LandBridge Company LLC
Q3 2015 Earnings Call Transcript

Published: 19 Nov 2015

[Operator:]

Good morning. My name is Kyle and I will be your conference operator today. At this time I'd like to welcome everyone to the Q3 Earnings Conference Call. [Operator Instructions] Ms. Preston, you may begin your conference.

[Amie Preston:]

Thank you. Good morning, everyone, and welcome to L Brands’ third quarter earnings conference call for the period ending Saturday, October 31, 2015. 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, lb.com. Also available on our website is an investor presentation which we will be referring to during this call. This call is being taped and can be replayed by dialing 1-866-NEWS-LTD. You can also listen to an audio replay from our website. Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO of Victoria's Secret; Nick Coe, CEO of Bath and Body Works; and Martin Waters, President of International, are all joining us today and Sharen is joining us remotely. After our prepared comments, we will be available to take your questions for as long as time permits so that we can speak with as many of you as possible, please limit yourself to one question. Thanks. Now I'll turn the call over to Stuart.

[Stuart Burgdoerfer:]

Thanks, Amie, and good morning, everyone. We delivered record third quarter results as we continued to deliver sales growth, merchandise margin rate improvement and sound inventory management. Earnings per share increased 25% to $0.55 versus $0.44 last year. Excluding the $0.04 negative impact from foreign exchange rates, earnings growth was 34%. As Les commented in our press release, our brands are differentiated and have high emotional content and we continue to deliver new, compelling merchandise in an exciting in-store experience. We remain focused on executing fundamentals and staying close to our customers. We are pleased with our month-to-date performance and we are well-positioned for the most significant part of our year which is in front of us. To take you through the third quarter results as detailed on page 4 of the presentation, net sales for the quarter increased 7% to $2.482 billion and comps increased 7%. Foreign currency negatively impacted our sales growth by about 1 percentage point. The gross margin rate increased by 80 basis points to 41.6%, driven roughly by an improvement, driven roughly equally by an improvement in the merchandise margin rate and buying and occupancy leverage. SG&A expenses leveraged by 70 basis points. Operating income dollars grew by 19% and our operating income rate improved by 140 basis points. Turning to the balance sheet on page 8, retail inventories per square foot at cost ended the quarter up 7% versus last year and down 6% on a two-year basis. Inventories reflect some early receipts at the end of the quarter and are clean and we’re well positioned. We repurchased 751,000 shares of stock in the third quarter for $61 million. At quarter end, we had $137 million remaining under our current $250 million repurchase program. Turning to page 11 of the presentation, our forecast for 2015 reflects actions we are taking to grow our business

[Sharen Jester Turney:]

Thank you, Stuart, and good morning, everyone. The Victoria's Secret segment grew both sales and earnings during the third quarter. Total sales increased 8% to $1.6 billion and comps increased 7% on top of 3% last year. Operating income of $211 million was up $19 million or up 10% to last year. Included in last year’s results are approximately $36 million in apparel sales in the direct channel, which we have fully exited this year. Excluding this item, our segment sales growth would have been between 2 and 3 points higher. We began the quarter with successful Body By Victoria and Wear Everywhere Bra launches as well as a record back to school results in our PINK business. That strength continued throughout the quarter as customers responded to our newness and fashion leading to double digit growth in our bra, panty and loungewear categories. In regard to the beauty business, we’re in the process of a full repositioning of this category and remain committed to delivering an elevated beauty business that is more consistent with the Victoria’s Secret brand. Throughout this transition, we expect and are seeing beauty results which are down to last year. Merchandise margin dollars for this segment increased versus last year, driven by strength in both stores and direct. Rate was up slightly to last year. We finished the quarter with inventory levels up to last year, driven by planned strategic investments in PINK and increased beauty inventory related to the [indiscernible] restage. Now, let’s turn to the specific channel performance, starting with stores. Sales for the quarter increased 9% to $1.3 billion and comps increased 7% on top of 3% last year. Sales growth was driven by strength in bras and panties, as well as PINK loungewear. Merchandise margin dollars increased versus last year, margin rate declined driven by planned promotional activity including our Angel Card reissue and unfavorable FX impact in our Canadian business. Additionally, lower beauty sales led to an unfavorable mix impact. Total expenses leveraged slightly versus last year as an improvement in the buying and occupancy rate was partially offset by deleverage in SG&A, driven by investments in selling expense to improve the customer experience within the stores. For the quarter, operating income dollars were up to last year and the operating income rate was down. Now turning to the direct channel, our strategy to distort the core categories is working and we were pleased with results in our direct channel. Third quarter sales were up 4% as 20% growth in our go-forward categories more than offset $36 million of non-go-forward apparel. The merchandise margin rate and dollars were up to last year during the quarter as we continued to distort to the core. Operating income dollars and rate increased significantly. In summary, we know that the majority of the season is ahead of us. And in order to deliver our goals, we are going to remain focused on our customers, our core business and executing with excellence. We’re excited and optimistic about holiday, which starts with Black Friday next week, so happy Thanksgiving everyone. We’re positioned with a strong fashion-wide assortment and activities that will drive both self purchase and gifting. This includes our new bra launch in early December. Following Black Friday weekend, the Victoria’s Secret Fashion Show will air on Tuesday, December 8 10 PM EST, featuring musical performance by Ellie Goulding, Selena Gomez and The Weekend. Thanks and now I’ll turn the discussion over to Nick.

