risk. This is of particular importance as we look forward to the holiday season. I would assert that we remain enthusiastic about the brand’s relevancy and its forward performance potential. Those are my comments this morning. And I’d like to turn it over to Jan Singer, CEO of Victoria’s Secret Lingerie.

[Jan Singer:]

Thanks, Denise. Hi, it’s Jan Singer, CEO of Victoria’s Secret. It’s really great to be on the call today. Coming into L Brands and to Victoria’s Secret with 15 years in beauty, over 10 years in sports and most recently in intimates, I’m really excited to bring Victoria’s Secret Lingerie, my passion for the consumer and the customers that we have, the insights that they bring, understanding of innovative, aspirational product creation and a really close understanding of supply chain and agility. In addition to that, brand programs that are authentic and engaging and will continue to build loyalty and conversion for our existing and new customers into the business. The vision going forward is that, there are many ways to run this offense, and I’m on the offense to mine for long-term sustainable growth with four clear filters. Number one and always first is knowing her. Putting the consumer at the center, deeply knowing her today, what she expects from products and experiences that speak sexy to her, not just to him. Number two, solving her sexy, which means really strengthening the core of our business with bras that are our best at in design, innovation, fit and finishing. Bras with benefits and key adjacent categories that also bring fashion and fantasy for her are the focus. Thirdly, serving her where she wants to shop, when she wants to shop in an elevating, engaging brand accretive way, all powered by building a high-performing team and culture of diversity and inclusion. That culture is what breeds innovation. Innovation is what helps us build the best at bras. And when we do, we get paid for that work. My focus right now and for this past year has been on the deep consumer connection, literally beginning the experience with working in stores and being in the market every week since day one. The consumer connection we have with millions of women is a competitive advantage every day. From that, we build the product in the most excellent, innovative form, resetting how we, as a team, optimize our merch, design, planning, supply chain, teams for speed, relevance and innovation is a new way of working and one that I’m excited to bring and lead the team on. And with the team, we are in – on the offense of building world-class high-performing talent. We have a balance of undeniable internal experience from L Brands and the balance of new team members that bring a lens of innovative thinking to the mix. That chemistry and competency is job one in building a high-performing team. This quarter, it begins with bras. And number one job was balancing the assortment, making sure that we have choices of sexy for her. We have a cornerstone in the business of the push-up bra, and we went to the bralette business and now we’re finding a lot of sexy in the middle, balancing that assortment and bringing sexy solution, as well as fantasy and fashion in constructed bras is the way to go for us going forward. We’re also resetting the panty architecture for the mix business, when she just want cheap and cheerful, fast fashion, as well as disruptive single ticket pinnacle product. In addition to the time this quarter, we are obsessing holiday. Holiday is an everyday conversation for us and we plan on coming into the quarter with holiday plans dialed. Transitioning the team has been our focus this quarter and also learning from last Retail 101, so that we can write the future together. I’m most excited to see the deep consumer engagement that we have, as a team, given the access to the customers. I’m excited to see the reset return of the right level of loyalty. We have an incredibly loyal customer today and building new loyals is a mission for us, and reactivating our existing customers has also been a focus. I’m excited for the future ahead and it’s a pleasure and honor to be at the brand at this time. I’m now going to turn it over to Greg Unis.

[Greg Unis:]

Good morning, everyone. I’m glad to be here with you this morning. It’s been a little over a year since I joined Victoria’s Secret, and I’d like to begin this morning with sharing a few thoughts about what we’ve been focused on in beauty. So last fall, we began a journey to create a clear point of view for our brand and for our customer, most importantly, about what we stand for as a beauty business. We narrowed our assortment offering by 40% and we saw significant increase in our productivity. That decision allowed us to focus on fewer, more powerful launches within our prestige fragrance business and to create fashion and newness in categories, where we can leverage our speed model through the beauty part. So moving on to spring 2017. We were focused on laying the foundation for healthier businesses across all product line. Within Q2, by focusing the assortment, we made big bigger and-best selling fragrances are up year-over-year in both stores and digital. We layered in fashion and newness in our mist collection, lift and accessories businesses, which the customer is responding to. We reduced lead times and continued to get faster. Overall, I’m confident, we are headed in the right direction with positive sequential growth. So looking forward to fall, to this coming fall, we will continue all key strategies, continue to lay the foundation of a healthy business to set up for growth in the future. We will build upon what’s working, making big bigger, leveraging our speed model to infuse fashion and newness and testing and learning new ideas. Thank you for joining this morning. I will now hand it over to Nick Coe to share his opening thoughts.

[Nicholas Coe:]

Thanks, Greg, and good morning. I’d like to just add really just a couple of words of color to go with the black and white script that we sent out, where we – you can see, we continue to grow the business and the operating income on top of the pretty solid last year. So I’d like to start by speaking the obvious, and that’s it really goes without saying, our most valuable assets is our brand. And our focus and efforts in the last six months have been a critical part of us of moving the business forward. So what’s really not visible in the script, so the major investments we’ve made in two really critical areas to help move both the top line and the bottom line and we’ve been able to do that at the same time as growing the business. So during the last six months, the last couple of quarters, we’ve significantly increased the amount of newness, new product categories and new product testing, and that’s a pretty big change versus recent history. And I’m really referring to newness that isn’t just seasonal updates on new fragrance launches, it’s significant new newness for the store. And this has been invaluable for us, because it’s provided us with some critical insights that will really help us define what’s important to keep the brand relevant and remain category dominant. Secondly, we continued disciplined approach in investing in the fleet, making sure the stores are updated, making sure the stores are exciting, and obviously interesting for the customer shopping. And that investment will bring us to the end of the year to about 420 stores and the investment should continue as we go forward. And as you know, we talk a lot about the importance of the customer experience, the store experience, and how frankly that obviously translates into sales. And I really think both of these two initiatives contribute significantly to us building the health of the brand, which once again is our most valuable asset and really sets us up for success. So in summary, I think, it’s important to note, we’ve pushed hard on these two initiatives, and we’ve done it in a manner that has allowed us to drive top line and bottom line at the same time. And with that, I’ll hand it over to Martin.

