LandBridge Company LLC
Q2 2016 Earnings Call Transcript

Published: 18 Aug 2016

[Operator:]

Good morning. My name is Lisa and I will be your conference operator today. At this time, I'd like to welcome everyone to the L Brands Second Quarter 2016 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:]

Thanks, Lisa. Good morning, everyone, and welcome to L Brands second quarter earnings conference call for the period ending Saturday, July 30, 2016. As you know we released detailed commentary last night, which is available on our Web site. We will make some brief introductory comments in order to allocate more time to your questions. 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 the earnings presentation are available on our Web site, lb.com. Stuart Burgdoerfer, EVP and CFO; Nick Coe, CEO of Bath & Body Works who is off-site today; Andrew Meslow, COO of Bath & Body Works; and Martin Waters, President of International are all joining us today. All results that we discuss on this call are adjusted results and exclude the 2016 pre-tax gain of $108.3 million or $0.24 per share related to a cash distribution from Easton Town Center and the pre-tax charge of $35.8 million or $0.08 per share related to the early extinguishment of our July 2017 notes. Thanks, and now I'll turn the call over to Stuart.

[Stuart Burgdoerfer:]

Thanks, Amie, and good morning, everyone. We’re pleased that we were able to deliver a slight increase in operating income against last year’s record result and a second quarter earnings result that was above our initial expectations, all in the midst of significant change in our business. We remain confident that the changes we are implementing at Victoria’s Secret, which we discussed in detail on last quarter’s call, will simplify the business and position us for accelerated future growth. We made progress in the quarter on the implementation of these changes; combining our stores and direct channels, clearing through merchandise in the exited categories of swim and apparel, and beginning to make changes to our promotional approach. We are well-positioned heading into the fall season. Our brands are strong and we’re energized about our opportunities for growth. We will continue to leverage speed in the business and be flexible and agile in our approach in order to maximize profitability and deliver great experiences for our customers. With that, I’ll turn the discussion over to Nick.

[Nick Coe:]

Thanks, Stuart, and good morning, everybody. Just a few additional comments before handing over to Martin. Overall, I’m pretty pleased with our first half performance. We feel good about growing sales and earnings on top of the record performance that we had last year. We continue to leverage our speed model, which has really provided us the opportunities to chase into winners across the business which is obviously beneficial from a top line and a bottom line perspective. Once again, our inventory is well positioned and clearly we’ll closely monitor that position to maximize our agility as we maneuver our way through the season. Finally, we remain very, very committed to one of our most important disciplines, which is all about staying very close to the customer and reacting to her behavior. This is something that allows us to feel confident as we work through the season with newness, floor sets and changes, et cetera, so it puts us in a pretty healthy position. Thank you. I’ll turn it over to Martin.

[Martin Waters:]

Thanks, Nick, and good morning, everybody. As we mentioned in the pre-prepared notes, the pattern from Q1 really continues into Q2 with impacts from our investment in China, from FX, and sadly from weakness in our Victoria's Secret Beauty business. I’m actually just back from a long trip around the world. I went to the UK, Dubai, Hong Kong, Macau, Shanghai. I just got back last night, and I will tell you that everywhere I went around the world, I felt the standard of execution was just fantastic in all markets. As it relates to China, I was particularly impressed with the talent that we’ve been able to recruit into that market with the leadership that we now have in place to take us forward, so feeling very excited there. I also saw some great real estate list in front of us for China, so overall feeling very optimistic. Over to you, Amie.

[Amie Preston:]

All right. Thanks, Martin. So that concludes our prepared comments. At this time, we’d be happy to take your questions. Just a reminder, please in the interest of time and consideration to others, please limit yourself to one question. I’ll turn it back over to Lisa.

[Operator:]

Thank you. [Operator Instructions]. Your first question comes from the line of Lorraine Hutchinson from Bank of America. Your line is open.

[Lorraine Hutchinson:]

Thank you. Good morning. Stuart, I wanted to follow up on the other segment loss which was much better than we had expected. Can you just give us a little bit of insight into the cost cuts there, how sustainable they are, and then perhaps an update on the Henri Bendel and La Senza pieces of that? Thank you.

[Stuart Burgdoerfer:]

Yes, in terms of the year-on-year improvement in the other segment result, we certainly are working hard to manage corporate overhead and other expenses with discipline. We did have lower bonus payouts for the spring season reflecting our results versus a year ago. Also in LY results, we had a few discrete expenses that didn’t repeat in 2016. All that said, we’ll continue to manage corporate overhead with discipline, and we’ll continue that mindset. In terms of Bendel business, we remain optimistic about that concept in that brand, that business, that opportunity that continues to drive sales growth in their stores and are developing a very nice online business as well. And so, we’re optimistic we’ll continue to work to get the best results this fall season and periodically think about how and when to best expand that business. But the focus right now is on driving further sales growth in the stores that we have, driving good results online which we are and improving the margin architecture of that business, but good overall trends for Bendel.

[Martin Waters:]

Maybe a few comments on La Senza, really good performance in La Senza. In fact, we’ve seen positive comps in each of the last several quarters in that business really getting closer to the customer and sharpening up the proposition around young, sexy, obvious value positioning. I’m excited that our launch in the USA will take place later this fall, so good progress in that business.

[Amie Preston:]

Thanks a lot, Martin and Stuart. Next question please.

[Operator:]

Our next question comes from the line of Mark Altschwager from Robert W. Baird. Your line is open.