[Nicholas Coe:]

Thanks, Sharen, and good morning, everyone. At Bath & Body Works, we were pleased with our third quarter results. We were again able to increase earnings versus our record earnings last year. We were able to drive growth in sales while improving margin rates and continuing to manage inventory appropriately. Third quarter sales at Bath & Body Works North America were $705 million, up 7% or $46 million to last year, and comps increased 6% on top of 7% last year. Sales were strong across the quarter and we were able to drive growth in each of our three key businesses

[Martin Waters:]

Thanks, Nick, and good morning, everyone. As in previous calls, I should give you a brief overview of progress in our international businesses. As you know, our opportunity for international growth is significant and we’re making good progress. As detailed on page 13 of your presentation, we’ve opened 93 gross international locations so far this year, 29 in the third quarter, to end the quarter with 480 stores in the segment. Revenue increased 16% in the quarter to $92.8 million and operating income increased 13% to $18.2 million. The operating income rate decreased 50 basis points to 19.6%, driven by FX headwinds. Absent the impact of FX, OI rate would have been 3 to 4 percentage points higher. Retail sales growth in local currency in the international business continues to be strong. Victoria's Secret international, we’re pleased with performance of our full assortment stores. In the UK, we have a busy quarter ahead with another four stores to open to end the year with 14 stores. In the Middle East, we opened our fifth store of the year two weeks ago in Istanbul, bringing the total to 16 VS stores and three PINK stores. Staying with Victoria's Secret, our beauty and accessories business continues to progress well, with 342 locations opened at the end of the quarter, about a third of which are in airports. We have another 40 or so open in Q4. Turning now to Bath & Body Works, we now have 110 international stores and we continue to be very pleased with their performance. We expect to open another 15 or so BBW international stores in the balance of the year. So in summary, continued progress from our international business in the third quarter and we remain focused on the fundamentals, great execution of our brands wherever we go. With that, I'll say thank you and I’ll turn it back over to Amie.

[Amie Preston:]

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

[Operator:]

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

[Susan Anderson:]

I was wondering, Stuart, if you could talk about just the gross margin composition going forward? Do you think there is opportunity still with markdown in the fourth quarter, especially given the environment around the holiday? Then also any AUC opportunity and I guess if you could talk about just the B&O bucket, if you can continue to comp mid single digit opportunity there.

