- Sales growth was diversified and driven by strength in bras and spring merchandise such as dresses and swimwear. Direct saw increases to last year in almost every merchandise category.
- In sales recovered from the fall of 2007, Direct experienced remarkable growth in the client file. The company generated double-digit growth across the board, with a particular strength in the top-tier customer level.
- Operating income dollars were up to last year, and the operating income rate decreased as a percent of sales. The rate decline was driven by a decrease in the gross margin rate partly offset by SG&A expense leverage. The decline in the gross margin rate was a result of increased markdowns to clear the holiday seasonal product and increased costs related to the DC stabilization. That said, the results of the Direct clearance strategy exceeded expectations and led to inventory levels being down to last year.
Comparable store sales at Bath & Body Works were down 11% versus a 5% increase last year.
- Total sales were down 5% or $23 million versus last year. The 6% spread between comparable store sales and total sales represents sales from new stores. Sales were below expectations driven by continued softness in store traffic.
- Despite the first quarter sales decrease to last year, the gross margin rate increased versus last year, driven by an increase in merchandise margin rate partially offset by deleveraging of fixed buying and occupancy fee expenses.
- The increase in merchandise margin rate was primarily driven by improved end-to-end inventory management as promotional levels were consistent with last year. Consistent with prior quarters, the company continues to experience deleveraging of fixed buying and occupancy expenses associated with store real estate activity.
- SG&A expenses were flat to last year on a dollar basis due to aggressive expense management, but deleveraged on a rate basis due to negative comparable store sale trends.
Operating income versus last year declined $5 million to a loss of $6 million. Profit rate was down 120 basis points to last year, primarily driven by the expense rate deleverages on declining sales.
- Performance of ecommerce business met expectations.
Second Quarter 2008 Outlook
- The company expects second quarter earnings per share of between 16 cents per share and 20 cents per share versus last year''s adjusted 20 cents per share result. Comparable store sales will be down in the mid to high single digit range on top of last year''s positive 1 comparable store sales excluding apparel.
- Gross margin rate will be flat. Consistent with the first quarter, the apparel divestiture, including the recognition of mass sales to Express and Limited stores, resulted in a negative impact to the second quarter gross margin rate. The company expects merchandise margin rates to improve at both Victoria''s Secret stores and Bath & Body Works.
- The company estimates that the SG&A rate will improve in the second quarter, driven by the impact of the apparel divestiture, including the recognition of mass sales to Express and Limited stores.
- Inventory levels in the second quarter will continue to be down to last year, although the rate of decline will moderate as the company laps last year''s decreases. The company expects to end the spring season with retail inventories per square foot down in the mid to high teens.
Fiscal 2008 Outlook
- The company is projecting earnings per share of $1.38 to $1.58 excluding the 18 cnets of onetime items in the first quarter.
- The company has revised full year comparable store sales guidance from flat to down low single digits, reflecting the current challenging top line trends of the business. However, consistent with the first quarter results, the company is working hard to maximize opportunities with respect to merchandise margins, and continues to aggressively manage expenses.
- Therefore, for the full year versus last year''s adjusted $1.21 earnings per share result, the company expecst an improved gross margin rate driven by improved merchandise margins at both brand segments and an improvement in the SG&A rate.
- The impact of the apparel divestiture drives a negative impact to the full year gross margin rate and a favorable impact on the SG&A rate.
- The company is projecting 2008 capital expenditures to be about $60 million below previous estimate or between $515 and $540 million. Total capital expenditures will be down more than $200 million from the 2007 actual.
- The company expects net square footage growth at Victoria''s Secret of about 7% versus prior estimate of 8%. About 60% of the gross square footage increase is driven by the opening of 43 new stores, and the remainder is the result of 66 remodels. The new stores, which generate strong returns, are primarily located in specialty centers and are an average size of 6,700 selling square feet.
- The company plans to open four additional Victoria''s Secret clearance stores, which will bring the total to six. These stores are located in the best outlet centers and provide an additional means of clearing excess inventory.