[Mark Altschwager:]

Good morning and thanks for taking the question. Was hoping you could dig into the beauty repositioning a bit, just when do you begin to lap the more significant pressures on that business? And given the shorter lead times there and the aggressive clearance activity through Q2, why wouldn’t we expect to see a more significant inflexion point in Q3? And then kind of separately still on beauty, on the international side, do you have any ability to make some shifts in the product or pricing given the learnings in the U.S. over the last few quarters? Just wondering if that might impact the timing of an inflexion on the international side? Thank you.

[Amie Preston:]

Thanks, Mark. We’ll start with Stuart and then go to Martin.

[Stuart Burgdoerfer:]

So I think as you appreciate, maybe in order from our standpoint, we’ve got a new leader in the beauty business. He started in May. He’s learning about our brands in Victoria’s Secret and is onboarding but now getting into the business of the business, if you will. Second point I would probably register is that through promotional and other activity, changes in pricing and promotion, we certainly tried to and did drive a lot of trial in the second quarter, and we expect to continue that in the fall season. So through pricing and promotional activity driving trial in core categories of beauty to drive business, to drive results. And encouragingly, we’re seeing some pretty good repeat, customer repeat post-trial at some of those products. The third thing I’d mention is Greg working with Les and others developing a point of view and implementing a point of view about rationalizing or narrowing the assortment in a meaningful way this fall season. And then lastly, as you cued up in your question in terms of what we’re lapping, the year-on-year pressure in '16 will moderate as we go through the fall season. And maybe last, last is we all recognize the importance of speed in our business and including through the eyes of new leadership really working to reduce lead times in that business make further use of the beauty park that we have for personal care and beauty at Victoria’s Secret Beauty and those changes are beginning, and we’ll have some positive impact on the fall season, so we’ll see some year-on-year reduction in pressure certainly through fall, and it’s such an important category and such a strong category for us that we’re very committed to it and optimistic about the growth potential for that business over the next, call it 12 to 24 months.

[Amie Preston:]

Thanks, Stuart. Martin, anything to add there?

[Martin Waters:]

Yes, we see very similar patterns in the international business through the patterns that we see in North America. As you know, it’s a replication model in international, so we sell the same merchandise that we have in the home market. So to that extent, not much opportunity to do things differently. But as you suggested in the question, Mark, as it relates to pricing and promotions, we do have opportunity there. We are taking the learning from North America and reflecting and adapting our plans in that respect.

[Amie Preston:]

Great. Thanks, guys. Next question please.

[Operator:]

Our next question comes from Anna Andreeva from Oppenheimer. Your line is open.

[Anna Andreeva:]

Great. Thanks so much. Good morning and congratulations to the team for making progress. I guess a question on SG&A, Stuart, leveraged pretty significantly here in the second quarter. What drove that? I think you’re just starting to see lower home office costs and trying to understand the expectation for the leverage in the third quarter, why wouldn’t we see some of those benefits continue? Thanks.

[Stuart Burgdoerfer:]

Sure. So the management of the company is very focused on balancing our investments in the business, including those that hit the SG&A line and doing that with discipline. In terms of the difference between second quarter and the third quarter results, in Q3 we have a lower sales assumption. Now we’re going to work hard to beat that sales assumption but just in terms of the map of it and the impact on rate guidance, we have a more conservative assumption about comp and total sales growth in Q3 versus Q2. Secondly, our investment in China and its impact on SG&A is more significant in the third quarter than it was in the second. And then lastly, as I mentioned in the context of the other segment, our spring and Q2 specifically, expenses related to short-term incentive comp provided benefit in Q2, and our going-in assumption for Q3 is that year-on-year, benefit won’t be as significant in the third quarter. So those would be the highlights.

[Amie Preston:]

Thanks, Stuart. Next question please.

[Operator:]

Our next question comes from the line of Oliver Chen from Cowen and Company. Your line is open.

[Oliver Chen:]

Hi. Good morning. Your core lingerie business growing at low single versus PINK double digits, could you just brief us on how you feel about core lingerie and how do you expect to unpack the assortments? I was also curious about the average unit retail across your core lingerie and how you feel about the mix between good, better, and best in fashion versus core? Thank you.

[Stuart Burgdoerfer:]

Thanks, Oliver. It’s Stuart, I’ll respond to that. So in terms of core lingerie, there are some important trends going on in the business and we’re taking significant actions to participate in and frankly lead with respect to those trends. And what I’m speaking about is the unconstructed or bralette trend is one and separately the sport bra business as a second important development in the bra category. And we’ve made significant progress and drove meaningful growth in both of those areas in the second quarter and intent to pursue those segments of the bra business very aggressively in the fall season. One of the important things about the bralette business or unconstructed bra business particularly is we do think it has a higher fashion element to it and we think that’s a good thing for us where we’ve been a fashion specialty retailer for a long time. Our abilities in terms of lead times and speed and read and react, particularly play well into the bralette category. And while the AUR in bralettes is below some of the other categories in bras, we believe that the unit volume or their frequency of purchase given the fashion element to it in part makes up for the lower AURs. So those are two important trends in the bra business. Again, we drove very significant growth in both of those trends in Q2 and expect the same or even greater growth in the fall season. In terms of the average unit retail in total, importantly in connection with our promotional changes, we had a large number of offers in our history in our base that included $10 off a bra, and we have substantially reduced or eliminated those offers, so that provides an upside in the AUR. And kind of when you pull it altogether, our non-red line AUR for the second quarter was pretty consistent with prior year or steady compared to prior year, so the combination of all those things, we didn’t have a decline in AUR in non-red line categories of the business. PINK continues to also grow its bra business at a very healthy rate, so some changing dynamics for sure, but we had good overall results in the bra business driving sales growth and very optimistic about the fall season with respect to bras.

