LandBridge Company LLC
Q3 2014 Earnings Call Transcript

Published: 20 Nov 2014

[Operator:]

Good day. My name is Carmen and I will be your conference operator today. At this time, I would like to welcome everyone to the L Brands' Third Quarter 2014 Earnings call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Thank you. 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, Carmen. And good morning everyone and welcome to L Brands third quarter earnings conference call for the period ending Saturday, November 1, 2014. 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 third quarter earnings release and related financial information are available on our website, www.lb.com. Also available on the website is an investor presentation which we will be referring to during this call. Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO of Victoria’s Secret, Nick Coe, CEO of Bath & Body Works, and Martin Waters, President of International all are joining us today. After our prepared comments, we'll be available to take your questions for as long as time permits. So that we can speak with as many of you as possible, please limit yourself to one question. Thanks, and now I’ll turn the call over to Stuart.

[Stuart Burgdoerfer:]

Thanks, Amie, and good morning, everyone. Our third quarter results were very sold and represented a record for the company. Total sales increased 7%, comps increased 5% on top of a 3% increase last year, and operating income dollars increased 35%. Earnings per share increased 42% to $0.44 versus $0.31 last year. As you know holiday in the fourth quarter are critical representing over half of our earnings for the year. While we have momentum in our business and we are well positioned, last holiday was challenging. Therefore we remain focused on the execution of retail fundamentals and we will continue to manage the business discipline. Turning to our third quarter results in more detail. Total sales increased 7% to $2.319 billion and comps increased 5%. The gross margin rate increased by 130 basis points to 40.8% driven by an increase in the merchandise margin rate and slight buying and occupancy leverage. The SG&A rate improved by 110 basis points to 28.6%. Operating income dollars increased by 35% driven by our growth in all three of our major segments and our operating income rate increased by 260 basis points to 12.3%. Earnings per share increased 42% to $0.44. Turning to the balance sheet on Page 8, retail inventories per square foot at cost ended the quarter down 12% versus last year, we’re very comfortable with our inventory positions. They are clean and in good shape. Turning to Page 11 of the presentation, our guidance for the fourth quarter is consistent with our prior year. As previously announced our full year forecast includes a negative impact of about $0.10 to $0.12 from the exit of certain apparel merchandise and make-up, and about $0.05 of incremental non-operating expense, primarily interest, for a total of $0.15 to $0.17 of pressure. Importantly, we expect a more significant impact from the exit of apparel of Victoria's Secret Direct in the fourth quarter. We have sold through the majority of this product so the magnitude of the sales decline will increase in the fourth quarter. Whereas direct sales increased by 2% in the third quarter, our expectations is that sales will decrease in the high single digit range in the fourth quarter which will negatively impact earnings per share by about $0.05. For the fourth quarter, we expect earnings per share between $1.61 and $1.71 against last year's $1.65 result. Our fourth quarter earnings forecast reflects a low single-digit comp increase. We expect fourth quarter gross margin rate to increase primarily driven by improvement in the merchandise margin rate. We also expect the SG&A rate to increase primarily driven by forecasted increase in incentive compensation as last year's payout was below target. Non-operating expenses consisting principally of interest expense are projected at about $80 million in the fourth quarter. Our projected tax rate is 38% and our weighted average shares outstanding are forecasted at about 299 million. We expect to end the fourth quarter with inventory per square foot down in the mid to high single digit range to last year. For the full year, we are projecting positive low single digit comps, totals sales growth will be about two points higher than comps due to growth in square footage in our international business. We expect our full gross margin rate to be up to last year and the SG&A rate to be about flat to last year. Assuming all of these inputs, we expect earnings per share for the full year 2014 to be between $3.21 and $3.31 per share. We are projecting 2014 CapEx of about $750 million. As you know, about 70% of our CapEx budget is for real estate and stores, remainder relate to investment in technology, logistics and facilities. As detailed on Page 12 of the presentation Victoria's Secret square footage in North America will increase by just over 5% this year driven by expansions of existing VS stores and the opening of 33 news PINK stores and 20 Victoria's Secret stores. Total company square footage will increase by about 3.5%. Turning to liquidity. We expect 2014 operating cash flow of $1.5 to $1.6 billion and free cash flow of about $750 million to $850 million. We remain committed to returning excess cash to shareholders through a combination of share repurchases and dividend. Our free cash flow and cash position along with the additional availability under our revolving credit facility result in very strong liquidity, which is more than sufficient to fund our working capital, capital expenditures, dividends and any other foreseeable needs. Thanks. And now I'll turn the discussion over to Sharen.