[Stuart Burgdoerfer:]

There were a lot, Susan, in that question and thanks for your remark about the third quarter. As we think about merchandise margin and the related buying and occupancy expense and our thinking has been very consistent about this. We have some additional opportunity, probably not a lot in the merchandise margin rate and the reason for that is the most important thing is to get the product right. And from that, obviously we get full price selling and all good things happen. There is a little bit more opportunity or some more additional opportunities related to speed and the value that that creates. But all of that is balanced against making sure that we’re providing great value to customers. And what we don’t want to do is have the margin percent get too high and as a result either limit our growth in terms of dollar growth or have the outcome where the customer doesn’t feel like she is getting a terrific value. So that’s really how we think it. As we’ve talked about previously, we’re not a company that’s particularly focused on AUCs. We obviously do buy a lot of merchandise and we’re not looking to over-pay, but what we’re really focused on is innovation, newness, fashion, speed, product quality, that’s where we spend most of our time and energy working with a great group of partners in terms of the folks that manufacture our merchandise. As it relates to buying and occupancy expenses, we are investing in our stores. And as we outlined a few weeks ago at our annual update, we’re very energized and optimistic about the growth that that will provide for the company. And frankly, the strategic importance of that, if you will, in terms of ensuring that our store environments remain very compelling for our customers. And as a result, the dollar growth in our buying and occupancy expense will be in the mid single digit range for the remainder of this year and going into next year. So that would be how I would outline our thinking about gross margin rates.

[Sharen Jester Turney:]

Susan, one point to add on that just specifically as it relates to the fourth quarter, so as Stuart mentioned in his comments that we will see 2 to 3 points of sales spread versus comps in the fourth quarter primarily because of the direct business is flipping around against exited apparel merchandise. So we will have bit of a lower leverage point on buying and occupancy going forward.

[Operator:]

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

[Paul Lejuez:]

As you’re growing square footage in the US, can you talk about what’s actually happening to rents in the new space that you get relative to existing space? And then does it do anything for you in terms of negotiating rents in existing space, maybe for each of the brands, if you could talk about them separately, has there been any change there?

[Stuart Burgdoerfer:]

What I would say is as we renew leases, as a general matter, rents are increasing as you would expect. So our lease terms, as a general point are 10-year lease terms, and as we renew leases, the rents are higher. With that said, and unlike our thinking as it relates to merchandise and margin rates that we talked about earlier, the most important thing obviously as it relates to real estate is having a terrific location within a given shopping venue. So we’re not looking to get the lowest rents, if you will. We’re looking to get the right locations, we drive a lot of productivity as you know in terms of sales per foot, so our ability to do that with the major developers frankly throughout the world is pretty good. But we’re not focused on getting the lowest rent terms if you will, we’re focused on getting great locations, driving lot of sales, lot of [four wall] profit. And as we renew leases, our rent per foot or rent dollars do increase. But at the end of the day, the four wall economics remain very, very powerful.

[Operator:]

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

[Christina Brathwaite:]

It’s Christina Brathwaite on for Matt. On the international front, we were surprised by the revenue growth in Q3, given some of the wholesale shipments that shifted into the quarter form 2Q. Can you walk through the puts and takes of growth during the quarter and just tie into your long-term expectations for revenue growth?

[Martin Waters:]

Maybe two points on retail sales in international [on OI]. Retail sales in local currencies are up significantly to last year and broadly in line with the increases that we saw in the previous quarter. Secondly, the recorded revenue which you’ll remember is a mix of three things

[Operator:]

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

[Kimberly Greenberger:]

I'm not sure if this question on Victoria's Secret beauty is for Sharen or Stuart. I'm wondering if you can just give us the longer term picture on the category. By recollection, I think beauty has largely not grown here over the last eight to 10 years and as a result, the beauty piece, the mix percentage of beauty to the overall assortment has declined. I don't know if you have those statistics, if you do, it would be great to hear them. And that would seem, given beauty's high margins that the brand has absorbed actually a gross margin headwind over the last number of years. I'm wondering if you any quantification around that and what's the outlook for beauty with all of the new packaging and the new relaunch and the new restaging, how should we think about the growth of that business over the next one, two, three years?

