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Limited Brands, Inc. (LTD)

October 19, 2011 8:30 am ET

Executives

Leslie H. Wexner - Founder, Executive Chairman, Chief Executive Officer, Chairman of Executive Committee and Group President of Lingerie

Amie Preston - Vice President Investor Relations

Stuart B. Burgdoerfer - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Martin Waters - Executive Vice President of International

Analysts

Laura A. Champine - Cowen and Company, LLC, Research Division

Jeff Black - Citigroup Inc, Research Division

Brian X Tunick - JP Morgan Chase & Co, Research Division

John D. Morris - BMO Capital Markets U.S.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

Unknown Analyst -

Janet Kloppenburg - JJK Research

Amie Preston

Good morning, everybody. If everybody could take a seat. I think we're ready to get started. Yes.

Good morning. Welcome to Limited Brands' Annual Investor Update Meeting. Also, welcome to all of those who are listening in on the webcast. Before we get started, I'm sorry, but I have to remind you that any forward-looking statements we may make today are subject to the Safe Harbor statement found in our SEC filing.

So thank you all for joining us today. We're really excited about sharing our vision for long-term growth opportunities for the company. Related to that, we do want to focus on long-term drivers of growth today. So we will not be commenting on October sales or third quarter earnings, and we will report sales in a couple of weeks, and our earnings call is November 17.

So with that, it's my pleasure to introduce our Chairman and CEO, Les Wexner.

Leslie H. Wexner

Well, good morning. Normally, I begin these meetings with some outrageous but always accurate forecasts about Ohio State's football season, and it's past to the national championship. The outcome is not in doubt. I'll skip that outrageous comment.

Welcome, everybody here who's present, those who are watching on the webcast, those that are listening via electronic device. Most of the operators of the business are here. Some are listening. But hopefully, most are at their desks, stores or wherever they should be, working to enable us to have the best possible holiday season and to finish up what has been a record-breaking year for us.

Today, we'll begin with Stuart Burgdoerfer taking you all through the numbers, which I know you're critically interested in, and talk about performance. And Martin Waters will, I think, give what probably has been our most complete inside and explanation of our international business. There's been a lot of curiosity about it. There's a lot of progress with it. And we think we're in a position today where we can at least clear things out so you'll understand clearly how we're doing.

In addition to that, Martyn Redgrave is here. Bruce Soll is here. Tim Faber. We have other people that are working on the administrative side of the business that are present and can your answer questions.

What I'd like to kind of get you through into my frame of mind, and maybe it colors how you listen or maybe it just, I don't know, gives you an insight into my frame of mind, is that I think that I've seen thick, I've seen thin. I know about the Great Recession that began in 2008. And clearly, inside the business and knowing the people and knowing what we've done, I think I have a fair degree of sensitivity about what we've done and how we've done it. So an enormous pride in the accomplishments. So I'm in a happy place, a very happy place. And I think that happy place is the result of focusing on the things that we could influence, and getting very serious about fundamentals. And you should hear that through Stuart's remarks. You'll hear it in how we're thought about international. I'll follow up at the end, taking you through, quickly, the highlights of the operating businesses, and maybe fill in some, put some meat on the bones of thinking.

The other ear or lens I'd -- the ear I hear or lens I'd see from, is from our view, a part of that happy place position, is the performance that we have. But it's also in the industry that we have. We have dedicated ourselves for the last 3 years to have top-tier industry performance in specialty retailing. That means that we wanted our performance to be in the top 3 performers of the world, and we're about there.

In the categories we're in, which I think you have to understand in specialty retailing, in the Lingerie category, we have the first, second and third largest and best-known Lingerie brands in the world: Victoria's Secret, PINK and La Senza. In specialty retailing, we dominate that business in volume and profitability globally. Not just in the U.S., but in total volume around the world, we outproduced other all other specialty retailers. And when you think about those 2 categories, Lingerie, specialty, beauty, and then you think about the competition and our differentiated position and dominant positions, I'm in a very happy place.

In addition to that, we have significant and substantial success across channels. Our direct businesses are healthy, strong, growing, and they give us a connection for marketing and for volume on a global basis. So we are focused on our domestic business, that's the golden goose, and we're looking optimistically. And we think we have done the things necessary to prepare to win internationally. So that -- the outline of today should follow those major things.