[Sharen Turney:]

Thank you, Stuart. And good morning, everyone. Our third quarter results are detailed on Page 14 of your presentation materials. The Victoria’s Secret segment grew both sales and operating income in the third quarter. Total sales increased 6% and comp sales increased 3% on top of 4% last year with operating income increasing $40.7 million or 27% and our operating income rate increased 220 basis points. Merchandise margin dollars and rate for the segment increased with the strength in the store channel offsetting the impact discontinued apparel merchandise in the direct channel. We also finished the quarter with inventories down double digit to last year. Now let me give you a recap of each channel, starting with the stores. In the stores channel, third quarter sales increased 7% and comps were up 3%. Operating income increased over 30%. Sales growth was driven by lingerie and PINK, our beauty business was down from last year reflecting the impact of the exiting the make-up category. We were very focused in our core categories and therefore have had solid momentum in bras, panties and fragrance, complimented by strong growth in PINK loungewear and sport. The stores merchandise margin rates increased during the quarter, we continue to focus on the fundamental of frugal expense and inventory management as a result SG&A expense leveraged versus last year while buying and occupancy held flat. Now turning to direct. Or third quarter results reflects our strategy to exit non-core apparel category. Third quarter sales were up 2%. The merchandise margin rates were down and the operating income rate declined slightly. Merchandise margin dollar and operating income dollars were roughly flat to last year. Our strategy to distort the direct channel to core category where we have our best growth opportunities is working. Collectively, sales in bras, panties, PINK, sport, beauty and lounge were all up in mid teen. And the merchandise margin increased during the quarter. These results were partially offset by the exit of non- go forward apparel merchandize. As we transition to the fourth quarter, we are excited about our upcoming launches and product offering. We have strong assortment still with both self purchase and getting opportunity for the holiday and we are looking forward to provide our customers with excellent in-store and online experiences. However, as Stuart mentioned earlier, we are sold through the majority of our non-core apparel in direct, as a result we expect to see a high single digit sales decline in direct in the fourth quarter. Following Black Friday weekend, we are very excited for the Victoria's Secret fashion show which will be held in London this year, and will air on December 9th featuring musical performances by Taylor Swift, Ed Sheeran, Ariana Grande, and Hozier. In summary, we are pleased with our performance in the third quarter. We know that the majority of the season is ahead of us. Therefore, while we are cautiously optimistic, we know that we must remain intensely focused on our customer and execute the fundamental in order to deliver our goal. Thank you. And now I'll turn the discussion over to Nick.

[Nick Coe:]

Thanks, Sharen, and good morning everyone. At Bath and Body Works, we were pleased with our third quarter results where we were able to grow sales and increase earnings versus our record performance last year. While effectively managing inventory levels about flat to last year. Total sales for the quarter was $650 million, up 9% or $53 million to last year, comps increased 7% on top of 2% last year. The overall assortments of shop activity were able to drive sales growth in the competitive retail environment. We continue to be pleased with our -- with the customers acceptance of product newness across our three key businesses, our signature collection product line, the Soap and Sanitizers business, and our Home Fragrance assortments. For the quarter, operating income was $93 million, up 30% from last year, operating income as a percentage of sales were 14.2% in the quarter and with that 230 basis points for last year driven by expense leverage and improvements in merchandise margin rate. We were also pleased with the performance of the BBW direct channel during the quarter. Total sales were up 16% and operating income grew significantly versus last year. Looking ahead for the fourth quarter, we are excited about the holiday assortment and the confidence in our approach following a disappointing fourth quarter last year. We will leverage our read and react capabilities, provide a world class in-store experience and reestablish ourselves as the Christmas destination by celebrating the moment better through the floor sets and activities. We will flow newness throughout the quarter beginning this month with our newest signature fragrance launch a Thousand Wishes along with new seasonal fragrances in our three key businesses. Our inventories are well positioned heading into the quarter, and are flexible enough to react to customers' preferences, expenses are well managed but we will continue to take the appropriate investments to drive growth in our business. With that I'll turn the discussion over to Martin.

