L Brands Q1'16 Earnings Conference Call: Full Transcript

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May 19, 2016 5:12pm   29 min read   Comments

Operator:

Good morning my name is Laurie and I will be your conference operator today. At this time I'd like to welcome everyone to the L Brands Inc
LB 0.06% (https://benzinga.com/stock/lb#NYSE) First 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:Chief Investor Relations Officer:

Thank you. Good morning everyone and welcome to L Brands first quarter earnings conference call for the period ending Saturday April 30,
2016. As you know we have released detail commentary last night which is available on our website. Given the shorter length of our call this
morning we will make some brief introductory comments in order allocate more time to your questions.

(https://pro.benzinga.com/?afmc=43)

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 first quarter earnings release, additional commentary and earnings presentation are all available on
our website lb.com. Stuart Burgdoerfer, EVP and CFO, Nick Coe, CEO, Bath & Body Works and Martin Waters, President of International are
all joining us today.

All the results that we discussed on the call today are adjusted results and exclude the 2016 pretax charge of $34.5 million or $0.07 per share
related to actions Victoria's Secret and the 2015 pretax gain of $78.1 million or $0.23 per share related to the sale of our remaining interest in
the third party apparel sourcing business.

Thanks and now I'll turn the call over to Stuart.

Stuart Burgdoerfer:Executive Vice President and Chief Financial Officer:

Thanks Amie and good afternoon everyone. Although we delivered first quarter results above our initial expectations we were not satisfied
with our overall results as adjusted operating income declined 4% compared to last year primarily driven by a decline by decline at Victoria's
Secret. We had a range of performance across the company in the first quarter with PINK and Bath & Body Works delivering strong results
and weaker performance at Victoria's Secret and BV.

From a macro perspective we did experience a deceleration in trend through the quarter, but we are focused on what we can control and we
have opportunities to improve our execution. It's important to note that we have made significant changes in the last couple of months at
Victoria's Secret making organizational and leadership changes, exiting merchandise categories, exiting nearly 300 people from the business
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and changing our promotional strategy. We are making these changes proactively from the position of strength and following a record fourth
quarter and 2015 for the brand.

Our revised outlook for 2016 will reflect the impact of the actions at Victoria's Secret as well as incremental cost related to our plan to develop
China as a company owned business. Our brands are strong and we are energies 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.

With that I will turn the discussion over to Nick.

Nicholas Coe:Chief Executive:

Thanks, Stuart. So I think the only comment I would add from then those when out last night is spend some fair amount of time in the stores
over the course of the past few weeks. So I will comments on those observations and firstly, we remain pleased with the traffic and the
energy that we are seeing in the stores. Secondly, we are specifically keeping customers pretty engaged through the newness in the
compelling stories that we're telling which is really important for us when you think about the destination brands so we really need to continue
to keep engaged.

Thirdly, for the most part pretty pleased with customers response to publics and assortments and our collection. I think we can do better but
pretty happy from that perspective. As it relates to speed really pleased with our ability to have been able to leverage the speed model into
our ability to chase in the home business and that's been important for us not only because it's the most difficult business to chase into but
also because it's a very, very healthy business for us.

We're pretty pleased in terms of what we're seeing from the real estate investments and the type of return that we giving back. So again
we've relatively pleased with what's happening then we will continue to monitor that and read and react as we would. And then finally, as we
see the market place remains pretty dynamic we will continue to leverage our most important discipline which is really promotional things as
close as we can for the customers and then reading and reacting to her behavior.

I will turn it over to Martin.

Martin Waters:President, L Brands International:

Thanks Nick. Good morning everybody. As you would expect I have been spending quiet a lot of time in China recently which we will now for
sure is company owned. Although, it still much to do I am really enthused about the teams that we put together for China and the progress
that we've made in readiness for the launch of our full assortment stores at the end of this year and also our direct to consumer business
which will open later to this year in China.

I am also very focused on growing our existing businesses in the UK which is been good and in the Middle East which is been tough recently
as well as on improving performance in the VSBA business. All in all I feel good about our prospects for growth and of course remain focused
on the fundamentals we see that. Great execution of our brands wherever we go in the world.

