Bath and Body Works comps were below expectations at negative 11%.
- The comp performance was primarily the result of softness in store traffic and lower sales per transaction.
- Total were $997 million, down 8% or $83 million from last year.
- The 3% spread between comp and decline in total sales decline represent sales from new stores and growth in the e-commerce business.
Operating income versus last year declined $86 million to $209 million driven primarily by sales and gross margin declines as well as buying and occupancy increases over last year.
- Gross margin rates decreased significantly versus last year caused primarily by merchandise margin rates.
- Fixed occupancy expense combined with negative comp sales also contributed to the lower gross margin rate.
- The significant decline in merchandise margin rates to last year was caused by the increased promotional activity aimed at driving transactions and in clearing seasonal inventory through the very difficult holiday season.
SG&A expense dollars were down to last year driven by a tight focus on expense management.
- The firm''s SG&A rate de-leverage, was the result of the fixed component of the cost structure and the negative comp environment.
- The active management of inventory throughout the season allowed the firm to finish the year with inventory levels that were down to last year.
- Performance of the e-commerce business met expectations. The channel is both a revenue and profit generator as well as a marketing vehicle for the Bath and Body Works brand and the collection of sub-brands.
In light of the difficult economic conditions an active control of discretionary sending and inventory level management is necessary to mitigate any top line softness.
- The first priority is the nationwide re-launch of the Signature collection which happened on February 9.
- This re-launch has improved the perception of this brand under more sophisticated packaging, improved formulas and new and improved in-store marketing and navigation.
- Second, the firm is capitalizing on the success of presentation tests ran in the fall by rolling out the Home Fragrance and Signature collection segmentation to over 500 stores.
- Third is about newness. In addition to the new Signature collection the firm is launching over 10 additional collections, fragrances and/or forms across its sub-brands throughout the spring season.
Fiscal Year 2009 Outlook
A reasonable comp expectation ranges from down 5 to down 10% for the full year.
- A similar decline in sales at Victoria’s Secret Direct and Mast sales to decline between 15-20% as customers reduce inventory and their orders.
- Although inventories are well controlled and the firm is planning them conservatively the environment should remain very promotional and customers are reluctant to pay full price
- The firm is also pursuing opportunities to reduce the cost of merchandise, the benefit of which will be weighted to the latter part of the year.
Full year gross margins will be down to last year driven by buying and occupancy de-leverage partially offset by an improvement in merchandise margin rate.
- Cost reduction initiatives should reduce costs by approximately $150 million in 2009.
- Interest expense will be approximately $60 million in the first quarter reflecting the increase in the amended term loan interest rate and a portion of other fees and costs that are not amortized over the life of the facilities.
- Interest expense should be approximately $52 million per quarter for the remainder of the year reflecting the increased interest rate in the amended term loan and the amortized portion of other fees and costs.
Interest income will be about $15 million lower than 2008 driven by very low yields given market rates and the conservative investment posture.
- Earnings per share is expected to be between 60 cents and 85 cents per share.
- First quarter comps will be down in the high single digit range based on a challenging environment.
- Gross margins will be down significantly driven primarily by a decline in merchandise margins in business and buying and occupancy de-leverage on the negative comps.
SG&A de-leverage is expected in the first quarter on the negative comps as the benefit of the expense reductions is weighted to the back half of the year.
- Assuming these inputs for the first quarter the firm expects to lose between 7 cents and 12 cents.
– Limited Inc will continue to proactively manage inventory levels for 2009 with receipts for the first half of the year down between 10-12% and inventory levels down in the high single digits at the end of the second quarter.
- 2009 CapEx is projected at about $200 million, down from $479 million in 2008 and $749 million in 2007.
Approximately 70% of total 2009 capital spending will be focused on real estate, reflecting investment in key U.S. centers and significant growth for Bath and Body Works in Canada.
- Total square footage is expected to grow by 1% while square footage in Canada is expected to grow by 3%.
- The firm plans to open 50 new stores, 23 of which will be in the U.S. and 27 in Canada, which is down from 145 new stores opened in 2008.
- A total of 44 reconstructions are planned in 2009 primarily in the United States, down from 153 reconstructions in 2008.
Key questions and answers from the fourth quarter fiscal 2008 earnings call as presented by Limited Brands, Inc on February 26, 2009
Dana Telsey (Telsey Advisory Group): On the real estate side of the business, what are you seeing for both businesses in terms of renegotiation of existing leases and potential store closing that would be evaluated too?
Martyn Redgrave: We are such a strong presence in the mall and we are a very successful part of that presence we are approaching our conversations with landlords in a very respectful and confidential way.
We are leading with our emphasis on strengthening our relationship with the landlords rather than simply asking them for concessions.
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