[Martin Waters:]

Thanks, Nick, and good morning, everyone. Turning to our international segment. We continue to be pleased with our results and progress. Reported revenue increased by 34% to $80 million and operating income increased 60% to $16.1 million. The operating income rate increased to 20.1%. You will recall that results in this segment include both our wholly owned UK business and the majority is in our franchise model in other geographies. At Victoria's Secret international, we continue to be pleased with performance of our full assortment stores. In the UK, our London flagship stores on Bond Street continued its exceptional performance and we've begun construction to expand the store. Our eight mall locations are also doing well and we will be opening one more store this year in the UK. Elsewhere in the world the eight stores under our Alshaya partnership continue to do very well and we will be opening another seven stores this year across the Middle East region. Our Victoria’s Secret beauty and accessories business continues to progress well, and we ended the quarter with 245 stores open and we are on schedule for just under 300 stores by the end of 2014. We are also on track to open nine VSBA stores in China in January. As a reminder, all of our VSBA stores are franchised. In Bath & Body Works International, we are now to 67 stores outside of North America, again all franchised. We continue to be very pleased with the performance of the business and will open another 18 stores this year. It's peak season right now so we are focused on slow execution. That's all from international. With that I'll say thank you and turn it back over to Amie.

[Amie Preston:]

Thanks, Martin. That concludes our prepared comments, and at this time we’d be happy to take your questions. Please as a reminder and in the interest of time and consideration to other, please limit yourself to one question. And with that I'll turn it back over to Carmen.

[Operator:]

[Operator Instructions] And your first question comes from the line of Jennifer Davis with Buckingham Capital. Please go ahead with your question

[Jennifer Davis:]

Hey, good morning. Congratulations on a great quarter. And I was wondering if you could talk a little bit more about Bond Street store. Can you remind us when you started construction there and is it having any impact on the margins in your international division and when you expected to open. Thanks.

[Martin Waters:]

Yes, I'll take that one. So we started construction about three months ago. It did having an impact on business not much. We have some hoardings up inside the store which has meant that we have to give over some space to the construction project. But most customers wouldn't notice the difference. So a few less fitting rooms but it is not really noticeable to the human eye. Does it have an impact to our margin? No. But we did take some accelerated depreciation nothing particularly significant. The new space will open in three separate -- at three separate times. The first amount of space will come to is just before Christmas this year. Then we will get another amount in early spring and then the final reveal will be sometime in April, May of 2015.

[Operator:]

Your next question comes from the line of Ike Boruchow with Sterne Agee.

[Ike Boruchow:]

Hi, good morning, everyone. Thanks for taking my question. Congrats on a great job in the third quarter. Not sure who I'd direct the question to but my question is on the VS Direct side. Understand the exiting of certain businesses and packs of sales for Q4. How should we think about how the trajectory VS direct into the first half of next year, the go forward categories are growing nicely but when do we finally get clean-- clean up to really see that number go in the right direction and also how do we think about the international opportunity with e-commerce kind of ramping up as well. Thank you.

[Sharen Turney:]

Hi, Ike. It's Sharen. Thank you very much. We will continue to go up against the non-go forward apparel business offer to spring season. So we will -- and we will not finish anniversarying this probably until next October. Obviously, we feel strong about our strategy and think that we can offset some, maybe all of that apparel business as we go forward with the shared categories and manage the strategy. As we think about the international opportunity, we've already put things in place to help us to better service our international customers through our domestic website. We do believe that's an opportunity and something that we can talk more about in 2015.

[Operator:]

Your next question comes from the line of Susan Anderson with FBR Capital Markets & Co. please goes ahead with your question

[Susan Anderson:]

Good morning. Good morning. Thank you for taking my question and congrats on a really good quarter. I was wondering, at the analyst day you talked about doing a better job on the BBW promos in the third quarter. Is there potential for this in the fourth quarter also and maybe if you could talk a little bit about clearing that up thanks.

[Nick Coe:]

I am sorry Susan, you are going -- it's Nick, would you mind repeating the question, it is hard to hear you.