Amie Preston:

Thanks, Martin. That concludes our prepared comments this morning and at this time we will be happy to take your questions. Please as a
reminder so that we can get to as many of you as we can please only ask one question and Laurie I will turn it back over to you.
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Question & Answer

Operator:

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

Christina Bradley:JPMorgan:

Hi it's Christina Bradley on for Matt impart to here a question just what the goal of roughly seeing the product apparel merchandise can you
just walk through some of the puts and takes of exiting that those businesses on this year and then any touch your that you are expecting in
the SG&A reduction that will be helpful.

Amie Preston:

Thanks, Christina and we will go to Stuarts.

Stuart Burgdoerfer:

Sure I mean the rationale first of all for the category exists is to focus our energy at all levels of the business or resources at all levels of the
business on our most significant core categories bras, panties, beauty in the Victoria's Secret business and we made a conclusion came to a
conclusion that the win business was not one of those core categories that it has been a flattish business for the last several years many
years and we are putting our energy against those core categories to accelerate growth in bras, panties and beauty. It is going to put some
pressure on the business along with some of the promotional changes that we are making less direct mail couponing et cetera.

But as you outlined in your question we have some expense savings that we have auctioned as well including the elimination of catalogue
spend and a meaningful reduction in our home office overhead which impart offsets the sales and profit pressure from the category exists
and the impact of the promotional changes that we're implementing. But at the end of the day as outlined in our commentary that we seen
our last night and the brief remarks we made this morning. We are making these changes from our positioning strength to accelerate growth
in this core categories and there'll be some short term financial pressures outlined in our guidance both for Q2 and the full year. But we'll than
work hard to beat that guidance as you would imagine and we are absolutely confident that these changes are the right thing to do for the
long term help VictoriasSecret and again to accelerate growth in that business.

Amie Preston:

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And Christin I just want to clarify something in your question you said we were exiting athletic apparel that's actually what we are exiting is the
payroll that we are now selling in the direct channel that is not carried in the stores that it seems like t-shirts, sweaters, boots, for example. So
we are still very focused on growing our sports and athletic business.

Christina Bradley:

I missed those I think I was trying to say are you replacing that athletic apparel or building that or replacing with more additional athletic
apparel?

Nicholas Coe:

Yes again we are not exiting athletic apparel. Just to be very, we are not exiting athletic apparel. Believe strongly in the sport category our
primary focus in that categories in sport bras, but we sell lot of sport pants and related sport merchandised and we have strong believe in that
category and we are realizing good sales growth in that business so we are exiting non-athletic apparel VictoriasSecret direct that's not
carried in the store.

Amie Preston:

Great. Thanks. Next question please.

Operator:

Your next question comes from the line of Brian Tunick of RBC Capital Market. Your line is open.

Brian Tunick:RBC Capital Market:

Thanks. Good morning everyone. I guess two questions, one I guess Stuart do you view 2016 being the resetting year or do you think there
is potential more pressure in 2017. I guess do you think you can grow earnings again next year and then the second question really is on the
expected traffic impact on pulling back from these promos you mentioned macro a lot in the script and just wondering what's going on in the
core laundry business yet you feel confident you can pull back on some of these promos and still drive improving comps.

Stuart Burgdoerfer:

So Brian I appreciate you are asking the question about kind of 2016 a reset year and then how do we think about 2017. One of things I love
about working for our company and less point of view most significantly but the leadership team our point of view is that while we reset
guidance and I am not all three in that guidance in mind set. This is in reset here at all.

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So we are going to have some challenge in the near term and we have done our best to outline that in our guidance. But I'll will tell you
starting at the top with some acknowledgement of short-term pressure we are going to work very hard to exceed that guidance and in no way
we have in our mind that 2016 is kind of reset year with no growth again the guidance is the guidance but you should known us for long time
our mindset we are going to work very hard to drive great experiences for customers very strong sales growth and resulting profit growth I am
glad you ask the question and obviously from that expecting very good 2016 after some short term pressure again the guidance is the
guidance and then certainly expect a very very good 2017. So good question. With respect to Brian to the traffic generated from direct mail
couponing we're working hard to replace that volume and that profit and again we're doing it for reasons that I think you appreciate from our
earlier remarks in terms of doing promotion that drives trail in key categories.

And at the end of the day it's healthier we believe for the business. But in the short term it's challenge but we're doing a lot of things in terms
of test and rolling different ideas to ensure that we had healthy traffic and good sales results and that will be week to week, month to month
exercise but it's been very actively work on Mondays and Tuesdays every week and with good test and learning and adjustment. Again
another thing really enjoyed about the company and respect about the company is that we test, we read, we react, we are agile in our
thinking and in our execution and it's more dynamic right now than typical no doubt about that. But I'm confident that will read and react and
adjust appropriately.