[Martin Waters:]

Thanks, Nick. Good morning, everyone. In the international business, we experienced similar overall trends as those that we saw in the first quarter, including softness in beauty, difficult market conditions in the Middle East, some pressure in the UK market, and of course, we continue to make investments in China. We did see some improvement in our Victoria’s Secret franchise and travel retail businesses, as well as continued strength in the Bath & Body Works International business. We continue to be pleased with the first two full assortment Victoria’s Secret stores in Mainland China, and we successfully transitioned to the T Mall domestic digital platform within country fulfillment back in July. We continue to be very bullish about our growth opportunities in China and around the world. And 2017 will be an exciting year for us, as we continue to establish our business in China and build on our footprint in other geographies globally. Amie?

[Amie Preston:]

Thanks, Martin. So that concludes our prepared comments this morning. And at this time, we’d be happy to take any questions that you might have. As a reminder, we’d like to get to you as many – get to as many of you as possible, so in consideration of others, please limit yourself to one question. Thanks, and I’ll turn it back over to the operator.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Susan Anderson with FBR Capital Markets.

[Susan Anderson:]

Hi, good morning. Thanks for taking my question. I was wondering if you could maybe just give some more color on the lower guide for the year. It sounds like it’s pretty much all traffic-related and just lower expectation for sales in the back-half. But then also it sounds like you feel that the swim exit did impact traffic in second quarter. So maybe just your thoughts on how you see traffic playing out in the back-half? And then also on the merch margin front, do you expect it to improve in third quarter from second quarter? Thanks.

[Stuart Burgdoerfer:]

Thanks, Susan, so it’s Stuart.

[Susan Anderson:]

Hi.

[Stuart Burgdoerfer:]

In terms of the guidance, as outlined, we just reduced our assumptions around sales versus what we’d forecasted earlier in the year. So that is the driver. And with that said, we’re – this team is going to work very hard to maximize our opportunities this fall. As you know, we try to run the business conservatively as it relates to the management of inventory expenses, capital spending. And so we try to be thoughtful about our sales assumption in managing those things, and that same conservative mindset place through to our guidance. We did beat the Q1 guidance that we put out, and we’re on the Q2 guidance as well. But the takedown, if you will, is sales-related. With respect to your question or further perspective on traffic, at the end of the day, traffic is within our control. And we believe based on brands and product and experiences in-stores and online that we have the opportunity to impact traffic and we do when we’re performing at our best. And so we’ll be focused on getting the best result in the back-half. But in terms of the takedown, it is sales-driven fundamentally. Thanks.

[Susan Anderson:]

And just on the merch margin front, do you expect it to sequentially improve from second quarter to third quarter, or do you feel like you’ll have to promote more to drive the traffic?

[Stuart Burgdoerfer:]

Yes, we had some merchandise margin rate improvement in Q2, as we reported, and we would expect to have some improvement in Q3 and Q4 as well.

[Susan Anderson:]

Okay, great. Thanks. Good luck next quarter.

[Stuart Burgdoerfer:]

Thank you.

[Amie Preston:]

Thanks, Susan. Next question, please.

[Operator:]

Your next question comes from the line of Kimberly Greenberger with Morgan Stanley.

[Kimberly Greenberger:]

Great. Thank you. Good morning. Stuart and I’m not sure if anyone at Victoria’s Secret wants to address this as well. But traffic, obviously, seems to be the number one kind of key ingredient that’s missing to drive the go-forward business. You mentioned that you’re increasing marketing selectively in the third quarter. I’m wondering, if you can talk about the goal of driving traffic is your new targeted direct mail pointing you in the right direction? And are there any other levers that you’ve got at your disposal to try to drive traffic as we go through the back-half of this year and into 2018? Thanks.

[Jan Singer:]

Hi, Kimberly, it’s Jan Singer, thanks for the question. I think that when we use the marketing strategically in a brand accretive way, we have the opportunity to engage existing customers and make her aware of the new products that’s coming. In addition, we have the opportunity to engage new customers that we believe would really have a great experience with the brand. So the idea is to make sure that what we’re doing is brand accretive, inspiring and drives traffic and conversion. So, yes, that’s a strategy for us.

[Amie Preston:]

And then I would add from a PINK perspective that we enter into a season with a very holistic point of view regarding how we’re going to reach out, inform and touch the customer through all relevant digital platforms in addition to pieces that we might mail. I think above and beyond just trend right product in the moment, our event strategy are movable, bus tour, which visits college campuses continues to drive interest in the brand and traffic into the store.

[Jan Singer:]

Thanks, Amie.

[Amie Preston:]

Kimberly, did that do it for you?

[Kimberly Greenberger:]

Yes, I’m just wondering what kind of response you’re seeing to the targeted direct mail efforts? Is it helping or initially, in those test markets, is it helping to drive traffic to the stores?

[Stuart Burgdoerfer:]

Short answer is, yes. We’re getting good results. We’ve learned a lot, Kimberly, as we’ve talked about over the last six to 12 months. And we’re seeing pretty strong response to the direct mail activity that we’ve been pursuing. Thanks.

[Kimberly Greenberger:]

Great. Thank you.

[Amie Preston:]

Thanks, Kimberly. Next question, please.

[Operator:]

Your next question comes from the line of Paul Lejuez with Citi.