[Susan Anderson:]

Sure, yes. I was wondering if you could talk a little bit about how your changing up the BBW promos? It sounds like you had a much better job in the third quarter and do you see those opportunities in the fourth quarter? Thanks

[Nick Coe:]

Sure. Based on the customers' acceptance to product and the trend that we were on during the last few months, particularly from late spring, it is allowed us to pull promotions back slightly so we have been slightly less promotional than we were last year which is a good thing. And this helps from the margin rates and just from the brand equity perspective. As we go into the fourth quarter, it will be a comp, we are planning at this juncture for to be a comfortable level of promotional activity, but expressed in a different way so it feel different to her so it should be comparable amount but feel difference in terms of cut through as we think about how promotional the market place is going to be at that time.

[Operator:]

Your next question is from the line of John Morris with BMO Capital Market. Please go ahead with your question

[John Morris:]

Thanks and congratulation everybody. Martin, question for you. Checking on this, I believe you guys are turning on global eComm and local currency very soon if not already. Would you anticipate a nice uptick in performance from that? And can you --really about fulfillment, can you handle fulfillment of that out of Columbus? What plans are you considering on a go forward basis as they are progresses and when would you all look to turn on e-commerce in local language as well? Thanks.

[Amie Preston:]

Thanks, John. I think we are going to have Sharen take that question.

[John Morris:]

Hi, Sharen.

[Sharen Turney:]

How are you? Listen, I think that we have turned on and been very excited about the results that we are seeing so far. With us really trying to make it much easier for our customers internationally to -- as we talk about to the local currency. As we think as I said before, we believe there is a big opportunity within our e-commerce strategy from the international perspective. And it's something that we will talk more about in 2015.

[John Morris:]

And fulfillment?

[Sharen Turney:]

Same thing. It should be right now, we are fulfilling everything from the US just as we do all of our international properties. And as we go forward we are looking at other opportunities and that's something we will talk more about in 2015.

[Operator:]

Your next question comes from the line of Matt McClintock with Barclays Capital. Please go ahead, put your question.

[Matt McClintock:]

Hi, good morning, everyone. Sharen, you talked little bit about the exit of makeup. And I was just wondering if you could remind us where were at in terms of the beauty business, in terms of the margin opportunity for the beauty business? How much margin opportunity potential do we have going into this holiday season and then maybe next year to improve profitability there? And then when you think about core drivers of the beauty business going into holiday season, can you maybe just talk about what you are most excited about? Thank you.

[Sharen Turney:]

Number one is that we have a very large profitable beauty business today. And as we think about the opportunities that we have go forward, our total focus is on fine fragrance. And we have seen increases within our fine fragrances; our launches have been bigger and better than they ever had been. So we are excited about the opportunities as we go forward. When I think about the core drivers going into this holiday, number one is going to be all the new fragrances that we have launched, plus the fragrances that have been in our foundation. And when I think about those fragrances such Tease, Dream Angel, those that we are actually seeing some high single digit, double digit increases in those fragrances plus the new fragrances which we just launched Scandalous, which was the largest fragrance launch we ever had. So we feel very confident in terms of that business as we go forward. The second core business that we have is the gifting business. And gifting business is always a little hard to predict as that it really happened in the last -- in the first three weeks and going into the last week of Christmas. So we have some early indictors but we are still cautiously optimistic as we think about going into the holiday season.

[Operator:]

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

[Kimberly Greenberger:]

Great, thank you, good morning. Terrific third quarter here. Stuart, it seems like the third quarter profitability has really moved meaningfully higher as the revenue in the quarter has gone from about $2 billion a few years ago to $2.3 billion. Your operating income in the quarter has almost doubled with that, it would seem only 15% move higher in the revenue picture. So I'm wondering is it just that you're better able to flow more of the incremental revenue to the bottom line in the quarter, better able to cover your fixed expenses? Or have you taken a different philosophy to sort of expense management and really tightening up the P&L?

[Stuart Burgdoerfer:]

Thanks, Kimberly. To be honest I wouldn't say that there is different philosophy on third quarter expenses. I think as you mentioned in your question, it is really been driven by revenue growth and healthy margins, merchandise margins in the third quarter. You are right to point out that we've grown the revenue and the profit in the third quarter meaningfully over the last few years. Sharen or Nick could elaborate on this, but one of the things that the business is trying to do is to make the most of all meaningful selling periods including those out of traditional holiday, and I think the business did some very smart things. VS and BBW, this third quarter should drive volume and profit, but in terms of -- is there a different philosophy or mindset around expenses in the third quarter versus the rest of the year, no. It is managed -- obviously expenses with discipline and forcing trade off but I wouldn't say there is anything unique in the third quarter with respect to that. It's really been about volume and trying to make create events and maximize sales and margin in the third quarter.