Amie Preston:

Thanks, Stuart and thanks Brain. Next question please.

Operator:

Your next question is from Richard Jaffe of Stifel, Nicolaus. Your line is open.

Richard Jaffe:Stifel Nicolaus:

Thanks very much. I guess two part question the loss sales you described a $525 million. Could you just give us a sense of how that will
breakout apparel in shoes some the direct channels and the swimwear from both direct and store. So the impact on stores versus direct and
then if you could just comment how this is different from 2014 when you consolidated the store with the catalogue and eliminated a number of
merchandise categories at that time? Thank you.

Martin Waters:

So the biggest component of that Richard thanks for the question is thus when business and it restores our mixes higher to the direct channel
versus the stores channel.

The apparel that we are exiting and we've commented on early in the call that was solely indirect and the swim business was larger in the
direct channel than in the store channel I will not going to go deep on numbers but directionally that would be the way to think about it and
that's our trend. Is there a second part of this questions.

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Amie Preston:

Yes. How is it different from 20..

Martin Waters:

Thank you. So what's different about this versus the earlier exits Richard is that truly now with these changes we will only sell merchandise in
the direct channel that sold in the store. And while we made important exits as we all remember earlier we still had merchandise styles and
categories that we are sold online that weren't sold in the store and with this set of changes the offering will be truly the same online as it is in
stores and part of that frankly is to drive to take out complexity and simplify the business and focus of the business but that's how it
characterized.

Amie Preston:

Thank you. Next question please.

Operator:

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

Kimberly Greenberger:Morgan Stanley:

Great, thanks so much. Stuart my question is on inventory here is the end of the third quarter I think you said about 3% at retail and I think
you got it in a single digit growth at the end of Q2. It seems a touch higher then your inventories been running I am wondering if you can
comment are there is some pockets about that inventory here in the first half of the year that you think you need to work during the second
half and sort of medium to longer term what sort of inventory growth rate do you think is appropriate for the business? Thanks.

Stuart Burgdoerfer:

So I thinking about inventory and inventory discipline hasn't change and I am not saying that because it's convenient it just hasn't change.
With that said we are experiencing some short term sales pressure for the reasons described in the context of sales of Kimberly it's going to
be up mid single as we outlined.

In terms of any significant pockets of inventory that we are concerned about I am not we are not and we were very focused on ending spring
season clean and at the right levels and that's requiring some pretty intensive energy right now. But it's a discipline that's very important to us
and while mid singles are little ahead of sales certainly not dramatically ahead of sales and we are working it actively to get to that result. But
again not intending to have any significant pockets of inventory in the business that we won't have dealt with through this semiannual sale
activity as we wrap up the spring season.

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Kimberly Greenberger:

Thanks Stuart.

Amie Preston:

Thanks Kimberly. Next question.

Operator:

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

Dana Telsey:Telsey Advisory Group:

Good morning everyone. As you think about VictoriasSecret business and the people and product changes. How do you think about the
guide post of how that business changes go forward with it's new product introduction. How are you thinking about integrating loyalty and
what is this mean for the long term top line growth for the business? Thank you.

Stuart Burgdoerfer:

Yes I mean Dana what it's a risk of being repetitious which certainly not intend to be we're making important changes to the business. So Just
again step back and then effort to respond your question. We think that reorganizing the business into three units Victoria's Secret launch
Victoria's Secret PINK and Victoria's Secret beauty each of which have the stores and direct activity under common leadership for those
three businesses.

We think that's an important change in organization that will simplify and focus the business on those three broad categories. In terms of
guide post or objectives the purpose of all of it is to ensure that we are focused and to accelerate growth in core categories. Obviously PINK
has been our strongest performing business over the last several years and that sales trend that sales performance has continued in 2016.
Beauty has been the weakest of the three businesses and as we shared in our commentary a new leader joining the business at the
beginning of this month it will take some time logical question we get asked to understandably within and outside of businesses how long will
it take to substantially improve the trend of that business and it is a bit longer and lead time and cycle and approach development activities.

Then some of our categories but with new leadership and again the focus through the organizational changes I mentioned certainly optimistic
that we will see improvement in trend there and then longer rate business the core of the core in terms of bras and panty's a new leader
coming in at the beginning of September with various substantial experience and existing strong leadership team. So an additional resource
in leadership leader coming in to strengthen in that team, but coming from the good base and again optimistic through these changes that it
will accelerate growth in all of the measures whether its customers satisfactions, sales growth, margin improvement, inventory turn those are
all of the things that will be driving towards.