[Paul Lejuez:]

Hey, thanks. Is there anymore detail you can give on the comp breakdown between Victoria’s Secret and Bath & Body Works embedded in your third quarter and fourth quarter guidance? So just how you think about each from a transaction versus ticket perspective that’s built into the second-half? Thanks.

[Amie Preston:]

Thanks, Paul. So we’ll go to Stuart for that question.

[Stuart Burgdoerfer:]

Yes, Paul, as you know, we don’t get too granular about guidance by segment, because there’s variability even at the company level and obviously further variability as you break it down into parts. With that said, as we think about it and trying to be somewhat response or responsive to your question, we would expect stronger results in the businesses that have had stronger recent trends, so that might be an extremely obvious point. But we would expect a continuation and further improvement in all of our businesses. But in terms of absolute traffic and comp results, the businesses are in different places, as described. We’re expecting improvement through the fall season across the Victoria’s businesses and a continued strong performance at Bath & Body Works. So that really be the color. But in terms of getting detail about traffic for PINK versus beauty and all that, it just – it gets so granular, I’m not sure that it’s helpful. We plan the business conservatively. We’re optimistic about the fall. Bath & Body Works had a strong spring season. PINK had a strong spring season. And lingerie and beauty made a lot of progress as well and we believe we’ve got improvement opportunity across the portfolio. Thanks.

[Paul Lejuez:]

Thanks.

[Amie Preston:]

Thanks, Paul. Next question, please.

[Operator:]

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

[Oliver Chen:]

Hi, thank you. Good morning. We had a question related to panty sales below expectations. Could you clarify what happened here? Was it an air play with some of the bra launch performance there? And on that topic of targeted direct mail – mailing and returning to that, what was your framework for thinking about that decision? And what will be different about the program in terms of being most brand appropriate and a brand accretive way this time versus in the past? Thank you.

[Amie Preston:]

Thanks, Oliver. So, we’ll go to Jan.

[Jan Singer:]

Hi, Oliver, thanks for the question. On panties, I think there is a few things in play. Number one is, we moved from highly promotional free panty conversation into resetting the line in the architecture and making sure that we have content on a couple of different levels beginning. On the 54 [ph] business, which is our entry price point, the content needs to be absolutely on point, which requires a fast fashion model. We fortunately have speed. So resetting that proposition and getting on our existing speed model is job one. Number two is, we’ve had some success and we need to build on it and what we call the single ticket and the more elevated panties, where we disrupt the marketplace. Our job is to push the edge and bring new sexy silhouettes to the market. And when we do, she comes in and she transact. So we’re resetting that opportunity. We think that’s part of the – of clearly the growth for panty in the future. In addition, yes, there’s attachment rate to bras as well. And as we bring new product and we bring the logical balance to that business, we’ll see that traction in panties. So I’m very confident in the architecture go-forward. I’m confident in using the fast fashion model, as well as the more elevated. And I think, we’ll see a healthier panty business with more loyals going forward. In terms of the mailing, brand accretive offers mean that we are offering an opportunity to trial in a way that we are proud of and we continue to get repeat purchasing add. We offer our direct connection with the customer in a segmented way that shows to her that we know her and show her new products that are for her. When we do that, it feels personal and it is and she comes in and checks out the business. And I think that’s what we’re trying to build on when we say brand accretive product marketing.

[Amie Preston:]

Great. Thanks, Oliver. Next question, please.

[Operator:]

Your next question comes from the line of Lyndsay Drucker Mann with Goldman Sachs.

[Lyndsay Drucker Mann:]

Thanks. Good morning. Jan I was just hoping to get some clarification on the panty price architecture. So are you saying that you will be taking opening price points for panties lower? And if that’s the case, how are you thinking about overall AUR for panties going forward? What kind of impact that might have on the business? Would you expect for the panty category to flatten out in coming quarters, or is this a category that’s likely to be a drag as this transition takes shape?

[Jan Singer:]

Yes. No, let me just clarify. Thanks for the question. We did not talk about lowering price point on panties at all. In fact, we think there’s more opportunity in the upward motion than the down. The 54 businesses is a 54 business and we’ve been aggressive about making sure that we’re on a price value. The opportunity I’m talking about is making sure that our team is as fast as possible on content, and that the conversation we’re having with the customer through the design of that panty is current We’re doing a lot of things to reset and make sure we put more value in those panties, but not take price down. In addition what I was – sorry, yep, go ahead.

[Lyndsay Drucker Mann:]

No, go ahead.

[Jan Singer:]

You’re fine.

[Lyndsay Drucker Mann:]

Okay. I guess, I was going to ask, will you be changing to the degree the panties were often offered as a promotional lever free panties or panties discounted. Do you expect to be further discounting promotional activity on panties, whether it’s standalone, or as part of a broader lingerie package promo? And will you be doing anything on your kind of entry price point panties to change the average unit cost, or should we be expecting overall merchandise margins in panties to be flat or maybe even up?

[Jan Singer:]

I think that when we talk about panties and promotions, it’s a balance and we have to be selective. Do I want new customers to know what we have? Yes. Is there a brand accretive way to do that without giving away panties to everybody that walks in the store? I do believe so. So for me, panties are a business. They’re not just a marketing tool, and we’ll be continuing to build that business and getting paid for that work. And we’ll balance that with trial when we think that we can get a conversion from that conversation.

[Lyndsay Drucker Mann:]

Great. Thanks so much.

[Jan Singer:]

You’re welcome.

[Amie Preston:]

Thanks, Lyndsay. Next question, please.

[Operator:]

Your next question comes from the line of Paul Trussell with Deutsche Bank.