Let's begin with Stuart, because I think the proof of the pudding is in the numbers and the results and our financial thinking and all the metrics that I know that you're curious about. Stuart?

Stuart B. Burgdoerfer

Thanks, Les. Thanks for coming. Really appreciate your interest in the business, your attendance this morning, in person or on the web. This is the fifth of these meetings that I've done, and I'll use Les's words, I'm in a happy place, too. I'm a pretty uptight guy and kind of a focused, intense guy. But I am, believe it or not, whether you see it or feel it or not, I'm in a happy place as well. We've made a lot of progress. We've had a good plan. And there's so much more that's in front of us. So we're in a good place.

So in terms of how I'd like to spend the time, we'll go through some numbers, what we've accomplished recently, financially, then we'll move to how we see our potential financially, and then we'll move to Q&A. So an annual investor meeting, probably makes sense to start with shareholder return because that is what we're supposed to be about. And in fact, it is what we're about ultimately as it relates to our financial performance.

The page on the slide, the page in your materials, was done in mid-September. There are 3 periods of time there, 3, 5 and 10 years. And the good news is we're at or near the top of the list in those time frames. The stock was trading at about $38.50 at that time. It's doing a little bit better than that now. I think it closed around $42 yesterday. So the point is, in terms of the ultimate financial measure, how are we doing? We've been doing pretty well lately. It's very important to the business, to the management of the company, to our Board, and obviously, to our investors. So good news.

What's driving it? Earnings growth. An obvious point, an important point, fundamental point financially. The chart looks a lot better than it would have in a meeting 3 or 4 years ago, obviously. So the midpoint of the August guidance is $2.43. That would be up 18% from 2010 and would be up 45%, 45% from 2006. We've increased earnings per share for 8 consecutive quarters. We're very focused on the consistent improvement in earnings, and we've made good progress. More to do.

Another big source of shareholder return is, obviously, cash return, $11 billion. That's similar to the market value of the company. So think about that. We've essentially returned the market value of the company from February 2000 to July of 2011. And more recently, if you start from March 2010, about 18 months ago, we have produced $5 of special dividends, $5 of special dividends per share. We've authorized and largely executed share repurchases of $1.3 billion. And at the beginning of this year, we increased our regular dividend 33%, from $0.60 to $0.80 a share.

So the return of cash to shareholders, very important. Doing it in a balanced way, very important. Regular dividends, share repurchases, special dividends. It's something that we work very closely with our Board on, and our Board gives us a lot of advice, perspective, and ultimately, authorization for these actions. And again, a balanced approach, very important to us.

The footnote is a good one too, by the way. If we were to look at that number in March of 2009, when the stock was trading at $6, $7, $8 behind. I'm sure purchases wouldn't have looked very good. We're buying stock at $24 over a 10-year period, once trading at $42. That feels pretty good at this point.

Okay. Two years ago in this meeting, we announced a goal, management's goal, to improve our operating income rate to 15%. And we were in the valley of that graph, at the bottom of that graph. And the good news is we're approaching the number. And the fourth quarter is a big quarter. We absolutely are confident that we're going to get to the 15%, and it's just a question of when. The guidance that we've put out would be just short of that goal. We're obviously going to work hard to have the best fourth quarter that we can, and we're very confident that we'll get to 15%. And as Les alluded, and I've got a page later in the material, we actually see our potential in the high teens. We'll talk about that when we get to it.

So what's driving the improvement? What's driving the numbers? Les mentioned, and we think a lot about the fact -- and if any of us were looking at a business cold, we'd start with, Well, what industry are they in? What's the nature of the industry? And as we think about the 2 segments of retailing that we're in, intimate apparel and personal care and beauty, we think we're in 2 great segments. Strong customer loyalty, pricing power and margin potential. In addition to being in 2 good segments of specialty retailing, in Victoria's Secret and Bath & Body Works particularly, they are the category definers. In a specialty context, they are the category definers. They established in many respects, in most respects, these categories.

So as we think about it, and sometimes I've talked to some of you about it, we're not in a Hertz, Avis, Coke, Pepsi, Home Depot, Lowe's. Boy, how do we differentiate from the other guy? There isn't a next obvious competitor for Victoria's and Bath & Body Works, and we don't mean that in an arrogant way. We've got to work hard to make sure we maintain that leadership position. But boy, it's a good position to be in. So very important in understanding what drives our performance.

