Limited Brands, Inc. (LTD)
Q2 2011 Earnings Call Transcript
August 18, 2011 9:00 a. m. ET

Executives

Amie Preston – Chief Investor Relations Officer
Sharen Turney – Chief Executive Officer of Victoria’s Secret
Matyn Redgrave – Chief Administrative Officer and Executive President
Andrew Meslow – Chief Administrative Officer
Stuart Burgdoerfer - Executive Vice President and Chief Financial Officer

Analysts

Kimberly Greenberger – Morgan Stanley
Lorraine Hutchinson – Bank of America
Paul Lejuez - Nomura Securities
Jeff Black – Citigroup
Jennifer Davis – Lazard Capital Markets
Stacy Pak – Barclays Capital
Mami Shapiro – Retail Tracker
Michelle Tan – Goldman Sachs
Neely Taminga – Piper Jaffray Companies
Jeffrey Stein – Ticonderoga Securities
Omar Saad – ISI Group
Randal Konik – Jefferies
Dana Telsey – Telsey Advisory Group
Howard Tubin – RBC Capital Markets
John Morris – BMO Capital Markets
Paul Lejuez – Nomura Securities Co. Ltd

Presentation

Operator

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Limited Brands, Second Quarter 2011 Earnings Conference Call. Thank you. I would now like to turn the call over to Ms. Amie Preston, Chief Investor Relations Officer. You may begin your conference.

Amie Preston

Thanks, Stephanie. Good morning, everyone, and welcome to Limited Brands Second Quarter Earnings Call for the period ending Saturday, July 30, 2011.

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 second quarter earnings release and related financial information, including any non-GAAP or adjusted financial reconciliation tables, are available on our website, limitedbrands.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, Victoria''s Secret; Andrew Meslow, Chief Administrative Officer of Bath & Body Works; and Martyn Redgrave, EVP and Chief Administrative Officer, are all joining us today. As you know, Nick Coe joined Bath & Body Works in July as CEO. He is still on-boarding and familiarizing himself with the business and will not be joining us on the call today. Many of you know Andrew, an experienced retail executive, who''s been with Limited Brands for 8 years and at Bath & Body Works for 6 years.

After our prepared comments, we will be available to take your questions for as long as time permits. So that we may speak to as many callers as possible please limit your questions to one question per caller. Thanks, and now I''ll turn the call over to Stuart.

Stuart Burgdoerfer

Thanks, Amie, and good morning, everyone. We are pleased with our record second quarter performance. Our adjusted earnings per share increased 33% to $0.48 per share versus $0.36 last year. Our reported result was $0.73 per share versus $0.54 last year.

Though this and last year''s reported results include significant items as detailed in our press release, this year''s reported second quarter results include the following: a non-taxable gain of $147.1 million or $0.47 per share and a pretax expense of $113.4 million or $0.22 per share related to the charitable contribution of all of our remaining Express shares to the Limited Brands Foundation. This contribution allows us to fund the foundation in a very tax efficient manner. I won''t repeat the 2010 significant items, which are detailed in our press release. All results discussed on this call exclude these significant items in both years.

To take you through the second quarter results, as detailed on Page 4 of the presentation, net sales were $2.458 billion versus $2.243 billion last year and comps increased 9%. Our other segment revenue increased by $66.4 million or 26% to $324.4 million. Over 75% of the increase was driven by growth in our International business particularly in Canada. The remainder of the increase is primarily attributable to the change in accounting for Mast sales to Express and Limited Stores.

The gross margin rate increased 200 basis points to 36.7% primarily driven by leverage on buying and occupancy expense. The merchandise margin rate improved slightly despite a negative impact of about 60 basis points related to the increase in Mast sales to Express and Limited Stores, which are recognized at a 100% this year versus 75% last year. We will anniversary this accounting change in the third quarter.

We continue to focus on managing total expense growth at a rate that is slower than sales. Total expenses, the combination of buying and occupancy and SG&A increased by 6% and leveraged as a percent of sales. SG&A dollars increased by $54.1 million or 10%, and the SG&A rate increased by 10 basis points. A significant portion of our SG&A is variable, and we will continue to manage that proactively throughout the quarter in response to our sales trend. 2/3 of our SG&A expense growth relates to investments that we made in store selling and marketing to support and drive sales growth. These investments included higher selling payroll and credit card fees related to the growth in sales, increased investments in training and investments in other store initiatives, including technology. The remaining increase in SG&A relates to growth in our home office expense across various categories, including investments related to our International business.

Turning to operating income on Page 6. Total operating income increased $70.5 million or 30% and 190 basis points as a percent of sales to $307 million or 12.5% of sales. By segment, the Victoria''s Secret segment increased by $47.4 million or 200 basis points as a percent of sales to $239 million or 15% of sales. Bath & Body Works increased by $5.7 million or 50 basis points as a percent of sales to $70.1 million or 12.5% of sales. The other segment operating loss improved by $17.5 million to $2.2 million driven by growth in our International business and improved profitability at Mast. Total non-operating expenses increased by $25.5 million driven by increased interest expense and the loss of income from Express and Limited Stores.