[Paul Trussell:]

Yes, good morning. Just to follow-up on the conversation we’re already having. Can you be a bit more specific on thoughts around units versus AUR in lingerie in the third and the fourth quarter, and what the drivers are of that growth, given what the comparisons are from a year ago? And then also, just a bit more detail on Bath & Body Works, obviously a good overall quarter, but certainly a slowdown at the end of the period. Just dig a little bit deeper into what exactly happened in July, and what we should expect as we move into August in the second-half of the year? Thanks.

[Jan Singer:]

Paul, hey, it’s Jan Singer. So I would say on your first question, as we go to balance out the assortment, especially on bras from a bralette predominant conversation, we expect to see AURs go up, of course, because constructed bras are bras with benefits and we get paid for that work. So in terms of that AUR conversation, that’s our intension.

[Amie Preston:]

Great. And we’ll go over to Nick for the Bath & Body Works question.

[Nicholas Coe:]

Hey, Paul, good morning. I think, July for us was really about a transitional month. I talk to you a lot about the amount of change and the amount of product testing that we’ve put in, the amount of differentiated assortment. I mean, July is pretty transitional anyway as exit sale and start thinking about being in the fall season. So I really look at that slowdown in performance pretty much through the lens of – it was transitional and it was about a lot of changes and some very interesting changes under the covers in terms of mix, assortments, et cetera. Thanks.

[Amie Preston:]

Great. Thanks, Nick. Next question, please.

[Operator:]

Your next question comes from the line of Brian Tunick with Royal Bank of Canada.

[Brian Tunick:]

Thanks. Good morning. I guess, my question first for Jan. I guess, this T-Shirt Bra launch last month was your first big launch, I think, since you’ve been at the company. So curious about any learnings you’ve had there as we look into the fall season, how should we be thinking about any big launches and any timing for VS launches versus last year? And then maybe Stuart can talk about the inventory guidance at the end of this quarter, is that a bullish viewpoint about the holiday season, or is that more about timing versus last year’s inventory position? Thanks very much.

[Amie Preston:]

Okay. So let’s start with Jan, T-Shirt Bra.

[Jan Singer:]

All right. Thank you for the question and the opportunity to talk about that for a bit. Yes, we were able to – actually a couple of interesting things I’ll share. We actually reduced the assortment in that collection by 30% and made plan in comp last year’s two different collections with the one assortment, which – the assortment was a mix of few bras, the refresh and three new bras and we saw our product deliver plan – really on plan. The most exciting thing about that product was that we brought new customers into the mix and new customers for us in a – an exciting fresh way that the silhouettes that are new, not necessarily the existing. So I was really pleased with the execution of that launch and I was pleased with the results. And more importantly, the engagement with the customer was exciting. In addition to that, the engagement on social media with the customer about the bra itself was exciting. So I think, that was a leading indicator that when we build the business that – in a way that connects with her and fits and feels good, she will come. So it’s the beginning of the beginning.

[Amie Preston:]

Great. And Stuart, on inventory?

[Stuart Burgdoerfer:]

Yes, Brian, with respect to inventory, you’ve been following us a long time, you know, what our commitment is, which is to grow inventory in line with sales. We’ve done that very consistently for a long period of time. There’s nothing, that’s changed about that point of view. With that said, we want to make sure that we’re in stock and appropriately positioned to have a good fall in terms of the guidance about the third quarter. I would describe it as consistent with that thinking, it is up a little bit, but not significantly. And there’s a little bit of timing involved, but our commitment to manage inventory in line with sales was – as strong as ever and some of this is what we’re lapping and cycling, but again, it’s a pretty conservative position. We ended the spring season very clean. We’ve got a lot of agility, which is great, and we’ll manage inventory in line with the sales trend. Thanks.

[Amie Preston:]

Thanks, Stuart. Next question, please.

[Operator:]

Your next question comes from the line of Anna Andreeva with Oppenheimer.

[Anna Andreeva:]

Great. Thanks so much. Good morning. A question on the August guide, should we still expect comps to be down low to mid-single digits this month? And as we think about 3Q guide for flat to down low singles, maybe talk about which markets do you expect to see the biggest improvement to reach that level? And then secondly, just priorities for cash, I think you bought back a bit more stock during the quarter, maybe talk about opportunity for bigger buyback, especially given the stock at these levels? Thanks.

[Stuart Burgdoerfer:]

Let me answer on the August comp guidance. When we began the month we said down low-to-mid, we don’t have further comment on that today, back-to-school period we think is an important one there to get back to school result, but we are not commenting beyond that for August, we report every month as you know, but no really significant update to that. With respect to cash and – sorry, sequentially through the quarter, the biggest cadence in the quarter will be as we’ve described, the diminishing effect of the non-go forward exit and so sequentially that will be become less unless as we go through the fall season including their by month and the third quarter, so that’s the additional color we provide on the comp. With respect to cash, as you know, we have a very strong record and commitment to returning excess cash to shareholders and we had spoken a lot about that, you are familiar with it. We are executing under our share repurchase authorization, we are also paying a very healthy regular dividend as you are aware right now given recent earnings results that have very high payout ratio and a very attractive yield for shareholders, but we remain committed to returning excess cash to shareholders using regular dividends, through repurchase programs and from time-to-time with special dividends. We consult with our Board about that as you would expect and we’ll continue to execute against our authorized program, so it’s kind of where we are now. Thank you.

[Amie Preston:]

Thanks, Stuart, and thanks, Anna. Next question, please.

[Operator:]

Your next question comes from the line of Ike Boruchow with Wells Fargo.

[Ike Boruchow:]

Hi, thanks everyone, good morning. I thought I’d try to get Martin involved. I guess for the back half of the year, I think you guys commented that comps ex-China were down in Q2. What’s kind of baked into the back half assumptions and the top line for the international business? And then maybe any update on the operating loss you expect this year from China given all the investments and how you expect that to scale maybe as you move into next year?