[Operator:]

Your next question is from the line of Barbara Wyckoff with CLSA. Please go ahead with your question.

[Barbara Wyckoff:]

Hi, everybody. Great, quarter. Could you -- and this is for Sharen, could you update us on how many stores or malls have full PINK assortments this year versus last and also how many Victoria's Secret have full active assortments versus last year? Thanks, Sharen.

[Sharen Turney:]

Sure. We haven't really moved the needle a lot in terms of full assortment PINK in Victoria's Secret stores, where the opportunity has been -- have we actually moved the PINK into freestanding real estate. So today we have -- when we think about more than 800 stores do not carry all of the lingerie assortment and more than 650 stores do not carry all of the PINK assortment. Now we have grown the PINK real estate by opening up the fourth PINK, the pre standing PINK stores. When I think about the sport business, we will have the full assortments in about 181 stores per fall and then we have the bra assortment just a very small bra assortment in the rest of the all stores. But it is someway about a cabin to two cabin. And we do believe that there is a lot of opportunity. So therefore you can surmise by that we proven with the real estate expansion that we have been able to grow the business and return on investment. And we are not seen the end of the light of the tunnel yet and still look forward to these opportunities that we do have in front of us.

[Operator:]

Your next question is from the line of Lorraine Hutchinson with Bank of America, Merrill Lynch. Please go ahead.

[Lorraine Hutchinson:]

Thank you, good morning. Stuart, could you discuss the key drivers behind the increase in free cash flow guidance this quarter?

[Stuart Burgdoerfer:]

It would be the increase in net income, a tighter view on the ending inventory balance before the end of the year would be the two most significant drivers so be there -- it will flow through the Q3 be and again tightening up important capital assumptions for the whole year.

[Operator:]

Your next question is from the line of Jennifer Black with Black & Associates.

[Jennifer Black:]

Good morning. And let me add my congratulation as well. I wanted to know, I know you can focused on increasing productivity of the sales associates both at Victoria's Secret and BBW. Can you talk about how are you measuring your associates today? Is it sales per hour, are you changing incentive, if you could each talk about what are you doing to empower your sales associate and increase their productivity? And then I also wondered if Alshaya or your other franchisees are also utilizing the same strategies? Thank you.

[Sharen Turney:]

Hi, Jennifer. Thank you for the question. As we think about our stores and our selling associates is that obviously we want everyone everybody have to careers with Victoria's Secret and they are, we are so fortunate to have such passionate sales associate. When we think about productivity, we really do measure by our spot [ph] though selling productivity per average hour. And really looking at how do we make sure that we have our best people and most productive people where we have the most traffic. And if something that we have the capability of measuring, we have the capability of tracking our sales associate that sale, therefore we can coach them, and we can ask them what new more training if they need so that we can give them the tool necessary to help them to be more productive. And it's an ongoing initiative and we are just at the very beginning at the beginning of the beginning and as you know that at this time of year, it is holiday, we start to hire new seasonal people so we started at, we are going to kind of continue to play with it through holiday but then it will be even more in detailed manner we will talk for spring 2015. So we are very excited about the opportunity that we have within our total selling organization.

[Jennifer Black:]

Great and next.

[Stuart Burgdoerfer:]

It is comparable story not much different, we continue to touch all sorts of different things to drive different results which are part of our core DNA of how we run the business but it is comparable story.

[Jennifer Black:]

Is it new for you?

[Stuart Burgdoerfer:]

Is it new for BBW?

[Jennifer Black:]

Yes.

[Stuart Burgdoerfer:]

We are fundamentally we are really watching very closely to what Sharen is doing with the business. Trying to take the learnings from that and then we are slight different business model. We are obviously smaller stores and so trying to understand which piece of that equation makes the most sense for us. So we are in a fortuitous situation where we can do some of our own things and get greater learnings from Sharen's business.