[Sharen Jester Turney:]

Our beauty business is about a $1 billion business today. And you’re right, it has not grown really over the last three years, it’s pretty much a flat business. As we have thought about our beauty business, we have continued to shrink the real estate in our beauty business because we feel like it has the opportunity to be much more productive. The strategic intent of taking beauty off the lease line and closer to the cash wrap has allowed us to become more productive, therefore we’ve been stagnant a little bit in our growth category. We felt like the beauty business was trading on the brand equity versus the opportunity to trade up to have it really lead the category from a prestigious perspective. And as our base of our business was in the fantasies business which is more of an opening price point high-unit velocity business, we’re trading in to more as a fine fragrance business as well as a higher in-body care business. As we go through these transitions, just like we did in direct, we know that we will take a step back as we take a step forward. We also know that the beauty characteristics are very exportable. We still believe in our beauty business. We still believe that there is growth in our beauty business, but it’s up to us to reformat this business to make it much more elevated, so it does have growth characteristics.

[Operator:]

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

[Janet Kloppenburg:]

Sharen, I wondered if you would talk about the bra category and the performance, obviously PINK we know had a great performance, but maybe the core bra and panty category performance for Victoria's Secret in the third quarter and your outlook in the fourth. I think you are launching a new bra. Just as a point of clarification, Stuart, could we expect that spread differential of, I think you said 2 to 3 points, is that something we should be factoring into our models for next year?

[Sharen Jester Turney:]

We’re very pleased with our Victoria's Secret launch of bra business, it was in the high low single digit growth over – between 8% and 10%. So very happy about that business. And when I think about our total bra category, both from a Victoria’s Secret array perspective, a PINK perspective and a sport perspective, we're seeing mid double digit growth, which is a very strong category. We’re excited about the bra launch that we’re bringing in December, this will the first time that we will have one. It was on in the fashion show. So we have a good track record in the bra business. We see growth in our core bra business. And we still believe that we have a lot of potential as we continue to segment that bra business going forward.

[Stuart Burgdoerfer:]

Janet, on the spread, the short answer to your question is yes. As Amie remarked, why we haven’t been realizing the spread year-to-date is due to the impact of the VSD apparel exit through the first three quarters of this year. We’re going to have that spread in the fourth quarter. And as you think about 2016, 2017, 2018, I would expect, we would expect that there will be the spread from square footage growth that we’ve been outlining.

[Leslie Wexner:]

If anybody has got a crystal ball about foreign currency, I’d love to call me offline, I’d love to know more about that.

[Operator:]

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

[Lindsay DruckerMann:]

It's great to see how insulated the business has been relative to some of the other challenges we've seen from your peers in the mall. I was curious if you could give us any perspective on whether you're seeing a difference across regions, across mall type? It does seem like consumer behavior shifted a little bit in the last few months, so I'm curious if there's any color you can add there on your business. And then Sharen, I was curious outside of the Angel Card relaunch, how are your promos in Victoria's Secret third quarter versus last year, were they consistent outside of that one launch? And as you think about the fourth quarter, how are you planning your promos versus prior year?

[Nicholas Coe:]

We’re not seeing any dramatic differences or demonstrable differences between either regionally and/or mall type. I think what we’re really, really focused on at the moment is continuing to try and keep the store looking as animated and interesting as possible so that we can continue to drive traffic. We’re very, very focused on best quality selling, we’re very focused on newness, we’re very focused on story-telling and that seems to be what’s helping insulates us from challenge in traffic. So in terms of are we seeing anything really different, I can’t say that we are either regionally and/or mall type.

[Sharen Jester Turney:]

In terms of the region or mall types, we’re really not seeing a big difference. There will be certain stores in certain regions depending on their penetration of beauty, but outside of that, there’s pretty much of a consistency. So we’re excited about that. As I’m thinking about the Angel Card relaunch in the margins that you’re talking about for the third quarter and the promotional activity, the promotional activity was not greater or we did not have more promotions this third quarter versus last year. The promotions we did actually were bigger and better. So we’re trying to get fewer but bigger and better, therefore driving traffic and efficiencies within the store. As I think about fourth quarter, right now we’re planning to have a few less promotions in the fourth quarter. We thought that we had too many last year. This year we also have a lot of contingencies in place just in case that we need to react to the business to keeping agility. So we’re looking forward to how this fourth quarter does play out.

[Operator:]

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

[John Morris:]

Sharen, question for you. We've talked a little bit about it thus far, the store training and incentive program. Can you give us a status update and the progression there, and what’s so far your learnings? And another part to this is, I think you and I had talked about how one of your initiatives is to get out of holiday a little bit faster this year and I'm wondering how that will play out in the quarter, and could that set you up a little bit better for Q1 when you have Valentine's Day coming?