[Oliver Chen:]

Stuart, on the unconstructed bra comment, what would you say the skeptics I think that the marketing that you’ve traditionally done isn’t necessarily conducive to the changes happening, just curious on that? Thanks a lot and best regards.

[Stuart Burgdoerfer:]

Well, we – just in terms of promotional approach, we think the direct mail couponing that we were doing, we think there’s just frankly a better way to market and promote the brand. And so we’re pursuing different types of promotions and we made good progress on that in the second quarter and we’ll continue to learn about the most effective ways to promote within Victoria’s Secret. But again, we’ve been doing a lot of direct mail couponing for a number of years and we think there’s a better way to drive business and build our brand go-forward.

[Amie Preston:]

Yes. Oliver, I’ll just add to that in terms of the marketing as it relates to image or television advertising or anything like that, certainly the same way we focus on speed within our merchandise assortment, we can take the same approach with respect to marketing. So I think we can be agile with our product. We have made changes in terms of visual marketing and so it’s about fashion. We are a fashion business and so constantly evolving.

[Oliver Chen:]

Thank you.

[Amie Preston:]

Next question please.

[Operator:]

Our next question comes from the line of Richard Jaffe from Stifel. Your line is open.

[Richard Jaffe:]

Thanks very much, guys. If we could talk for a minute about PINK and obviously with rapid growth seems to be the winner in your portfolio, I’m wondering looking ahead your opportunity to invest in that space and to accelerate or expand line extensions, new products, I’m wondering what your thoughts are regarding investments and can you give us some visibility into the fourth quarter in particular? Thank you.

[Stuart Burgdoerfer:]

Well, Richard, the first thing I would say is PINK is a very strong business within L Brands. The other business that’s been consistently very strong for us is the Bath & Body Works business and I wouldn’t want that to be lost through our discussions. But with respect to PINK, it’s been a terrific business and we see very substantial ongoing growth for that business. It’s easy to say, hard to do but Denise Landman and the team there are very, very good at what they do. As you know, they have a clear mindset on their target customer, their ability to execute their business in-season and longer term is outstanding. Their use of speed, read and react capabilities is terrific, so they have a very clear customer segment, they’re executing very well, they have very deep and strong capabilities. With respect to investing in that business, a lot of the square footage that we’re adding and a lot of the capital that we’re spending on real estate is positioning and supporting PINK growth. And so as you know, Les Wexner and our company, we’re not afraid to invest when we’ve got a trend in results and the payback and we’re investing record levels of CapEx in our business and not suggesting that all that money is going to PINK but a lot of it is in terms of square footage growth at Victoria’s and again a lot of that flowing to PINK. Denise is very optimistic about the fall season. It’s off to a good start. And again, her ability to read, react and adjust within the season is very strong, so great business, great second quarter result, very optimistic about the fall and L Brands is investing very heavily in that business and getting very good returns.

[Amie Preston:]

Thanks a lot, Stuart. Next question please.

[Operator:]

Our next question comes from the line of Paul Trussell from Deutsche Bank. Your line is open.

[Paul Trussell:]

Good morning. I just wanted to ask a question on Bath & Body Works. There’s been good momentum there. Maybe you can just give us a little bit more color on the products driving the growth as well as an update on the performance of the models? And then lastly, your confidence on continuing to have merchandise margins up in the back --?

[Amie Preston:]

Thanks, Paul. So we’re going to start with Andrew and then since Nick is off-site and if he has anything to add, he can jump in.

[Andrew Meslow:]

Hi, Paul. Thanks for the question. On the first part of your question in terms of category performance and what’s been driving our results, as you saw in our prepared remarks we specifically called out our home fragrance business which has been a consistent strong driver of our overall business now for the last several years. In addition that, obviously we have our other product categories such as our Signature Collection fragrant body care business and our soap and sanitizer businesses. And while we do not call those out explicitly in our prepared remarks, those businesses are also growing over the last year. And so in total I would say we continue to be pleased with our overall results and our overall portfolio of performance. I believe your second question was regarding our remodel strategy. As a reminder that remodel strategy is one that is focused on touching this year about – will finish this year with about 250 stores in that new remodel that again includes both a remodeled Bath & Body Works store as well as a White Barn concept either in a side-by-side location or a shop-in-shop format. And again, our overall results continue to be very positive. We continue to be very pleased with that performance and we are committed to driving continued investment into that strategy both for the balance of this year and well into the next several years. And then last, your question on go-forward and our thoughts there, again, as we’ve heard Stuart say, read and react is a very, very important lever in our business. And so as we start any new season we go in with a relatively conservative perspective. We then follow the trends of the business. We’re constantly testing whether it’s new product categories, whether it’s new promotional strategies, whether it’s new story-telling strategies in stores and we use that read and react capability to chase to the upside. So again, as we come into the back half of the year, which is especially in the Bath & Body Works business a very important timeframe, we are still very confident in our ability to use that business model to chase to the upside.

[Amie Preston:]

Thank you, Andrew. Next question please.

[Operator:]

Our next question comes from the line of Kimberly Greenberger from Morgan Stanley. Your line is open.