[Nick Coe:]

And as you know internationally our goal is to operate and replication model so fundamentally the way the stores operate overseas is the same as the way they operate in North America. With that said, we do experience different cultures, different pay scales, different employment norms, different legal framework etcetera. That mean that our partners do impact to manage the way that they operate their people independently from the way that we do.

[Operator:]

Your next question is from the line of Paul Lejuez with Wells Fargo Securities.

[Paul Lejuez:]

Hey, thanks, guys. Now that you had some of the VSBA stores open for a couple of years, can you talk about their comp performance with some of the older classes? And also wondering as you bringing new partners, I am just wondering if the terms of the arrangements have changed just from the economic perspective since you started that in the past. Thanks.

[Martin Waters:]

Yes, thanks, Paul. I take that. We have 300 VSBA by the end of this year. And we take so many different cuts and performance of that business. We look at by age, we look at it by geography, we look at by size, look at every which way you can see. And the patterns are remarkably consistent, we do see positive comp growth and we do see great signs of encouragement that the new stores get even better than the original stores. There isn't really much of a story to tell there, Paul. In terms of new franchise partners, well, we've already filled most of the world with the partners we are working with. So we are not actively seeking new partners, but I would tell you that we have pleased with the terms that we went with originally and we don't anticipate any change to those with new partner's going--

[Operator:]

Your next question is from the line of Christian Buss with Credit Suisse. Please go ahead.

[Christian Buss:]

Yes, I was wondering if you could talk a little bit about some of the initiative you have towards faster lead time and how much more progress you have to make there, maybe the way of asking this, what do you think you are in the game towards getting a fast churn supply chain in progress?

[Amie Preston:]

Great. Thanks, Christian. So we will start with Sharen.

[Sharen Turney:]

Hi, Christian. As we started this journey, we have learned so much and we have made so much progress. I still think that we have much more to do. I think when we think about the back end of that just cutting and selling and getting goods here and thinking about cutting and reading reacting very, very good profit. When I think about the opportunities to continue, how we think about designing on the front end and raw material, we still have a lot more to do and a lot more opportunity which I am obviously very excited about. So the inning question so I guess we are in -- I don't know six -- how many innings are there in the baseball game?

[Stuart Burgdoerfer:]

How many do you want?

[Amie Preston:]

Nick, if you want to add--

[Nick Coe:]

Yes, I think Christian it is a good question and I think that the easiest way to me to answer that, if you look at our business in September and October, we designed a September floor set to live for about four weeks and it lived for about nine weeks and the way we are able to do that was by leveraging a speed model so we could replenish for that and maximize the opportunity. So I think the question is less about how much faster can we go and the question for us is probably how much more breadth of assortment that we are able to put on to that speed model that will allow us to have a greater degree of the business being fast versus the business being faster if that make any sense.

[Operator:]

Your next question is from the line of Betty Chen with Mizuho Securities.

[Betty Chen:]

Oh, congratulations. Thank you. I was wondering, Sharen, sorry if I missed it earlier, but I think Nick had addressed maybe some of his opportunities for the fourth quarter and help to maybe promotion being flattish year-over-year. Can you talk us about that for Victoria's Secret and also where we are in terms of margin and what opportunities in longer term? Thanks.

[Sharen Turney:]

Thank you, Betty. I think number one, we have taken all the necessary steps and the learnings from last year to be very well prepared and very, very well position for the fourth quarter. Last year we were promotional, this year we have a lot of things planned. We have things that we really engineered, we are going to read the business day by day, some things we may not have to, some things we may -- we need to drive more traffic. And most of these have been margin engineered. So if you are going to take it one day at a time, we have a lot of contingency in place, and we are going to take full advantage of maximizing this holiday season as best that we can.

[Operator:]

Your next question is from the line of Mark Altschwager with Robert W. Baird & Company, Inc. Please go ahead.

[Mark Altschwager:]

Good morning and congratulations on the great quarter. Could you talk about your early reads from The Perfect Christmas campaign at BBW, how is that assortment performing versus your expectations? And similarly, we've seen the greater focus on accessories at VS. Any thoughts you could share on the consumer's reaction to that as well would be great, thank you.

[Amie Preston:]

Okay. Mark, we will start with Nick on that question about Perfect Christmas.