[Sharen Jester Turney:]

As we think about, we’re so focused on, in terms of our selling organization, really about getting great experienced sales associates who really want to have careers with us. So as you know, we’re testing a lot of different programs, we’re really working on thinking about how to educate our people. Obviously, going into the holiday, we’re focused about making sure that we get all the holiday help that we need. So we are still focused on testing and learning at this point. We’re seeing past results of our effort, but there’s still so much for us to learn and we’ll continue to evolve along on this focus over the next 24 months. And we’re really going to get leverage out of the selling cost as we think about it and as we go into next spring and the fall season. In terms of the question about getting out of holiday earlier, this year, we’re actually pulling up our semi-annual sale, which will be a shift out of January into the last week of December. This will allow us now to really convert into spring, convert out of all of the – getting sale off the floor and really coming out strong with spring fresh merchandise and really wear now merchandise in terms of the transition. We’re excited about this strategy. And so there will be some puts and takes between the month of January and December.

[John Morris:]

But better set up I assume for the all important Valentine's Day period?

[Sharen Jester Turney:]

Absolutely.

[Operator:]

Your next question comes from the line of Christian Buss from Credit Suisse.

[Christian Buss:]

I was wondering if you could talk a little bit about your lean manufacturing initiatives and how much progress there is still to make there?

[Stuart Burgdoerfer:]

I’ll hand it generally and Sharen if you may want to elaborate further. So I think you’re referring to the work that we’ve been doing for now a number of years to reduce fundamentally our lead times and focus on speed. And as we talked about it, our read, react and chase capabilities, we've talked about it generally as sometimes we use the metaphor of a baseball game and I'd say we're in the middle to maybe the sixth inning or so. Again, Sharen and Nick may want to add to it, but it’s very important to our business in terms of a lever to increase full price selling and reduce markdowns. And we’ve made substantial progress across all of our businesses. There is some additional opportunity, but it’s been a very important focus for us now for three or four years and we’ve realized a lot of benefit from it. There is more yet to do, but we’re well into the opportunity. And again, Nick, Sharen, if you want to add to it, certainly feel free to do so.

[Nicholas Coe:]

Christian, it’s pretty much well leveraged at this point. It is fundamentally the way we do run the business and so really it’s incredibly well embedded. And so a lot of the energy really goes into our ability to make sure that we’re selecting the right types of products to be in that chase mode so that we can read and react and respond to customer behavior. But I would say it’s pretty well leveraged at this juncture.

[Sharen Jester Turney:]

I was just going to add from a Victoria's Secret perspective is that we still believe that there is more opportunity to be had. I think that how we do business, speed is just one way to do it. And as the world keeps changing, the opportunities keep changing for us to think about how to get faster and faster. And each and every one of our partners throughout the world are on this journey with us and it’s amazing how powerful these collaborations are when we think about the opportunities that we have. So I don’t think that from a Victoria's Secret perspective that we are totally leveraged yet and still have some opportunities as we go forward.

[Operator:]

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

[Brian Tunick:]

I guess, Stuart, first, you did talk about the BOW leverage potentially for next year. Curious on the SG&A side and where are we on the payroll investments, particularly at VS, and what are we lapping and maybe what new markets are we extending into? And then maybe for Stuart or Nick, maybe on the BBW EBIT margins, I think now you're poised for a mid-20%s operating margin this year. That's pretty incredible. So as we think about that business going forward and the remodels that you're initiating, what do you think is the right margin level for BBW?