[Kimberly Greenberger:]

Great. Thank you so much. Stuart, my question is on the Victoria’s Secret promotions. That brand has obviously been adjusting a number of the promotions used as you mentioned eliminating the $10 off coupon and instead offering alternative kinds of promotions. I’m wondering if you can share any of your learnings from that and if you – and your three months in have a greater degree of certainty about how to guide the brand through lapping that $10 off coupon here in the next few quarters based on what you’ve learnt so far?

[Stuart Burgdoerfer:]

Thanks, Kimberly. What I would say is that we shifted our promotional strategy from that free panty, $10 off a bra direct mail coupon generally to promotions intended to drive trial. And that might be a trial in beauty as we’ve talked about, it might be a trial in sport or sharp pricing and promotions related to the bra business and particularly the unconstructed bra business. I would say we absolutely have shown that we can drive trial in those important categories. We are lapping a lot of this direct mail volume in that amount of business that was driven is more significant in Q3 than it was in Q2. But again, our view is we really want to have purposed promotions that are brand building and drive trial for merchandise that we think is terrific merchandise, again, whether it’s in the beauty business or sport bra business or in the unconstructed or other parts of the bra business. So that’s our mindset. I would say what we learned is that we can absolutely drive trial but I wouldn’t suggest and you recognized and posted in the question, do I think we have all of that figured out in the first few months of this would not represent that. But good progress on it in the second quarter and I know we’ll continue to learn more in the third quarter and the fall season.

[Kimberly Greenberger:]

Thank you.

[Amie Preston:]

Thanks, Kimberly. Next question please.

[Operator:]

Our next question comes from the line of Ike Boruchow from Wells Fargo. Your line is open.

[Ike Boruchow:]

Hi. Good morning, everyone. On the international side, I guess Martin a question for you. Correct me if my math is off but based on the remarks you gave in the script, it sounds like your China business might have contributed around 8 million in sales and about $8 million loss in the quarter. I guess is that right? And is there a good way to think about sales and losses the next few quarters for that part of the business and how would you characterize profitability and sales growth next year and maybe a timeline to potentially breakeven there?

[Amie Preston:]

Thanks, Ike. Go ahead, Martin.

[Martin Waters:]

Thanks, Ike. I appreciate the question. I think the way you characterized the numbers is about right, 8 million in sales, about 8 million of loss. And sadly it’s hard to put those two things together because they reflect different parts of the business. So the sales is reflected at VSBA stores that are up and running and are trading. The loss represents the efforts that are going into building the full assortment business which will open in February of 2017. So those two parts are not related to each other. In terms of thinking forward and how do we project what’s going to happen over the next several months; very, very difficult to do that. What I will tell us that we’re on track to open two full assortment stores probably towards the end of February 2017 and then another flagship store in Beijing around the middle of the year. And we’ll continue to trade the VSBA business and add to that collectively probably about six stores over the course of the next six months. And then in addition to the sales part of the business, which is our direct to consumer business where later this fall we will test a full Chinese language, Chinese currency site which will initially be fulfilled out of the USA on a test basis ready for full fulfillment out of China in the middle of '17. So just so many moving parts, so it really is quite difficult to predict. We have, as you know, in terms of the way that we run the business, we don’t spend that much time looking through the crystal ball to try and predict what will happen. We try and follow a pattern, a test and run. The most important thing is to get the business up with the right brand presentation, in the right way, see what happens and then be flexible and agile and adopt as necessary. So I’ll probably be able to tell you more when we get to our investor conference later in the fall.

[Ike Boruchow:]

Thanks.

[Amie Preston:]

Thanks, Ike. Next question please.

[Operator:]

Our next question comes from the line of Janet Kloppenburg from JJK Research. Your line is open.

[Janet Kloppenburg:]

Good morning, everyone. Thanks for taking my questions. Stuart, I just wanted to confirm my calculation to get to your SG&A guidance for the year that you should be able to get some SG&A leverage in the fourth quarter even though I think your comp assumption for the fourth quarter is something around flat using the guidance that you gave us last night in the [indiscernible]. I wondered if that was a correct calculation. And then for Martin, I wondered if you could just tell us in the core international business, ex the acquisition of China, how the tourist traffic is trending and if you’ve seen any improvement versus prior months? Thank you.

[Amie Preston:]

Thanks, Janet. We’ll start with Stuart for the SG&A question.

[Stuart Burgdoerfer:]

So, Janet, in terms of our current view, as we talked about earlier in the context of Q3, we’re expecting some deleverage in Q3 reflecting our more conservative sales assumption. With respect to the fourth quarter, we also have a pretty conservative sales assumption in our Q4 view and as a result also some deleverage not as much as the third quarter. And that gets us for the year to be – for SG&A to be roughly flat to what it was a year ago. I think as you know you’ve followed us for a long time, we’ll work very hard to manage expenses with a tough mind and with discipline and we want to make the right investments in our business to deliver great experiences for customers. But we also want to make sure that over time we’re growing expenses slower than sales.

[Amie Preston:]

Thanks, Stuart. Martin?

[Martin Waters:]

Yes, so tourism does continue to be down slightly around the world. A couple of areas that I’d point out specifically I think Russian tourists and Latin American tourists are the two groups that are most impacted both as with those geographies and into those geographies, so that’s one that I will call out. The second is tourism to high-profile cities around the world is also down. So if I look at our business in the UK, we’re seeing real strength outside of London, a little more difficult in London in areas where we are dependent on tourist traffic. So overall, about the same pattern in Q2 as we saw in Q1 and I think that’s probably the new normal for the balance of this year.

[Janet Kloppenburg:]

Thanks so much.