[Nick Coe:]

So we literally just launched that and as we said in the opening comments, we are excited with our assortment in terms of products acceptance. We had good momentum during the last few months and obviously there is a long way to go as it relates to the rest of November and December. But so far we are happy with her reaction to Christmas specifically.

[Sharen Turney:]

In terms of the accessory business, we've already been in the accessory business. And really started trying to maximize even more so last fall season with the launch of Victoria. We see nothing but us to be able to gain momentum in that business domestically and I'll let Martin talk about from an international perspective as well. But it is the business that we feel think that has a lot of legs.

[Martin Waters:]

Yes. It is a great business for us, internationally represents about a quarter of our sales in the VSBA business, business that responds well to fashion and newness and into the core equities of the Victoria brand so I think a good business.

[Operator:]

Your next question is from the line of Jeff Stein with Northcoast Research. Please go ahead.

[Jeff Stein:]

One question for Stuart. Looking at the International business, you've got kind of an eclectic mix of revenues there with stores, with royalties, and with wholesale. And I'm wondering if you could just kind of give us some guidance in terms of how we should think about modeling each of those revenue streams? Because if you look at the sequential pattern of margins, you've been down obviously up significantly year-over-year, but you've been down sequentially. And as we kind of move ahead with the mix of growth in franchise stores versus company owned, how should we think about modeling margins?

[Stuart Burgdoerfer:]

Yes, I think the best overall advice that we would have for you Jeff is to look at our guidance that we are giving on store growth. And to develop an understanding and we certainly try to be helpful in that regard and understanding of what the franchise economics look like versus what company owned economics would look like particularly in a start up mode in different countries. And but really the key source of input if you will would be our guidance that we, Martin gave few weeks ago at our annual update about our growth in stores. And then again understanding the sources of revenue and the margin profile, the franchise business which is different than company owned business. But in terms of breaking that down in detailed on the call, the best advice we can give you is to really follow that store growth and use your understanding of the different economic profile of those two business once would be my be advice.

[Operator:]

Your next question is from the line of Thomas Filandro with Susquehanna Financial Group / SIG. Please go ahead with your question.

[Thomas Filandro:]

Hi, thanks and let me add my congratulations. Another amazing execution quarter across-the-board. So for Sharen, just a quick question on the port congestion whether you're seeing receipt related issues or costs there? And Nick if you could, I think you continue to experience very strong DTC growth. I was curious if you could give us a snapshot of the channel profit performance for the quarter, how that compares to last year? And possibly as well as how it compares to the brick and mortar business? Thank you.

[Sharen Turney:]

Hi, zero port congestion for Victoria's Secret.

[Nick Coe:]

The profitability is about comparable, Thomas, so we continue to see nice top line growth as we mentioned earlier and peaks it around 16%. It is comparable profitability and the real driver for us in that business without a doubt is we have a great relationships with the customer and the opportunity to tell really good emotional stories and lift that size a bit is a kind of first and foremost and as a nice outcome we continue to drive nice sales growth in that. But fundamentally it is a comparable level from the profitability perspective.

[Operator:]

Your next question is from the line of Simeon Siegel with Nomura Securities. Please go ahead.

[Gene Vladimirov:]

Good morning. This is actually Gene Vladimirov on for Simeon. Thanks for taking our question. I was wondering if you could give us some color around the currency environment, how that may have affected you, whether you guys have seen a slowdown in sales abroad? And then following up on that maybe any changes, either in the short-term or in the long term regarding the international expansion? Thank you.

[Stuart Burgdoerfer:]

So with respect to currency the good news for us is that it doesn't impact us as much as it does many other retailers. And that's in part because much of our international business is done on a franchise basis and so the economic flow into our business is a royalty of the top versus the full amount of retail sales. Obviously there has been pressure generally speaking related to business in Canada, some pressure economically on the business, it has been partly offset by some favorability at least in some periods and related to the British pound. But the most important thing I do want to register through all that is the impact on our business to this point really hasn't been that material, it has been a small drag on the business but not in the context of the overall company something that I would describe as material.

[Operator:]

Your next question is from the line of Anna Andreeva with Oppenheimer Capital. Please go ahead

[Anna Andreeva:]

Great, thanks and congrats on the great results, guys. My question is on La Senza. I was hoping to get some color on just the opportunity to revitalize that business. I think you mentioned at the analyst day potential for store growth in the US, just some update there. And Stuart, inventories have been so well managed. I'm not sure if you mentioned, but how should we expect inventories ending in 4Q? Thanks.

