L Brands Q1'16 Earnings Conference Call: Full Transcript

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 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. 

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 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.

 

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:

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. 

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. 

 

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. 

 

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:

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?

 

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 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:

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?

 

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 stuff back on in our collective judgment the right thing to do for this business is that have smarter ideas about driving trial and driving traffic versus get a free penny and $10 of a bra. 

 

Amie Preston:

And we are not trying to help a little bit with that $525 million of exited sales so I say this is very big picture high level but about two thirds of that is swim and the remainder is apparel. As you can expect we typically sale most of our swim business in the first half of the year and we still have that product that we're selling through this year so that impact will be more fully felt in 2017. The apparel business we are winding that pamp through this year so we will see some of that impact in the back half of this year and then the remainder in the first half of next year. 

 

Stuart Burgdoerfer:

And Amie is outlining is particularly on the sales stand point. There will be some margin pressure in 2016 and it's contemplated in our guidance. Some margin pressure in '16 margin rate pressure related to the exit activity that would talk. 

 

Lorraine Hutchinson:

Thank you. 

 

Amie Preston:

Thanks. Next question please. 

 

Operator:

Your next question is from Omar Saad of Evercore ISI. Your line is open. 

 

Omar Saad:ISI Group:

Good morning. Thanks for taking my question. I was hoping maybe you could dive in a little bit more detail around the VictoriasSecret launch category what's going on there especially in bras I am wondering if you could specifically address the power trend that's coming up significant lower price point or maybe higher units any greater details around the category outside of Macro would be helpful and where you thinking opportunity improve it as. Thanks. 

 

Amie Preston:

Yes Omar thanks. So first of all our total raw business loungewear PINK and sports store and direct grew in the first quarter. So in aggregate all types of bras across those channels had positive sales growth, high low single-digits right in the first quarter. 

There are clearly some trends in the business including the trend that you mentioned I think is well known and being well covered and we are participating in that trend in a big way as you would expect a market leader or the market leader to do. And frankly that's there is nothing new about that and we are in a business that has different fashion trends from time-to-time and hopefully in most cases we are leading those trends or certainly taking good advantage of those trends and things like sports bras or bra we think we are participating well with respect to those trends. 

So again total bra business including PINK up certainly some changes in trend that you comment on that we're participating in and we are not satisfied with a broad business that's we want to grow faster than that and particularly in the core launch array part of it and it's not sick business, but it's not growing at the rate we want and if so core of this business that imparts while we are making some of the organizational and leadership changes that we talk about.

 

Omar Saad:

Thanks.

 

Amie Preston:

Thanks, Omar. Next question please.

 

Operator:

Your next question is from Anna Andreeva of Oppenheimer. Your line is open.

 

Anna Andreeva:Oppenheimer:

Great, thanks so much, good morning guys. I guess the question to Stuart on SG&A an increase in the guidance for the year from previous for flat. I guess help us reconcile that despite the additional savings from catalogues and headcounts reductions and should we expect additional SG&A opportunity into '17? Thanks.

 

Martin Waters:

The SG&A guidance is expressed on a rate basis, on a percent of sales basis and what you are noticing in the change is the effect of us lowering our sales assumptions. So on a dollar basis not a meaningful change from the view that we had around the three months ago. We will continue to mind for expense opportunities as we have outlined we've reduced the home office at Victoria's Secret in a meaningful way and by the way tough thing to do as a business leader and as a business people. But from time to time we make difficult decisions for the long term health of the business that would be an example of one of them. 

But we will continue to be tough minded about expenses and again the change you are seeing in the guidance is largely about the change in sales assumption versus the change in expense assumptions.

 

Amie Preston:

And on it just to clarify one thing in your question so catalogue cost actually you are buying an occupancy and therefore you will see that it has the reduction to SG&A. Next question please.

 

Operator:

Your next question is from Lyndsay Drucker Mann of Goldman Sachs. Your line is opened.

 

Lyndsay Drucker Mann:Goldman Sachs:

Thanks. Good morning everyone. I wanted to clarify to the degree that you've decided to get little bit of the bunch of different types of promotions and then we will figure out other that are high quality ways to engage the consumer going forward. Was the elimination of those specific promotions did that happen completely in May or as we think about balance of year is there maybe sort of a gradual step forward process where the headwind from reduced promos intensifies as we get deeper into the year and then maybe just to tack on the second one on a different angle just given your high level view of the world I was hoping Stuart maybe you could run some perspective on what you think might be going on with the consumer right now? Thanks

 

Stuart Burgdoerfer:

So with respect to the promotional changes and particularly that direct mail promotions that we have changed we came to a conclusion about that or decision about that in late March which we implemented beginning in April but as you would appreciate Lyndsay the specific activity that were lapping or anniversarying from last year various by month and there is a meaningful amount of activity in May of 2015 that were lapping and again it does vary some by month. 