- Of the 66 expansions, about 80% of those are located in top malls, and over 80% are occurring at least expiration. It is important to note that these stores are highly productive, with sales per square foot roughly 25% higher than the balance of stores in top malls. Because they are at the end of their lease terms, they are also earning higher returns on sales. Investing in these stores to remodel to the current store design and to expand and to create the capacity for current and future category growth such as Pink, Beauty, Sport and Accessories, is the right thing to do for the long-term benefit of the brand.
- In 2007, the company expanded 112 stores by roughly 50%. While initially the company was seeing an incremental sales growth from these stores of roughly 30%, that has since declined to just under 20%, consistent with the overall decrease in the total business. The projected investment returns continue to exceed hurdle rates. Real estate activity will drive operating income dollar growth in 2008, but also will reduce operating margin rates in the near term.
- At Bath & Body Works, the company estimates net square footage growth in 2008 of about 4% versus previous estimate of 5%. Ninety percent of the incremental growth in square footage is driven by the opening of 84 new stores. Over a third of these stores are located in power strip centers, about a quarter are in specialty centers, and another quarter are in outlet centers. As with Victoria''s, these new stores generate high returns.
- The company plans to remodel 75 Bath & Body Works stores which are primarily located in top malls. Over 90% of the remodels are occurring at lease expiration. The majority of these stores are being remodeled to the newer design. The average size of the remodeled stores will increase by about 300 selling square feet or 14%.
- Square footage growth in Canada is expected to increase by 15%, primarily through the opening of 19 new La Senza locations and 6 Bath & Body Works stores.
Key questions from the first quarter earnings call conducted by Limited Brands, Inc. on May 22, 2008.
Paul Alexander (Merrill Lynch): Could you give color on the rationale behind the decision to slow store growth, and how much is that related to the economy or other factors?
Stuart Burgdoerfer: What we are trying to balance is, as, was laid out now a year and a half to two years ago, we do have a strategy to grow square footage in the United States based on our view of the sales, the profits, the return potential associated with that square footage growth. With that said, we are aware and mindful of the general economic trends, and we are, as we talked about in prior calls, closely monitoring the results of the activity that we are investing in, so specifically around expansions for the most part but also new stores. And so it is about balancing risk, risk taking, considering the trend in the business and the environment that we are doing business in. we are trying to strike the right balance.
Brian Tunick (J.P. Morgan): How do you think about growing Pink versus the core foundation business?
Sharen Turney: Success would look like both businesses have great growth. The core continues to have growth, and speaking about the Pink business, what we are looking at is expanded square footage. As we take our stores from 6,000 to 7,000 square feet to 10,000 to 12,000 square feet in some stores, Pink is basically getting the majority of that expanded space. Where they may be under 1,000, now we are looking between 2,500 and 3,000 square feet. When you think about Pink as well, the opportunity in terms of growing adjacencies, such as the Accessory business, which is a focus for us as we go into this fall season - and if you have been to any of the stores, you will have seen some of the accessories and luggage pieces of business - we still believe that we have not tapped into the bra business as much as we should into Pink. We see that as a growth opportunity. We do have today four freestanding stores, and we are excited about the learns that we are getting from those stores. Then as we talked about, we will be announcing some future opportunities for us later in the summer. I do feel like there is still plenty of growth opportunity in Pink, and what we are doing in terms of the core business is where we started to get younger and almost overlap with Pink, we are saying this Pink is focused to the 19-year-old customer and the core business is focused on the 26year-old customer and being more definitive about those lines.
Neely Tamminga (Piper Jaffray): Could you talk about the skew productivity that you have been doing?
Diane Neal: We have run last fall and continue to run this spring assortment optimization tests. We have taken that learning and we have implemented those learnings into our fall wall set, which is the end of September for next year. We have also looked at our seasonal launches as far as what is more productive versus last year in some of the things that we have tested. The other thing about the assortment optimization test, it has informed our segmentation efforts as we look forward to our specific - how we segment our stores by brand and by customer. It has been an extreme learning for us in that regard.
Paul (Credit Suisse): What was the impact from the DC issue last year?
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