[Amie Preston:]

Thanks, Janet. Next question please.

[Operator:]

Our next question comes from the line of Omar Saad from Evercore ISI Group. Your line is open.

[Omar Saad:]

Thanks. Good morning. I wanted to follow up on the discussion around bralettes and sports bras, I’m wondering if you’re seeing in your data whether it’s through the loyalty program and Angel Card kind of insights around behavior around the categories? Are you seeing consumers’ kind of dapple in the new types of bras or are you seeing heavy adoption? And when they are buying bralette and sports bras, do they tend to be incremental to their historical bra purchases? Any insight around the behavior, especially since you can probably get a lot of visibility through the data you get in your loyalty program and Angel Card? Thanks.

[Stuart Burgdoerfer:]

Yes. Omar, thank you. The most significant insight that we’ve had and this is we think a very important one for us given how we think about what we do is that the customer is absolutely a younger customer. And we think that’s very important to our business. We’ve always been about marketing, segmenting, targeting customers certainly with a young mindset and any time any of our business we feel like the customer is starting to not be in that target of a young mindset, we get concerned. And the good news is through our efforts in unconstructed bralettes, sports bras we’re absolutely seeing a shift to a younger customer which we view very positively. We’re seeing some good signs of repeat but the data around that not as clear. The data around younger is very clear and very compelling.

[Omar Saad:]

Thanks. That’s helpful, Stuart.

[Stuart Burgdoerfer:]

Sure. Thanks.

[Amie Preston:]

Thanks, Omar. Next question please.

[Operator:]

Our next question comes from the line of Dana Telsey from Telsey Advisory Group. Your line is open.

[Dana Telsey:]

Good morning, everyone. As you’re making new changes, what progress have you seen in combining stores and direct, and what are the guideposts that we should look at going forward? Thank you.

[Amie Preston:]

Thanks, Dana. Stuart?

[Stuart Burgdoerfer:]

Dana, at a high level and this might seem obvious but it’s important to maybe confirm the obvious. The integration of how we’re presenting product to the customer, the integration of pricing and promotion, the interplay in terms of driving business online versus to store, all of that is happening much more naturally today than it was 6 or 12 months ago. And I wouldn’t suggest from the comment that we’ve completely nailed that and we’ve completely figured it out and it’s all perfect, it’s not. But that coordination is more effective, more natural than it was 6 to 12 months ago. And we’ll make from time to time deliberate decisions about driving business one way or the other in terms of the channels obviously with the customer in mind through all of that. So I’d say we made good progress on that but certainly more to do.

[Dana Telsey:]

Thank you.

[Stuart Burgdoerfer:]

Sure.

[Amie Preston:]

Thanks, Dana. Next question please.

[Operator:]

Our next question comes from the line of Lyndsay Drucker Mann from Goldman Sachs. Your line is open.

[Lyndsay Drucker:]

Thanks. Good morning, everyone. Stuart, I wanted to just follow up on the Victoria’s brand and the changes in promo strategy. I was wondering now that you’re a few months in, you can talk about how much you think the shift in promotional strategy is weighing on your core lingerie business but from a comp perspective what sort of order of magnitude drag it’s been? It seems like it’s probably been less of a drag than what you were initially thinking about when you talked to us after the first quarter. And as you contemplate your guidance for the full year, what sort of an overhang you think that is Victoria’s into the back half to the degree that 3Q had more of a year-over-year comparison, is that even more amplified in the fourth quarter? Thanks.

[Stuart Burgdoerfer:]

Sure. So we did drive a fair amount of volume in prior years, in 2015 and prior years through that direct mail promotion that you’re familiar with and that we’ve talked about. With that said and again as I think you’d appreciate and we’ve talked about on the call, we’ve been able to replace a lot of that volume through our targeted promotions, particularly as it relates to sports bras and bralettes. The amount of direct mail volume that we’re lapping is more significant in Q3 and Q4 in dollars than it was in the second quarter. But Q4 in relation to the total quarter, it will be a little less than Q3. Separately, one way that we were able to drive a lot of volume and we’re committed to and did drive a lot of volume in the second quarter was clearance activity. We wanted to make sure that we ended the season clean and particularly as it relates to exited categories. And so that sales driver, if you will, or that source of sales that existed in the second quarter we won’t really have that opportunity in the third quarter. So able to replace some of the volume, clearance was also a contributor in Q2, it does represent pressure in Q3 and Q4 but you should know that we’re of a mindset that we’re going to offset that volume. And whether that’s every month or every week and the right people involved in those discussions, including Les and other leaders in the business, we’re working hard to replace that volume and do it in a way that’s healthier for the brand and it drives trial and business in core categories. Thanks.

[Lyndsay Drucker:]

Okay. Thanks, Stuart.

[Amie Preston:]

Next question please.

[Operator:]

Our next question comes from the line of Paul Lejuez from Citigroup. Your line is open.

[Paul Lejuez:]

Thanks, guys. Stuart, can you maybe give us the puts and takes on the Victoria’s Secret merchandise margin? How much did fewer promotional offers help versus the clearance that’s been hurt and I guess weakness on the beauty side hurt as well, if you might be able to help us out there? Thanks.