So didn't see a lot of thoughts on but not a lot of impact in April we'll see more in May. The other thing going on was may there is a Memorial Day shift that affects comp we think between one and two points as well. But that would be the color on the timing of our decision around the direct mail pullback and again the impact will vary by month and then with respect to a big picture view the consumer Nick could comment on that from Bath & Body and it's actions better then mine. So just go on

 

Nicholas Coe:

Hey Lindsay. I think she is behaving pretty consistently actually in an oddway I think she continues to wants to be excited I think she continues to want to have a story or a compelling story tells to her even though she remains value oriented but if she sees something that she like saw if she is engaged clearly that value price fluctuates and we can see it in both ways we see it fluctuates a really informed when the compelling story isn't told but we can also see it become significantly less important when the products is good. 

So from that perspective I think it's actually pretty consistent behavior there is a lot of talk about where is the customer what she doing but from our perspective I think it's a pretty consistent story and I think that also ties itself to traffic where we've been which seen pretty consistent levels of traffic. Now we have to work very hard to maintain the traffic given the more access but my overall point of view is the traffic is there we're working hard together and has behavior is consistent at the end of the day when big period happens big time frames such as Mother's Day she is still coming on she stills want's participate so kind of that's my overall point of view in terms of so the macro level what's going on with the customer.

 

Lyndsay Drucker Mann:

Is there any differences as you said differences by region or multi?

 

Stuart Burgdoerfer:

No not dramatic differences is very difficult by region because regions come up regions go down regions come up on aggregate that seems to be about okay obviously some better that other mile and we have a very broad mix because we are adjust in core moles we are also in stretch power centers sometimes we see a mix different mixes mix as it relates to products by model, but in general it's we have been pleased with of consistency. 

 

Martin Waters:

Lindsay just to add on. It really goes with the point we are trying to make which is we had a wide range of performance in our business Bath & Body had very good quarter in all metrics, all measures. PINK had a very good quarter and business and so we are not sensing some broad based issue, but rather specific execution opportunities which were proactively getting after. But we are not as remind that there is some major or macro phenomenon going on that's impacting all of our businesses because we have a wide range of performance including some very good in the quarter. 

 

Amie Preston:

So thanks Lindsay we have a board meeting unfortunately that is starting and I apologizing that we are going to leave many of you probably in the queue but we will take one last question. 

 

Operator:

Your next question comes from the line of Michael Binetti from UBS. Please go ahead. 

 

Michael Binetti:UBS:

Thanks for squeezing me in here and thanks for the detail obviously. Just two questions really quickly on the guidance can you help me think about few of the changes particularly the we are think about the low teens reduction in the free cash flow for the year, the CapEx didn't change and I think back into the net income it looks the changes base mostly on net income. Is that fair is there anything to think about related to working capital any change in the working capital profile of some of the business new businesses that you are getting into?

 

Stuart Burgdoerfer:

Short answer is no. No major changes. The change in free cash flow which again remains very healthy as related to the adjustment in the income. 

 

Michael Binetti:

And then could you just give me one thought on you mentioned that you are selling in store and online what being sold in stores and that's little bit different than what some of the other retailers in this space have been saying it seems like it's been more elaborating for other people to say we can offer a wider array of product online and we do in stores give any thoughts your on what's might be different for your business versus what we have heard in some other areas in this sector?

 

Stuart Burgdoerfer:

Yes. We just believe that focus is so fundamental to what we do. It's starts with the beginning of this business more then 50 years ago which has as specialty retailer being extraordinarily good at very few things and while it's attempting and we were attempted by it that you can sell lot of things online and you can do so in some respects more efficiently than in stores. We believe that the power and advantage of focus and the consistency between channels for out ways the increment that pick up by adding categories online.

 

Amie Preston:

Yes. Nick any thoughts there. 

 

Nicholas Coe:

Yes. Hi, Michael. I think at the end of day we are trying to really achieve is that at the really seamless customers experience so the brand stands for the same thing for store whether online and the benefit that we get from that just from brand perspective the alignment to same product, same price, same performance some cadence, messaging really drives terrific efficiency and it doesn't confuse the customers. So I think it's win-win on both sides when we get very-very good alignment to both the marketing message the brand message and the product message.

 

Michael Binetti:

Thanks a lot. 

 

Amie Preston:

Thanks everyone for joining us this morning and we appreciate you interest in L Brand.

 

Operator:

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

Posted In: EarningsNews
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