[Stuart Burgdoerfer:]

Brian, I will take the first part of that. So on SG&A expense as a percent of sales, what our goal as a company is overtime and we’ve been pretty consistent in our thinking about this is to grow expenses slower than sales. You pointed out in your question we’ve talked about, you’re aware of the fact that we’re investing in a more highly-paid more productive sales associate in our business and that certainly is putting pressure on near-term results, but we’re also, in many cases, finding ways to at least partly offset some of those investments. And you should be sure that we’ll continue to look for ways to work to offset those investments. But as a general matter, we will be looking to hold SG&A rates flat or get slight leverage overtime. We referenced in our remarks a few weeks ago in the broader group that we’re also thinking about dollar growth versus rate expansion. And as you appreciate, there’s a lot of balance in that. And that certainly applies to the SG&A line as well. But as we sit here and knowing the minds that of Sharen, Nick, Martin, the other leaders in the business at the end of the day we will continue to make sure we’re making the right investments to grow our business, but also be top-minded about driving trade-offs to either fully fund or at least partly fund those investments. So that’s our state of mind there.

[Nicholas Coe:]

So I think I’d echo what Stuart was saying, so it’s an awful lot of energy in that for going into top line growth as opposed to further margin rate expansion. And we’re very, very focused on first quality selling. So a lot of investment will continue to go into products to make sure we’re innovative as possible. And obviously as we head into the fourth quarter, which is rather into November, December which is such a dynamic period, maybe naive to think there was more in that.

[Operator:]

Your next question comes from the line of Laura Champine from Cantor Fitzgerald.

[Laura Champine:]

Stuart, on the La Senza business, or maybe it's for Martin, what is your timeframe on turning that at least to breakeven and why strategically hold on to the business at this point, it somewhat obscures the health of your bigger businesses?

[Martin Waters:]

La Senza continues to be a work in progress, no doubt about that. But we’re pretty pleased with the progress we’ve made. We continue to see positive sales momentum in the business. We’re getting closer to the target customers, better assortments, more fashion on significantly tighter inventory. So that's all really good and really positive. We also see sales momentum in the business where we’re colocated with Victoria’s and PINK is really strong. So there’s a real relevance for that brand in the market place alongside the other two businesses that we own. The logic for keeping it I think is obvious and compelling. We own the number one, number two and number three lingerie brands in the world, having a value play underneath of Victoria’s makes a ton of strategic sense. And so we’re very committed to its future. But the one bogey we have on La Senza, of course, and we've referenced it a number of times in this call is the FX rate between the Canadian dollar and the US dollar that gives us a really, really significant headwind. But it is what it is. FX is outside of our control and we continue to get better to stay focused on the customer and really lean into this peak time of the year.

[Operator:]

Your next question comes from the line of Joan Payson from Barclays.

[Joan Payson:]

You've given us I think some good color around the investments that are going into the stores and the selling experience. I was hoping you could talk about whether there are any incremental investments coming up that you're putting into the direct and online businesses, particularly as you begin to lap some of the apparel reductions that you've been going through on the Victoria's Secret side?

[Sharen Jester Turney:]

Our investment in direct, number one, obviously we’re going to continue to focus on the core products. That’s going to be the main investment. The other piece of it is that we’re constantly investing and looking at our technology platforms to drive mobile, mobile continues to be a big part of our business. It continues to be the fastest growing piece of the business. So as we go forward and look at some of the investments that we’ll be making, it’s going to be made in terms of the technology that we need to help continue to drive this very, very powerful online business.

[Operator:]

Your next question comes from the line of Dorothy Lakner from Topeka Capital Markets.

[Dorothy Lakner:]

Wanted to go back a minute to the Canadian business and just overall, I guess, Martin your impressions of the consumer environment there overall and maybe Sharen and Nick can answer this as well, but just differences that you're seeing maybe in that environment versus the US, if you're seeing them.

[Martin Waters:]

I wouldn’t describe the difference in customer behavior particularly different in Canada than what we’re seeing in the rest of the US to be honest. On a day to day basis, the customer in the malls in Canada doesn’t think about FX rates. She [indiscernible] based on what the movement in currency is. I think it’s pretty much the way we see in the US. The one exception I'd draw out from a regional point of view that is a little different than the US is the West of Canada is significantly weaker. So impacted by the oil industry and oil prices particularly, we do see that the West has a weaker level of sales than we’re seeing elsewhere. I think that’s about it. I don’t know if the others have anything to add?

[Operator:]

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

[Roxanne Meyer:]

My question is on Victoria's Secret margins in 3Q. I'm just wondering how much the lower beauty business and FX impacted the segment margin and how should we think about each of these in Q4, particularly beauty, given that you're signaling that the business is probably going to be down and that mix shift probably will have an impact?