[Amie Preston:]

Great, thanks Ike, we’ll obviously go to Martin.

[Martin Waters:]

Yes, thanks Ike for bringing me in, I appreciate it.

[Ike Boruchow:]

No problem.

[Martin Waters:]

So yes, the driver of negative comp really in the international business really were coming out of the UK, where we are seeing a couple of things happening. One is the same patented business that we see in North America, particularly around the exit of swim and apparel and also the lower AUR in bras. That said, we have seen significantly, I mean really significantly higher unit sales of bras in the UK, so we are winning share with bra, which is obviously a positive. I think the other thing in the UK that we are seeing is just generally somewhat of a malice and most retailers are reporting that traffic is down, not helped by the terrible incidents around terrorism and so on and so forth. So that’s really the big story in Victoria’s Secret International. We had some softness in beauty, but nothing that that I would say being particularly significant. And as we head into Q3 and Q4, we certainly expect to get back into positive comp territory, so feeling optimistic about that. The area where we have seen positive comps in Victoria’s in China and I think what you should expect to see is that we grow stores in the third and fourth quarter, we have two full assortment stores open now, we have four more in production. Those are the good and the bad thing and that we have pre-opening costs associated with them, which means we have to live with more loss, but of course getting them open gets us to trade. We then have 10 to 12 more full assortment stores coming in 2018. In terms of how the loss will be impacted, Q3 and Q4 you should expect to see somewhat of an increase in lawsuits year-over-year in both of those quarter, but the scale of that increase will moderate, moderate significantly as we get into Q1 2018.

[Ike Boruchow:]

Thanks very much.

[Amie Preston:]

Thanks Ike. Next question please.

[Operator:]

Your next question comes from the line of Omar Saad with Evercore ISI.

[Omar Saad:]

Thanks for taking my question, good morning. I wanted to ask a follow-up to, I think, of comment that Jan made about reactivating some of the Victoria’s Secret customers. Maybe you could kind of talk through what you think some of the reasons are that maybe drove a deactivation if you will and what the strategies are to – what caused the deactivation of some of those customers relative to brand? I mean, what the strategies are to reengage some of those lost customers? Thank you.

[Amie Preston:]

Omar, Jan.

[Jan Singer:]

Thanks Omar. Well, so I think that I wasn’t here more than a year ago, but my understanding getting here was that we had a dramatic shift in our marketing program. And we needed to do that for a very good reason, so we could reset to get to the right customers at the right level. So perhaps that pause had a conversation with R&D team, no matter where we are now is really understanding whose is our file and how to reach our best. So we have had almost as much as 40% engagement with customers that we haven’t talked to in quite some time and that’s a very positive reconnection for us and an important one to make.

[Omar Saad:]

Got it. So it’s really digital engagement that’s how you are speaking to those customers and in leveraging the, I guess, data from your loyalty program?

[Jan Singer:]

That’s correct.

[Omar Saad:]

Understood, thank you.

[Amie Preston:]

Thanks Omar, next question please.

[Operator:]

Your next question comes from the line of Dana Telsey with Telsey Advisory Group.

[Dana Telsey:]

Good morning everyone. I’m looking to Jan, Jan if you can give the progress of the new bra launches, how is it developing in your mind and where do you see the penetration of the lower AUR bralette and sports bras going to is stabilizing at? And then as you think of the new product, store environment, do you see that at all changing in terms of either look or brand? Thank you.

[Jan Singer:]

Thanks Dana for the question. I think I’ll take it a little bit high and then go detailed for you where I can. Theoretically, having a push-up bra constructed businesses are really important part of the mix. Giving her choices of sexy with bralette was a good do. Finding the balance between those businesses with our constructed bras that provide options of her is an important part of the future. So I think it’s important to say that bralette and unconstructed bras have a price in the assortment, but they trend up and down. And so we are in the business of building bras and I think that you and I probably know if you’d want a bralette for more than a day, trying to wear them for the rest of your life is probably not your best option. So we are in the business of building bras that have a lot of make and benefitting that and we are in the fashion business, so when bralette trend and they are important, we will have them in the mix, as we do right now. So I think it’s about choices and making sure that we have balance in there. And when we start to role launches forward like we did with T-shirt, we see her responding and really excited and the launch is going forward with same, so it’s a balance. In terms of new stores, what I’m really passionate about is the balance of our selling, being able to be where she wants to shop. So we have a healthy digital business and bra fitting happens in person, and as a person who spends three months in the store, six days a week for over 10 hours a day and became certified as a Bralette Specialist for Victoria’s Secret, we offer a very life-changing experience in that fitting room. And I’m very serious about that, it can only happen in person. It’s a really important part of our experience and when you have a retail store that offers an environment with an experience, that’s elevating aspirational brand rights, she comes in. So I think when we have a product like bras and we have a place like our stores, and we have specialists like our associates, we have a reason to drive engagement in that space.

[Amie Preston:]

Great, thanks Jan. Thanks Dana. Next question?

[Operator:]

Your next question comes from the line of Matthew Boss with JPMorgan.

[Matthew Boss:]

Thanks, on the margin front, can you just help quantify the level of gross margin decrease and SG&A increase in the third quarter? How best to think about some of the puts and takes for the fourth quarter? And then just larger picture as we move to next year, what revenue growth do you need to leverage SG&A? And is it reasonable to think about SG&A expense leverage next year?