[Stuart Burgdoerfer:]

Thanks, Paul. In terms of the magnitude, the effective clearance related to exits and just ensuring that we ended the spring season clean, that drag or that pressure, Paul, was the biggest impact of any of the impacts in the margin rate for inventories for the second quarter. The other pressure that we had, the next biggest pressure would be related to beauty. And so as you know, we restaged what we referred to as the fantasy’s business last fall, we believe we improved the product quality a lot of packaging and so on, a fair amount, which drove some increase in costs which we were fine with. But as we’ve talked about previously, we needed to make some adjustment in pricing this spring to drive appropriate volume in that business. And so that combination of things along with some use of beauty giveaways to drive business for our business and other business put pressure on the business. And then going the other way, which you mentioned but not as significant as the two things I just called out, was the benefit of the cessation of the direct mail couponing and promotional offers. So those would be the main drivers.

[Paul Lejuez:]

Thanks. Good luck.

[Stuart Burgdoerfer:]

Sure. Thanks, Paul.

[Amie Preston:]

Thanks, Paul. Next question please.

[Operator:]

Our next question comes from the line of Brian Tunick from the Royal Bank of Canada. Your line is open.

[Brian Tunick:]

Thanks. Good morning. I guess two questions; one, on the exiting of the 525 million, I believe, Stuart, you’re guiding for that 2 to 3 points of that headwind in the back half of the year. Just wondering if you’ve informed your view of what the first half of next year – what’s the rest of that pressure look like, either is it in the Q1 or Q2, just if you have any viewpoints on the 525 million. And then I guess outside of bralettes, can you talk about the core bra launch calendar, how do Les and Jan think about the biggest opportunities in the back half, particularly Q4, for the bra launch versus last year? Thanks very much.

[Stuart Burgdoerfer:]

Sure. So, Brian, in terms of the exits there will be pressure in the first half of 2017 and we know what we’ve sold in terms of business from those exited categories. And when we get closer to 2017, we will get more specific about the calendarization of that. But I think what you know and you’ve know us for a long time and we commented about this on the last call, we’re going to work like heck and we’re optimistic that we’re going to replace that volume with growth in other categories. And so we got to prove that, we got to do that, but you should know that that’s our mindset and we’re taking specific actions to do that this fall and certainly we’ll work to do that next spring. Does the math get harder next spring in terms of the dollar impact of those exits, it does. But again you should know that we’ll be working hard to offset that volume. With respect to the bra launch calendar and key drivers of bra growth in holiday, a couple of thoughts. You mentioned Jan, Jan hasn’t started yet. She starts in early September but that doesn’t mean that we don’t have a plan, we do have a plan. But given competitive aspects, Brian, and so on and I’m not trying to be in any way unhelpful, but we’ll be close to the vest about our bra launch strategy for holiday given where we are in the calendar is helpful as I want to be to competition. I’m not sure I want to be quite that helpful. So we’ll keep that closer to the vest.

[Amie Preston:]

Thanks, Stuart. Next question please.

[Operator:]

Our next question comes from the line of Simon Siegel from Nomura Securities. Your line is open.

[Simon Siegel:]

Thanks. Good morning, guys. Stuart, just a follow up on an earlier question, just given how much Victoria’s Secret sales be the initial guide this quarter, can you contextualize the be [ph] maybe versus the original expectations? Did the promo reduction or category eliminations have less of initial impact? How much did that extra clearance activity add to the guide? And then just maybe the corollary, are there any similar variables within initiatives that could come up over the next few quarters that might impact your guidance? Thanks.

[Stuart Burgdoerfer:]

So, Simon, thanks for the question. Two things, one, the clearance activity did drive a lot of volume in the second quarter and some of that was hard to estimate as we entered the quarter, but what we were very clear minded about is how we wanted to end the quarter with respect to our inventory position and that was dynamic within the quarter. But headline answer your question, some upside related to clearance. And then the second thought I would register being repetitive but it’s a theme through the dialogue is that we drove some good volume and some of the emerging trends in the bra business. So the bralette business and sport business were very healthy for us and good growth in the second quarter. And the panty business, we got some good results there as well. So that’s what I would call out and continue to have a very nice business in the second quarter as well. But in terms of what was really different, I would say clearance very strong and some good growth in these emerging categories within bras.

[Simon Siegel:]

Great. Thanks.

[Amie Preston:]

Thanks, Simon. Next question please.

[Operator:]

Our next question comes from the line of Roxanne Myers from MKM Partners. Your line is open.

[Roxanne Myers:]

Great. Thanks for taking my question. One, just a quick follow up on earlier comments on BBW, I’m wondering how you think about AUR as a lever in the second half either through pricing or through mix. It’s obviously been an important lever for you and a nice driver of comp over the past few years. And second, as you think about the bralettes driving a younger, more fashionable customer, how do you think about the potential for increased cannibalization with PINK? Obviously, it doesn’t seem like you’ve seen it given the strength in PINK but how do you think about that? Do you care if there’s an increased overlap and just how are you managing that? Thanks a lot.

[Amie Preston:]

Thanks, Roxanne. We’ll start with Andrew.

[Andrew Meslow:]

Hi, Roxanne. Thanks for the question. To your observation, AUR has been a strong driver of growth in sales for Bath & Body Works both for spring 2016 as well as for the past couple of years. And to your point, some of that is driven by mix in business. So as we’ve talked about, the home fragrance business has been our strongest growing category and that is general at higher retails relative to the balance of our assortment. So that certainly is a contributing factor. But then I’d say the other maybe even more important factor is our ongoing again testing into how to get paid for investments that we continuously make into the product. So obviously one of the key levers in terms of driving our business is constant innovation, constant investment into newness across all product lines in our business. And when we do that, we do extensive testing around our ability to command higher retails that go along with that. And that is an ongoing effort in our business, one that has proven to be successful again in our past and we would look to continue to be a driver in the future as well.