[Sharen Jester Turney:]

The majority of the margin was really about a third, a third in terms of if you're looking at the Angel recard launch, our FX from the Canadian business and then the shift in the beauty. I think that as we go forward and we look at fourth quarter, the beauty business is about 18% of the business in the fourth quarter. So I think hopefully that we have tried to architect the business in a way to help offset that. We feel that there is probably some opportunity in participating merchandise margin dollar improvement in Q4. But I think the margin rate will continue to be impacted mostly by the FX and the beauty business. So we are trying to look at that very carefully as we go forward. We still believe that the beauty business has opportunity to bounce back for us as we go forward into next year. So that’s where we really are as we think about our fourth quarter.

[Operator:]

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

[Anna Andreeva:]

A question to Stuart on inventories, the team has done such a great job managing a very tightly the 9% increase in the third quarter being a little bit higher than I think original guidance. Maybe talk about what drove that and what was the increase excluding the early receipts? And also just with the addition of debt to the balance sheet, is there a cash balance that the team talks about?

[Stuart Burgdoerfer:]

So on inventory, you’re referring to the balance sheet number and I understand why you do that and it’s up 9% year-on-year, it’s down 1% on a two-year basis, the balance sheet inventory and sales were up meaningfully over that period of time. We typically talk about and report on a monthly basis inventory per foot because we think that’s a relevant measure. And on that basis, inventory for the quarter ended up plus 7% and down 6% on a two-year basis. The bottom line is we think inventory is in great shape as I commented on in the prepared remarks. The early receipts had a couple of point impact on the inventory levels. And then what was the second part of your question? Sorry. As we think about minimum cash levels, I would say a range of $800 million to $1 billion in terms of starting the year, $800 million to $1 billion starting the year such that we wouldn’t need to use the revolver. We have a revolver, it’s a $1 billion revolver. We generally don’t use it. One could debate that, we obviously seek to manage the business conservatively. But in answering your question, $800 million to $1 billion with an assumption that we wouldn’t seek to use the revolver. That number has come up a little bit as our capital spending levels have come up over the last few years.

[Operator:]

Your next question comes from the line of Ike Boruchow from [Wells Fargo] (sic) Sterne, Agee.

[Ike Boruchow:]

I think this is a Stuart question, maybe a Nick question, but when we look to piggyback off Brian's BBW margin question, significantly more leverage in this quarter versus the first half of the year on the operating margin at BBW on the fairly similar comp. If I look last year it was kind of the same dynamic as well in terms of how much leverage there was in Q3. Is there anything special about Q3 in terms of why maybe there's more margin opportunity for the business the last two years, or anything this year just kind of curious about that?

[Stuart Burgdoerfer:]

I want to make two points about it; we’d want to make two points about it. Bath & Body over time and we’ve done this in the whole company over time, but Bath & Body particularly over time has done a great job improving margin rates, merchandise margin rates and managing expense levels with a lot of discipline. Some of that’s also reflected in the fact that we haven't invested a lot in the store fleet in terms of remodeling stores and so on. But the main point is Bath & Body has done a great job driving profit rates through discipline in their business and that’s a headline and a familiar one. Separately, a year ago, we did have a discrete unfavorable item and this year we had a small discrete favorable item that impacted the third quarter results a bit, just in terms of some uniqueness in the quarter.

[Operator:]

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

[Betty Chen:]

I was wondering if Martin you can talk a little bit more about the travel stores. You certainly referred some impact in the third quarter, any additional color you can give us on what you're seeing in that business and how we should think about it for Q4 and maybe 2016? And then my follow-up question is, as we continue to think about the brands making an emotional connection to the customer, how should we think about marketing dollars planned for the holiday season and perhaps next year as well?