[Stuart Burgdoerfer:]

Well, it’s Stuart, I’ll take the second part of that question first. As a general matter, a low-to-mid single comp which gets to a mid-single revenue growth typically will allow us to have slight leverage in our business, in a normal period of time which implicit in your question recognize 2016 and 2017 haven’t been normal given the volume declines related to the category exit and the China investments that you’re familiar with. So, 3 to 5 comp mid-single revenue gets to slight leverage would be how we think about it. With respect to the back-half of the year in comparison to the first-half of the year, we are making significant investments in real estate. We’ve moderated those, as you know, in our updated script or our commentary in the script. We took our CapEx guide down $50 million additional recently so at $800 million versus $850 million. But with that said, we’re making, we think very important, and as Nick commented on, successful investments, particularly in Bath & Body Works and otherwise in real estate. And so I mean it’s driving pressure in the occupancy line. What’s different about the back-half versus the first-half is, we’re going to have volume increases – dollar volume increases in the back-half of the year versus the declines in the first-half. And so on a dollar basis, we’ll have some variable expenses that run with that. So on a dollar increase, there will be more in the back-half than it was in the first-half driven by volume. And again, the percent growth and expenses, including some pressure related to the CapEx in the occupancy. Thanks.

[Matthew Boss:]

Great. Thanks.

[Amie Preston:]

Thanks, Matt. Next question, please.

[Operator:]

Your next question comes from the line of Adrienne Eugenia with Wolfe Research.

[Adrienne Eugenia:]

Good morning. My question is for Jan. I want to know how many new bra launches do you have kind of scheduled for the next sort of back-half of this year versus last year? And then the penetration of bralettes in the third quarter or actually in the back-half this year versus last year and whether you’re seeing AUR lift? And then, Stuart, for you, can you just talk about rent reduction opportunities, what percent of your leases come up for auction in the next three years? And then your longer-term view of the numbers – number of stores you should have at each brand? Thank you.

[Jan Singer:]

Thanks, Adrienne, it’s Jan. So in terms of launches, I mean, the I think, if you’re in this business, is constant newness. So we will continue to flow constant newness faster than most due to our speed model. So there’s a difference between newness and launches and I recognize that, we’ll have the appropriate amount of launches that bring bras that have the right build in them. And when you cadence those correctly, I think that we can create spikes that matter for the business. In terms of the mix, it’s less than 5% of bralettes as we go forward. Again, I think anybody can make a bralette and that was a moment that will come and go, it will come again. But for us, we make constructed bras best. And when we do, even in our bralette business, bralettes that have more construction in them, we get paid for that work.

[Amie Preston:]

Stuart?

[Stuart Burgdoerfer:]

Yes, Adrienne, with respect to real estate stores, rent reductions, our thinking has been pretty consistent. Now, we review the facts and the data on a very regular basis and take appropriate action, And as I’ve mentioned before, reducing our plans in 2017 significantly a couple of times. But to reiterate our philosophy on it and to be very clear about it, including the example that Jan spoke about a minute ago, in terms of that in-store experience and bra fitting, the store part of our business is critical whether it’s fragrance of Bath & Body Works, or bra fittings at Victoria’s Secret, Lingerie or Victoria’s Secret PINK or fragrance at Victoria’s Secret Beauty that in-store experience is a critical part of our brands, our customer experience, et cetera just inherent in the categories of business that we are in. Secondly, as you know, our sales productivity, our financial results, our metrics related to our store fleet are very, very strong on a selling foot basis with productivity over $800 a foot in total, and continuing at 99% of our stores being cash flow positive. An additional point I would make is that, we’re opening and closing stores literally every year. And so based on performance and consumer experience, we very actively manage our real estate fleet. With respect to the number of stores that we should have for the business at the end day that will be performance-based. Again, store – a store-based experience we believe is foundational to our major brands and it will be performance-based and we see the opportunity for some additional square footage in North America and obviously significant expansion internationally. We have a lot of flexibility on the CapEx and we have a lot of flexibility with respect to our situation in the lower tier malls with co-tenancy and named tenant provisions in our leases and a meaningful number of stores with very short lease term or even month-to-month lease provisions that contribute to our ability to close them when it makes sense. So with respect – lastly, with respect to rent reductions to be frank, it’s not the key part of our real estate strategy. They say about real estate, it is about location, location, location. And the biggest priority, or the highest priority that we have with respect to our relationship with our developer partners is to get terrific locations that provide great experiences for customers, a lot of foot fall, a lot of sales productivity, a lot of revenue and a lot of profit. And so that’s our dominant focus with the major developers. With that said, we’ve got a very experienced real estate team and we’re not looking to overplay and we don’t believe that we do. But it’s not our key real estate strategy to figure out how to get rent reductions. Our key real estate strategy is to ensure that, we’re in the right locations with compelling store designs that set us up well currently for the future. So hopefully, that answers your question. Thanks.

[Adrienne Eugenia:]

Great. Thank you very much. Excellent color. Best of luck.

[Amie Preston:]

Thanks, Adrienne. Next question, please.

[Operator:]

Your next question comes from the line of Roxanne Myers with MKM Partners.

[Roxanne Myers:]

Great. Thank you. Good morning, and thanks for taking my question. Just a follow-up to Adrienne’s question for Jan. What do you think is going to be the bigger game changer, new bra launches or the opportunity to improve existing categories? And then I’m just wondering, obviously, there are many sub-brands within the structured bra business. I’m just wondering what percentage of the assortment have you been able to reposition for fall? What do you think you’re going to be able to touch for holiday? And then just longer-term, how you think about what percent of the assortment needs to evolve? Thanks a lot.