Dana Telsey:
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Thank you.

Amie Preston:

Thanks, Dana. Next question please.

Operator:

Your next question is from Betty Chen of Mizuho Securities. You line is open.

Betty Chen:Mizuho Securities:

Thank you. Good morning. I would wondering if you can talk a little bit about the thinking behind China making it company owned versus
franchise and for over the timing right now and kind of when we can expect some contribution from that business I know there is always 26
stores. Thanks.

Amie Preston:

Thanks, Betty, we will go to Martin for that.

Martin Waters:

Hi, Betty, thanks for the question. Yes, China is obviously a massively important market for us. We've been very engaged in the last 12
months with our partner who is done a terrific job really they did a great job and standing up some 26 stores VSBA stores. But as we look
forward and we think about the share scale and opportunities in market and we combined that with the complexity the intrinsic complexity that
there is in China particularly on regulatory affairs around how we build our stores, how we operate those stores.

It seems to me that we will going to be doing most of the heavy lifting anyway and make sense that we should be in it completely. So when
can you expect it should start to make a contribution while the sales contribution will start at the very end of this year. From a profit point of
view, I don't really know our experience in the UK it takes 2 to 3 years to get a business from investment phase to the phase and it really
depends on amount of time that we take to build it. Our goal there is to be in it for very long term rather than to take short term team
guidance.

Hope that gives you some insight.

Betty Chen:

Martin do you see that the customer behaving any differently than you've seen in the US or elsewhere?
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Martin Waters:

Well the business that we've got right now is to beauty business and that performs remarkably similarly through the rest of the business
globally. One of the near tricks about the VSBA business is that it's a replication model of what we do here and the sales patters that we see
a very broadly similar everywhere. To the extent that larger we different level the only thing know and find that at the end of the year when we
open the stores and you'll be first to call me.

Betty Chen:

Okay great. Thank you. Best of luck.

Amie Preston:

Thanks, Betty. Next question please.

Operator:

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

Paul Trussell:Deutsche Bank:

Hi. Good morning. Just wanted to ask a question regarding the catalogue you mentioned that you have a tested over the past year reducing
the distribution and may be you can just give us a little bit more inside on the results of that test and thoughts overall around catalogue
impact. And then just secondly, with the sales guidance adjustments that was made to flattish comps can you just speak more specifically
about where that down take occurred is this simply a slowdown expected across each of the banners equally or to what extend is this more of
a beauty based step down laundry etcetera.

Stuart Burgdoerfer:

Great. Okay so with respect to catalogue we didn't test the elimination catalogue into significant markets for a year and saw a relatively small
to no impact on sales. And if one does simple math on it need to get a lot sales a meaningful amount of sales to pay for the catalogue and
round numbers. We were spending $125 to $150 million a year on the catalogue and we ran it again for a year and two significant markets
and didn't see a significant change in sales.

Separately I think importantly for the whole business in the fourth quarter 2015, we reduced our catalogue activity by normally 40% and
demand in the direct channel was up if I remember right about 15%. So both based on two markets that we tested in and significant reduction
in activity in our fourth quarter last year for the whole business it made us confident that while there might be some sales pressure certainly

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from an operating income standpoint meaning to the pay for itself on basis we felt that this was an appropriate change to make in our
business.

Importantly one of things that we try do as we say if we were starting this business today in current context 2016 would you start with the one
of your major ideas being a catalogue a paper base catalogue send through the mail as one of your key if not your key marketing activity for
a global brand and as we thought about it in that way along with the numerical test and financial evaluation very comfortable with change that
we have made.

Separately with respect to your second question on sales guidance and the reduction in comp guidance I am glad to ask. It's important to
know that as we outlined in our overall remarks that we have a range of performance in our business. So in terms of the sales reduction we
haven't change our assumptions about that and body works at all that and body works grew operating income 15% in the first quarter there
will be some occupancy pressure in that business in the later half of the year connection with the remodel activity for the White Barn and Bath
and Body remodels but Bath's and Bodies running a very good business.