[Stuart Burgdoerfer:]

Roxanne, with respect to bralettes, we believe that that business is highly incremental to the bra business. Nothing’s ever perfectly incremental but we believe it’s highly incremental. With respect to how that category interacts or interplays with PINK, PINK’s been in the bralette business for a long time and it has a very nice business there with good volume and good growth. We believe that the brand positioning and the customer segmentation PINK vis-à-vis Victoria’s is relatively clear to customers. And while there’s always a little bit of interplay, we believe again that the segmentation and the positioning is pretty clear between the two businesses, so feel good about it.

[Amie Preston:]

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

[Operator:]

Your next question comes from the line of Susan Anderson from FBR Capital Markets. Your line is open.

[Susan Anderson:]

Hi. Good morning, everyone. Thanks for taking my question. I have another question on BBW as it relates to White Barn. So I guess when you have a shop-in-shop, I was just wondering are their products performing similar to the BBW products or are there any differences in performance of price points? And then also, do you think this is an additional purchase the customer is making or is it something that they’re making instead of a BBW product? Thanks.

[Andrew Meslow:]

Hi, Susan. Thanks for the question. So in terms of performance in the White Barn stores by category, again, in general the remodels that we do that include a remodel of both in the Bath & Body Works portion of the store as well as then the addition of a White Barn component, whether it’s in the shop-in-shop or side-by-side format, is driving total performance of the overall bath. And so we do see a lift in essentially all categories when we do one of those remodels. Under the covers, we do see a slightly higher growth rate in our home fragrance business associated with again that addition of a unique White Barn component. And so that is something that we do see as a result of that real estate strategy. In terms of different products or new products in those stores, again, there are more home décor aspects in the White Barn portion of those stores but that is not a larger material portion of the overall performance of those stores. On your question of whether or not we’re seeing that as an incremental purchase, we are absolutely seeing incrementality across all of the aspects of those remodeled activities in terms of driving sales across all categories. So yes, we would definitely categorize that as incremental.

[Susan Anderson:]

Thanks. That’s really helpful --

[Amie Preston:]

Nick, go ahead.

[Nick Coe:]

Hi there. It’s Nick. Good morning. I think the only thing I would add to what Andrew is talking about is also two other components to it from a customer perspective. There is an acquisition side of it as we see new customers coming into the brand, but there’s also a renewal aspect as customers get reintroduced to Bath & Body Works as both sides of the store or both front and back of the store are completely remodeled. So there’s an additional benefit from that too.

[Susan Anderson:]

Great. Thanks.

[Amie Preston:]

Thanks, Susan. Next question please.

[Operator:]

Our next question comes from the line of Matthew Boss from JPMorgan. Your line is open.

[Matthew Boss:]

Thanks. Can you just talk a little bit about the positioning of sport in the marketplace today for you guys? How’s it been performing versus maybe your internal expectations? And then just with catalogue cost now more in the rearview mirror, not as much pressuring buying and occupancy, what’s the best comp to think about needed to leverage B&O for 4Q? And then where do you see that leverage point going next year and beyond?

[Stuart Burgdoerfer:]

Okay. So with respect to the sport business and how we’re doing and what’s our assessment, it’s obviously an important category in the bra business. We think we’re well positioned today generating very substantial growth. But we’re working hard to accelerate that growth and frankly increase our position and our dominance in that space. And so you’re seeing regular flow of new products, you’re seeing relatively short price points, you’re seeing promotion targeted to sport and we’re getting good results. So we would grade our paper pretty well for the second quarter with high ambition for the fall season in terms of growth of sport and particularly sport bras. In terms of the comp needed to leverage buying and occupancy given the benefit of the catalogue lap there, low-single digit would be the breakpoint, if you will, to get B&O leverage within gross margin net of the benefit of the catalogue elimination.

[Matthew Boss:]

Great. Best of luck.

[Stuart Burgdoerfer:]

Thanks.

[Amie Preston:]

Thank you. Next question please.

[Operator:]

Our next question comes from the line of John Morris from BMO Capital. Your line is open.

[John Morris:]

Hi, everybody. Good work on all the progress that you’re making. Question I think for Andrew or if Nick wants to weigh in. Wanted to talk on – great operating margins and we’ve talked a lot about the upside, the potential. A little bit of narrower gross margin expansion this quarter and besides some of the things you talked about, I’m wondering if that’s entirely due to the remodel program or mostly. Maybe give us a feel for what to expect there go forward? Thanks.

[Andrew Meslow:]

Hi, John. Thanks. As you saw in our prepared remarks, obviously buying and occupancy is a growing expense associated with all the real estate remodel activity that we spent some time discussing today. And if you’re looking at the difference between second quarter 2016 versus first quarter 2016, it is that growth in buying and occupancy cost that was the driver of slightly lower total operating income growth in Q2 versus what we experienced in Q1. And then when we looked on a go-forward basis that buying and occupancy growth we do expect it to continue not only in the back half of 2016 but frankly into 2017 as again we continue on this initiative. As I mentioned earlier on the call, we obviously are seeing very good results associated with the real estate remodel strategy in general and so we remain very committed to those investments but it does have the headwind obviously of that buying and occupancy growth.

[John Morris:]

Thanks. Good luck for fall.

[Andrew Meslow:]

Thank you.

[Amie Preston:]

Thanks, John.