[Jan Singer:]

Okay. Thanks, Roxanne, for the question. In terms of category, it’s a great question. Clearly, we’re going to be strong at the core with bras and panties our best at – and win that categories. But it’s not lost on us, the key adjacent categories matter that we’re in. The sleep business and the sexy lingerie business are categories that have higher velocity of fashion in turn. I think, right now, as you can see in trend, the lingerie one on the street pajamas as apparel is a thing, a real thing, and we’re taking our fair share of that business. It’s a fast fashion model and we’re optimizing our speed to get there, bring to back to store more often than we have at our core, which then gets our core stronger. So I think we have to be really focused on the core and cognizant of the appropriate adjacent categories and how to grow them. In terms of the changes, I look at it from the beginning when you walk in the door, I saw you are a team player out all in day one. So when – in the conversation of the product that I personally I’m affecting as much as I can, as fast as I can, as ready they’re. So there’s a percentage of change that you’re feeling right now that are clearly been focused on some upstream innovation to product creation and assortment. And you’ll feel more as the holiday season comes and then again into 2018, it’s just the builds, but I think starting fall forward.

[Roxanne Myers:]

Great. Thanks, and best of luck.

[Jan Singer:]

Thank you, Roxanne.

[Amie Preston:]

Thanks, Roxanne. Next question, please.

[Operator:]

Your next question comes from the line of Marni Shapiro with The Retail Tracker.

[Marni Shapiro:]

Hey, everybody. I’m curious, Les, had talked about when things were trending downward in the bra business, as the sizes were going up and this was an indication of the customer was getting older and as you brought bralettes back in, that starts to reverse. So I’m curious a couple of things, are you still seeing that trend? Are you getting your younger customer back in? And then importantly, when she’s coming in? You’ve talked a about AUR and bralettes in the active business. Is she only buying the bralettes? Is she more price sensitive than she used to be, or is she buying around the store? And is there any pushback on the pricing of restructured bras?

[Denise Landman:]

Thank you, Marni, for the question I think, we’re seeing – I know, we’re seeing our new customers come in and the average age of that customer in both our existing business like BBV Demi as the new business of T-Shirt. The customer we have the demographics of who she is and she is younger and that’s very exciting for us, because everybody wants to fill the file with the new, as well as engage our important existing high-value customers. So it’s not, I mean, bra is not a barrier of entry for her. When the bra fits and it feels like it’s changing her expectation of what a bra should do in agood way. She is coming in. And I was most impressed with that when I worked in the fitting room personally. And I will tell you, for instance, the BBV Demi, which is our tried and tested and most famous bra, she is opting into. So that’s exciting. I don’t see not having a high penetration of bralettes equally not having a new customer quite the opposite.

[Marni Shapiro:]

And then the pricing question?

[Denise Landman:]

In terms of, Marni, one more time, is there a barrier on price, or if it’s – she shouldn’t care what it costs?

[Denise Landman:]

No, there’s no barrier for price. And again, what’s interesting is the bra itself has a price, but then what she builds her basket to is always much higher. When you have a bra and we know that fits and helps you feel confident, sexy, whatever your goal is. There is really no barrier to price on that, especially one that will work with your body, feel comfortable. I think, we’ve seen time and again, especially from a younger customer, it doesn’t seem to be a barrier on our side of our business in terms of constructed bras.

[Marni Shapiro:]

Okay, thanks. Best of luck.

[Denise Landman:]

Sure.

[Amie Preston:]

Thank you, Marni. Next question, please.

[Operator:]

Your next question comes from the line of Janet Kloppenburg with JJK Research.

[Janet Kloppenburg:]

HI, everybody. Jan, I was just wondering given some of the softness in panties and sleepwear and the rebuild on bras. You expected a lingerie comp to match that the brand – the Victoria’s Secret brand in the second-half of the year, or we should expect that to continue to trail as these adjustments are made? And Nick, good morning. I was wondering if you could talk about the newness level in August? And if you felt that that you had brought in enough innovation in the month, so that we see a change from the July trend. Thanks so much.

[Amie Preston:]

Thanks, Janet. We’re going to go to Nick first.

[Nicholas Coe:]

Hi, Janet, good morning.

[Janet Kloppenburg:]

Good morning.

[Nicholas Coe:]

I think, you’re really going to start to see the newness ramp up more specifically as we get into September, October, November. So a lot of the learnings that we took place during the first-half of the year has started – and partly assortment more aggressively as we get later on into the year. So I’m looking forward to September. There’s an awful lot of change in newness coming in from that, that builds the way into holiday. So we’re sitting in the peak period of the area with probably the most amount of change.

[Janet Kloppenburg:]

Great. Thanks so much.

[Amie Preston:]

And Stuart?

[Stuart Burgdoerfer:]

Janet, if I understood your question right, you’re asking about the relative level of sales growth for lingerie, PINK and beauty if I understand the question?

[Janet Kloppenburg:]

Actually not. The lingerie business mix comp underperformed. I think the plan in the second quarter has and may have impacted your overall comp performance. So I’m wondering how we should think about the lingerie before - the lingerie comp in the third and fourth quarter relative to the overall Victoria’s Secret comp? Thanks.

[Stuart Burgdoerfer:]

Yes, we would – we believe that with respect to the overall Victoria’s Secret comp, we would expect that PINK would have the strongest results. And that beauty and lingerie in terms of absolute level of comp well, would not be at the same level, but will improve through the fall season.

[Janet Kloppenburg:]

Okay. And can you talk about performance at sports store and how that’s going?

[Stuart Burgdoerfer:]

I think, Jan can speak to that and provide a perspective on it. Thanks, Jan.

[Jan Singer:]

Sure. Janet, yes, happy to talk about it. I think, in general, we’re very excited about this sport business. We can see our trajectory over time. It’s been a growth driver and it is a growth opportunity for the business. At the end of the day, the center of the business is around the sport bra and we know no sport bra, new sport for her. So that’s an important part of our business. And again, we’re excited with the new launches that are coming in that space. Our bottoms business has also been a rapid growth driver for us. The more that we come out with our core, core fashion and then really provocative sport. I like to say, we’re more and more girl than girl, we win. So we have a unique position to be in this space relative to bras and bras and sport having to perform. And the second thing about really sport, sexy is strong, and we are in the business of fashion and sexy and we titles two things together, she is coming in. We’re also seeing a high penetration of new customer to the business. In addition, I’m most excited about the repeat customer that’s coming in as well, so we’re building loyals, it’s an exciting category for us.