As we also outlined the PINK business very strong. So I wouldn't want outside analysts or investors to think that L Brands has a broad based
concerned about sales trends, we actually have important parts of our business most notably Bath and Body works and PINK that are doing
very-very well and we have got some pressure in other parts of our business impart due to changes that we are making in terms of category
exits and reduction and promotional activity but some weakness in the beauty business that we have been experiencing now for some time
so a range of performance overall yes we have taken our numbers down but it's due to very specific things in only certain portions of our
business. Thank you.

Amie Preston:

Thanks Stuart. Next question please.

Operator:

Your next question is from Anne-Charlotte Windal of SC Bernstein. Your line is opened.

Anne-Charlotte Windal:SC Bernstein:

Good morning. Thank you. Two questions if I may. So the first one is a big picture question thinking a long term view what does business
looks like five years down the road so what's the contribution from PINK, luxury, beauty, sports and why would you like this business to be in
terms of operating margin and then I was wondering if you could also give us a little bit more detail on the impact from the category exist.

So if you could help us thinks to the seasonality of the $125 billion business that's you're exiting what's the cadence of the exists and the
expected impact to the comps in the back half of this year and then through fiscal '17 as well? Thank you.

Stuart Burgdoerfer:

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Okay. So in terms of what the Victoria's secret business looks like and aggregate and like major component five years for now and as
mindset and in terms of goals that we aspire to on our business in many periods we accomplished we're looking to growth the top-line sales
in major parts of our business. On the low side at 5% per year and on the high side when we're really doing well 10% to 15% per year. So in
terms of what we are trying to get done top-line wise over the next five years it would be growth ranging from 5% to 15% depending upon
category and frankly how well we execute.

In term of the operating income rate for the Victoria's Secret business this is one of the best brands in the world and from that brand, equity,
emotional content, leadership position when we execute really well we add pricing power. We deliver a motion, great customer experiences
differentiated from competition and that creates pricing power which ultimately creates productivity and margin. And so with that belief and we
got work hard to continue that leadership position. We believe the operating income rate for Victoria's Secret should absolutely be high teams
it's not 20% when we think about our own history and the best in world.

So hopefully that gives you some sense of our thinking and what our goals are over the next five years.

In terms of the exits and their seasonality, that we will sell through the swim that we have with the swim suit business that we have in stores
in the spring season and to the extent that we have some swim inventory remaining after spring we will sell that through in the fall season
2016 and the direct channel that's our current thinking in our current plan. With respect to the apparel exit again that's mostly our solely I
should say in the direct channel and we will sell that both in the spring season and to some extent into the fall season.

So we are looking to particularly in the store size of business move through the inventory this is about swim at pretty reasonable pace to
simplify store level execution and frankly to free up space for other categories like core bras and sport and other things. But we won't be as
urgent with respect to the swim and non-go forward apparel exit and direct because it doesn't create the same kind of complexity from an
operational standpoint in that channel. So in terms of dollar rising that by quarter it's going to be more dynamic, but hopefully that's helpful to
you in an overall modeling sense.

Anne-Charlotte Windal:

Okay. Thank you.

Amie Preston:

Thanks. Next question please.

Operator:

Your next question is from the Lorraine Hutchinson of Bank of America. Your line is open.

Lorraine Hutchinson:Bank of America:

Thank you, good morning. Stuart the comments around the catalogue testing are very helpful. Can you provide any color around what you
have done to test cutting the promotional cadence and what results you have seen there and then what portion of the $525 million of
discontinued categories will hit revenues this year versus next?
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Stuart Burgdoerfer:

Yes. With respect to the change in promotion and testing of that we have pretty reasonable measurement of attached sales in view of
incremental sales related to our historic promotions meaning we have pretty good analytics around what we got from that activity historically
and what we're doing now as I think you appreciate is where looking to replace that activity which was we called customer relationship
management what it really was coupening through the mail in many respects and we're looking to substitute that with various category level
promotions in particular that drives trial of key categories. That activity and the results from that new activity are being evaluated every week
and so that will done and while the nature of the offers that we utilize through traffic mail which most typically were a 3 penny and $10 of a
bra we have concluded that A; we have been running that for a long time. B a lot of customers and go their 3 penny and didn't buy anything
else and so if we think there is a cleaver way smarter way to drive traffic that's help us more healthy for the brand the details of that are being
literally work every week including tax of key promotional ideas in the business.

So hopefully that gives you some senses it would be easy to return the prior approach and we know what is worked that we have a pretty
good sense of what's important here is we're making important changes in the promotional approach to the business for the long-term health
of the business. Wouldn't be hard to turn that st

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