[Amie Preston:]

Thanks, Anna. We will start with Martin for La Senza

[Martin Waters:]

Yes, hi, Anna. Thanks for question. So yes La Senza continues to be a work in progress. I'll tell you we had a decent quarter and quarter three sales were up, margins was up, inventories was well there, so we go into the season with decent momentum and optimism, but as everybody knows as we make our money in the fourth quarter so it is still about what's in front of us rather than what's behind us. So I would say I am cautiously optimistic and looking forward to the fourth quarter. As far as store in the US are concerned, this time last year we were expecting to open stores in 2014, holiday didn't go the way we wanted it to, so we cancel that and we said no we don't do it. The same would be true for now. We will see how all the place are and we revisit that decision in January or February 2015.

[Stuart Burgdoerfer:]

With respect to inventory yearend on a per foot basis, we believe will be down mid single to high single on a two year basis about flat. And that's in line with sales per foot on a two year basis as well. So we feel like the inventories are in good shape and we've done job balancing obviously being in stock with making sure our assortments are fresh and we have good ability to read, react and chase.

[Operator:]

Your next question is from the line of Omar Saad with OSI Group. Please go ahead with your question.

[Omar Saad:]

Thanks, good morning. Wanted to ask about the fashion show in a couple weeks in Europe. I'm sure it's the biggest PR kind of event you've done internationally to date. But can you frame for us what sort of marketing activities or PR activities have been in place for the brand internationally to this point? Or is this really marks the kickoff of a more sustained significant and aggressive brand campaign outside the US? If you could put that into perspective? And then potentially as you look down the road have you started thinking about fashion shows maybe in other parts of Europe or even Asia in future years? Thanks.

[Sharen Turney:]

Hi, this is Sharen, Omar. When I think about the fashion show, we always have -- we have great partner with CBS, it is --we have international PR that we are working on and it is even no matter where the fashion show is, whether it is in the US or whether it is international, it is one of the highest rated shows and watched shows around the world. And we have continually to picked up in the press far beyond, it has far reached beyond holiday. So we have a very exciting line up as I spoke earlier about the entertainment this year, getting great buzz from the press in London. We have obviously in-store events that we plan, we have watch party that we planned, not only internationally but also domestically. So we are very excited about this international show. And this is actually the second time that we have gone international with the show. The first show was in Cannes so it is -- obviously we are very proud of the fact that we've been able to develop the show and so we are very excited about it. When you think about the opportunities that where our next year show will be, that world is our play station so you never know so stay tuned.

[Operator:]

Your final question comes from the line of Roxanne Meyer with UBS Securities. Please go ahead.

[Roxanne Meyer:]

Great, thanks. I'm glad to get in under the wire here but congrats on a terrific third quarter. Sort of a follow-up on Kimberly's question earlier. Years ago you earned just a few pennies in 3Q and now clearly you've grown 3Q to be much more important. And Stuart as you mentioned increasing volumes has been a part of that and your ability to leverage your speed model really seems to be at an inflection point. So I'm just wondering how your speed model is changing the way you think about quarterly contribution to full year sales and profits? And if you think it could shift at all over the next few years?

[Stuart Burgdoerfer:]

Yes, I mean I don't -- while the speed initiative and the work that we have been describing to you over the last few years and Sharen and Nick commented on again today, that drives value throughout the year. Certainly and it is the start we share a few weeks ago going into the fall season being 90% open. This is on the 1st of August, we were 90% open for holiday business in terms of open to buy, that's a very powerful thing. But I wouldn't say that I think that benefits the third quarter more than it does to fourth quarter or the first quarter or the second quarter. Obviously, the bigger benefit would be where you do more business since and so the tool is an important one. But I think at the end of the day economically what's driven the significant improvement in the third quarter as we've done a nice job growing volume and we've done so with healthy margin rate, the speed tool in and of itself has application throughout the year. And in many ways as most important where we do the most business so.

[Amie Preston:]

Great, thanks, Stuart. That concludes our call today. We wanted wish everybody a very happy Thanks Giving and we appreciate your interest in L Brands.

[Operator:]

Thank you, again for participating in today's call. You may now disconnect.