[Janet Kloppenburg:]

Can you give some margin outlook there on sport?

[Stuart Burgdoerfer:]

Janet, it should be very healthy over time. So we would expect in any major category of the business that we have. And sport certainly is one of the day and we’ll have substantial growth potential, but it will have a very healthy margin rate over time.

[Janet Kloppenburg:]

Great. Thanks so much.

[Amie Preston:]

Thanks, Janet. Next question, please.

[Operator:]

Your next question comes from the line of Simon Siegel with Nomura Instinet.

[Simon Siegel:]

Thanks. Good morning, guys. Jan, just for a perspective, could you quantify how much the aggregate AUR is down versus last year? And then just to be clear, your expectation for the moderating lower AUR bra penetration, is that a function of lapping the increased penetration from last year, or are you expecting sport and bralette units to decline in the back-half? And then, Greg, I know it’s quiet on your end this morning, but still there, nice results of beauty. Can you help quantify the top and bottom line benefits you’d expect beauty to contribute through the consolidated back-half results and then maybe the margin implications? Thanks.

[Jan Singer:]

So, Simon, I’m going to take the first part of that question. We actually said in the script that for our lingerie bra units were up mid-single digits and total lingerie bras were down high-singles. So I think based on that math, you can get back to the AUR results in the business. And with that, let’s go to Greg for the beauty question.

[Greg Unis:]

Yes. as we said earlier, we’re seeing nice – we saw in the second quarter nice sequential growth. And as we think forward to fall similar to the way that Jan spoke about the evolution of the lingerie business in fall we’re really – we’re very excited about what’s to come, and I’ve learned a lot over the last year and it makes impacts on the business there.

[Amie Preston:]

Simon, did you have another question in there?

[Simon Siegel:]

Yes, sorry Amie, so what I meant in the first part was just thinking through the go-forward, so the penetration – the moderating penetration, is that because you’re lapping the increased penetration in the lower AUR bras or do you actually see right there the growth in constructive offsetting that?

[Jan Singer:]

So, actually it’s Jan, hi. I mean by nature of not over assorting the line, something goes in, something comes out, so the mix is changing into contracted bras, by staying close to the customer, we see the demand for that. So, yes, by nature it’s actually both things on purpose, right.

[Amie Preston:]

Great, Simon.

[Simon Siegel:]

Thanks a lot guys.

[Amie Preston:]

Okay, so we have time for one more question, operator.

[Operator:]

Your final question comes from the line of John Morris with BMO Capital Markets.

[John Morris:]

Under the wire, all right, good morning guys, thanks for getting me in here. Nick, if you can give us a little bit more color directionally on the improvement that you’re seeing from the store renovations. If you can share any productivity metrics that would great. With the store learning – what the learnings are there from a traffic perspective, ticket perspective etcetera? And then Jan, I guess if you can briefly – you know I think this really would be, from your perspective, I’d be curious to hear a little bit more about your take on the Victoria’s Secret marketing as you’ve gotten familiar with it now, thought given to any innovation in the positioning, you know including the fashion show etcetera, but just overall the brand positioning and how you feel about it go-forward should we expect any changes, what’s your take on that? Thanks.

[Nicholas Coe:]

Hey, John, good morning. A couple of thoughts on that. So, as usual, we get a pretty wide range of performance from the new real-estate. But in general that continues to meet our expectations that allows us to continue to make those investments, so we see a pretty solid ROI, very consistent with what’s we’ve seen frankly over the past – close to the past three years. So, we continue to be pretty happy with that. I think the biggest thing is around customer-ship, John, so we see a high degree of new customers coming into the store, because it’s a better experience, it’s a new experience. We see obviously overall traffic is up in those stores, which is a key driver for the success behind it. And I think at the end of the day the real value in there is it’s an opportunity to introduce the brand in its best format and its most exciting format and the opportunity to introduce the newest products in the best format. So we continue to – in summary, I think we continue to be excited with the performance and performance has been consistent and we’ll continue to invest in those stores over the course of the next couple of years until we find out other ways.

[John Morris:]

You look great.

[Nicholas Coe:]

Thank you.

[Jan Singer:]

So John, hi, it’s Jan, thanks for getting us under the wire, that’s awesome. Number one, most of the time as I mentioned earlier, but I want to make sure I’m really clear about it is that you know the focus is deep customer connection and making great products job one. So, I’ve spent this year really up in the value chain, way up into innovation, product creation, our supply chain ensuring speed and agility, as well as our merchandising assortment, so I’m deep into that space and without that I can’t market anything, so I’m really excited about the time spent there. That said, we know the marketing space in total for the universe is changing and it’s about performance marketing and we are embracing that notion. We have the mission of attracting, engaging and converting our new customer as well as engaging our existing. Our new CMO will be joining the brand in September this fall on-boarding, so that is important for the VSL business. And you mentioned the show, although I can’t say too much about it, what I will say is that, Greg and I are deeply connected into this event to make sure that is actually ticks and ties for the business and we’re excited about what that means for our activity in traffic and conversion for holiday.

[John Morris:]

Terrific guys, thanks for – good luck for fall and holiday.

[Jan Singer:]

Thank you.

[Amie Preston:]

Thanks John. That concludes our call today. Thanks all for joining us and for your continuing interest in L Brands.

[Operator:]

Thank you ladies and gentlemen. That concludes today’s conference call. You may now disconnect.