[Martin Waters:]

The travel retail business continues to be very good business. It’s sophisticated customers around the world who have got money to spend, who have time on their hands, it’s just a terrific space to be in, particularly for beauty and accessories businesses. So we remain committed to it. I think Victoria’s is now the largest standalone retail operator of standalone stores in travel retail globally, which is terrific from a standing start in just a few years and we still see significant growth ahead of us. So we’re going to continue to open 30 or 40 more travel retail doors in 2016. Has there been a slowdown in the last three to six months, yes, there has, and I think that’s primarily driven by a couple of things. The world is not what it was, there is certainly more security challenges around the world than was probably the case this time last year. The Russian customers aren’t travelling to the extent that she was. The Chinese consumer has changed patterns of travel. So all of those things in the mix along with generally a bit of a malaise in travel retail driven by security concerns I think have taken the market down, the overall travel retail market down some probably mid single digit would be my guess. But overall the message is we are very, very happy with the business and we see it as very productive and strategically right place for us to operate.

[Nicholas Coe:]

I think the way we are really thinking about it is flat, but we’re also in a position if we see something exciting happening, we’ll be in a position to invest in that. I think the real focus for us in the fourth quarter though is really about agility and our ability to react to either customer behavior or market dynamics more importantly than we taking marketing up or down. But the message would be flat fundamentally.

[Sharen Jester Turney:]

As I think about it from a total mega brand perspective, we’ll be down a little bit in our marketing as we go into the fourth quarter and into spring.

[Operator:]

Your next question comes from the line of Simeon Siegel from Nomura Securities.

[Simeon Siegel:]

Maybe just to keep it in the family, if I can piggyback on Brian's other question, just Stuart given the VS stores deleverage despite that 7% comp, what would you expect the SG&A leverage point for stores to be next year? And then can you contextualize what percent of the store expenses are now fixed versus variable?

[Stuart Burgdoerfer:]

Simeon, there is a lot in that question. So in terms of the flex point on SG&A or store selling, it’s not actually static, it’s more dynamic. Really the only – at least in meaningful times of the year, important times of the year, the only fixed part of store payroll is the management complement, certainly in lower volume periods in the year, more of the payroll is fixed if you will. But again, we’ll be looking to grow expenses lower than sales as we move forward. We’re making investments in store selling, we’ll give you more guidance about 2016 when we give guidance in February for the coming year. But again, know that we’re looking to grow expenses lower than sales. And I know it’s handy or helpful to have a breakpoint, but I’m just being transparent with you, it’s not as simple as [indiscernible] because it’s more dynamic than that and we manage it in a more dynamic way than that.

[Operator:]

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

[Oliver Chen:]

As we look across holiday season for other retailers, a big theme is earlier promotions, the integration between online stores and buy online and pick up in store, as well as some degree of differences in the traffic patterns of the customers. I just wanted to get your highlights about how you're competing in that context and if you expect the holiday sales to be spread out, but I know you mentioned you're intensifying some of the marketing?

[Nicholas Coe:]

We’re not looking to go earlier or later. I think we want to be in a position to fundamentally follow last year’s pattern, but be in a position to react to the market and/or react to the customer in terms of the dynamics of that particular period. How that relates to the online channel, we’re pretty well integrated from a comparable product, comparable price, comparable promotion and that works really, really well for us. So we’ll leverage either channel depended upon what’s really going on in the market.

[Sharen Jester Turney:]

We over the last I would say four years, five years, have seen the patterns of holiday being changed. What you see is that there is a big Black Friday weekend and leading up to the – tranches down a little bit in the last two weeks gets stronger and then continue through past-Christmas. I think that having seen these patterns, we’ve been – we’re very well positioned in our thinking, in our programs, how we deliver in merchandise to take advantage of those changes in the patterns. We also have had much alignment and are still aligned within our direct channel as well as our store channel. We believe the engagement in social and how we are looking at using our social media this year will be very important. So I think that we’re ready and I think the most important thing is that you just never know. There is always something that comes up and surprises you. And because of our – trying to make that we stay as agile as we can with our contingencies and out thinking and how we’re going to operate the business in holiday, I think we’re prepared for those. You never know, there are always some surprises. But we’re not really starting earlier, I think we understand where the big days are and where the traffic is going to be and that’s what we’re focused on.

[Amie Preston:]

Thanks all of you for joining us today and we hope you all have a happy Thanksgiving.

[Operator:]

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