[Stuart Burgdoerfer:]

John, the only other thing I would just add is even at kind of a higher level and when we’ve talked about it and it’s an additional view is that Bath & Body Works operating income rate is very high and what we’re looking to do is reinvest in that business for the long-term health of that business and to accelerate growth. And whether that’s through the investment in real estate that Andrew and Nick have remarked about or other things, we want to balance operating income rate with top line growth and dollar growth. And so the observation about the impact of real estate is there. But again, over a multiyear basis it’s a terrific business. We want to keep it a terrific business and accelerate growth. And so we’re going to invest in the business and we are.

[John Morris:]

Super helpful, Stuart. Thanks.

[Amie Preston:]

Thanks, John. I think we have time for two more questions. So next question please.

[Operator:]

Our next question comes from the line of Marni Shapiro from Retail Tracker. Your line is open.

[Marni Shapiro:]

Hi, guys. I have to say your Victoria’s Secret fall line, the new colors, really do look beautiful. It’s quite a change from what we’ve seen over the last couple of years and I think it looks fantastic. Can you talk, Stuart, maybe a little bit about input costs just where they’ve been trending especially through the back half of the year at VS and BBW? And can you update us on a couple of things like wage, cost and any pressures, any different pressures that you’re seeing or an easing that you’re seeing? I know you’ve pulled back the catalogues, so any changes that we should expect to see in marketing at Victoria’s Secret that you haven’t talked about yet?

[Stuart Burgdoerfer:]

There’s a lot in that question, Marni, but that’s okay.

[Marni Shapiro:]

Well, after they [ph] called me the trucker, I figured it was only fair.

[Stuart Burgdoerfer:]

All right, fine. The most important point I want to register frankly in response to the question and I mean this sincerely but I think it’s the most important thing for an investor to understand about us is we’re not trying to win by being a low-cost player. That’s not what we do. And so you’re asking about cost inputs and I understand, I mean we’re a big company and we do pay attention to cost whether it’s about product cost or other cost inputs in our business. But what this management team is most focused on is delivering emotional content, great customer experiences, great store environments, great digital experiences, great interactions with store associates, et cetera, and we’re willing to pay for that and great product quality as well. So, are there material changes in input cost related to merchandise fall '16 versus fall '15, I would say no. Are there some changes related to mix; yes, sure. But in terms of year-on-year cost input related to merchandise, no significant changes. We got a great sourcing organization that does terrific work but what they’re most focused on is product quality and speed that do manage cost, but no big changes. With respect to wage inflation, we are seeing that more in the United States, which is at the end of the day probably a good thing. As you know from prior conversations we’ve had, we want to make sure that we’re attracting and retaining terrific associates whether it’s at the store level, in our distribution centers, in our home office and so we’re not looking to be the low-cost player in those space either we’re looking to pay for terrific people, ensure that we’re getting productivity from those people in terms of sales productivity in stores or other forms of productivity in other parts of our business. But in terms of cost pressures, the wage piece is affecting store selling but as you again heard us talk about it over time, we believe that through sales growth and other leverage that can come from more productive store associates, we believe that we shouldn’t have over time significant deleverage in store selling costs. Lastly, you mentioned the catalogue, we did cease producing the catalogue this spring. A big cost in our business I think is part of what you’re asking, have there been a few changes in marketing at Victoria’s Secret? There already have been and I’m sure there will continue to be more. And I don’t mean that in an unsettling way but that’s just the dynamic aspect of our business and we’ve made some good progress in marketing in the second quarter but there will be more change in the fall and I’m sure there will be more change in 2017.

[Marni Shapiro:]

Fantastic. Thanks a lot, guys.

[Stuart Burgdoerfer:]

Thanks.

[Amie Preston:]

Thanks, Marni. Okay, we have time for one last question.

[Operator:]

Our next question comes from the line of Jeff Stein from Northcoast Research. Your line is open.

[Jeff Stein:]

Thanks. A question for Stuart. First of all, Stuart, wondering if you could quantify the lift that the remodels at Bath & Body Works are having on the overall comp at Bath & Body Works? And secondly wondering on Victoria’s Secret if you can just give us some idea what percent of their revenues in the second quarter compared to third quarter on the type of promotions that we’ve been discussing, such as the $10 off coupon? Thank you.

[Stuart Burgdoerfer:]

So when we remodel stores or most of our stores, Jeff, if we have a change in square footage, they’re out of the comp base. So you may be asking about how does it contribute to sales growth. We are getting sales growth in those locations as we’ve talked about and we’ve provided some dimension that last fall and I would say in general results have been pretty consistent. But just specifically as it relates to comp, those stores often if there’s an expansion in square footage of more than 20%, those stores go out of the comp base. With respect to your second question, it was about the magnitude of volume that we’re lapping Q3 --

[Amie Preston:]

I think the difference in direct mail Q2 versus Q3, how much --

[Stuart Burgdoerfer:]

The Q3 dollars and proportion to the base, if you will, are more significant in Q3 than they were in Q2.

[Jeff Stein:]

Any way you can kind of quantify the dimension of that?

[Stuart Burgdoerfer:]

Yes, I want to be helpful, Jeff, but don’t want to get too specific to be honest with you. It’s some increase Q3 versus Q2. But as you know, we’re going to work hard to offset that volume.

[Jeff Stein:]

Got it, okay. Thanks a lot.

[Stuart Burgdoerfer:]

You’re welcome.

[Amie Preston:]

Great. Thanks, Jeff. That concludes our call this morning. We want to thank you for your continuing interest in L Brands.

[Operator:]

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