The second is this focus on fundamentals. And the list may seem obvious. But boy, is it important. And we've made a lot of progress, but there's a lot more for us to do. A list like this should always start with an understanding of the customer. We have a reasonable understanding of her. But the people that operate the business, merchants, store people, designers, others, are really deepening their understanding of the customer to serve her better, and we've got a lot more potential there.

Focusing on the core merchandise categories. So what does that mean? Imagine if you were in a steak restaurant and what you are really focused on was desert, and your steak were just kind of so-so. It wouldn't be very good, right? So in our business, it's about bras and panties and loungewear. It's about shower gels and body lotions and anti-bac and home fragrance. Those are our best at categories. As you've heard from us consistently over the last several years, that's where the business's focus has been, and it will continue on those core categories because we see a lot more growth in those categories. And as a steak restaurant, we want to make sure we have really good steaks and we don't distracted with desert or the music.

Okay. With that said, the next piece is around inventory. And you guys have -- most of you, we've spent some time together in different forums, you know how important the management of inventory is to the business. Not because we're trying to suck up the last $10 million of working capital. That's not it at all. What it's about is if you manage inventory well, the customers' experience in terms of a fresh, emotional, exciting assortment. If that inventory is fresh and turning and fast, then she's going to respond to it. Our level -- or our degree of full-priced selling will be higher. Our margin rates will be better. Our profitability will be better. We've been very focused on it. I'll talk a little bit about it through the presentation. We've made a lot of progress. Again, still more to do. And that's not just some general phrase, we decided we're going to say, Boy, there's more to do. There really is more to do. We can get better at this.

Speed's, read and react and chase. Again, we'll talk more about it, but very fundamental, how do we get faster in responding to what ultimately the customer is telling us through all parts of our business? Store selling and operations, we've got work to do here. We've made some improvements. How to effectively do we really engage her in the store? Do we truly have the very best store associates trained, motivated to meet all of her needs and maximize conversion in the sales in those locations? Opportunity for us. So fundamental things, basic things. We've made progress on all of them. And that's what's behind the numbers, and there's a lot more for us to do.

The last, then you'll make your own judgments you have, and you will continue to reflect on management, but what I can share with you that hopefully is helpful to you is that the degree of focus and alignment. Focus and alignment is the best that I've ever seen. Now Les has got a lot more experience than I do, but I've been in business for about 25 years in different situations. And the focus and alignment of a management team is as important as anything, as anything in the business, and that the degree of those things in our business today is really good. And it's very much behind the numbers.

Okay. A couple of charts here, one about inventory, then another in similar form on expenses. And the first line in the chart is our sales growth. Since Q4 2009, just displayed on the line. And then the next line is inventory growth. So have anybody remember a saying that we'll grow inventories slower than sales? Is that a familiar message? Hopefully, it is. And the good news is, in fact, that's what we're doing. And what I would tell you is that we remain very focused on it. I've shared with different folks that if inventory got out of control, I would expect to lose my job. That's clarifying. Helps you understand what you're going to do when you wake up in the morning, right? So it's really -- it's that important. It's that important to the business.

And that's not just that the bean counter is focused on that, and I am focused on it. But I'm working very closely with those in the business, side-by-side, monitoring, approvals, read and react, what's being chased, what's being canceled, how do we measure it. Very important to us, made good progress, and an ongoing priority. It could be 20 years from now. And if I'm still standing up here 20 years from now, we'll start on this. I mean, we'll have the same discussion. It's that fundamental.

So same chart, expenses. So the good news is that expense growth is also below sales growth, meaning we're leveraging expenses, also a priority for the business. But like inventory or most things in business, we want to do it in an intelligent way. So it's very easy to cut expenses. That's not hard at all. The question is, how do you think about the difference between saving money and making money? And an example -- that sounds pretty conceptual or philosophical. How much payroll should there be in a Victoria's Secret on a Saturday to maximize conversion? And what should the training and wage rates and all that be to get the best sales and profit result?

Now the bean counter might say, well, geez, the percent of sales really should be blah, blah, blah. But you really got to think about it, first, from a customer point of view and what's going to drive the highest level of sales, the highest level of dollar profit and on appropriate expense rate and profit rate. So we're committed to growing expenses lower than sales. There's a lot of judgment involved here. We are investing in things that we believe drive the better customer experience, drive traffic, drive loyalty in the company.

Chart on inventory turns. Going in the right direction. Most charts we want to go northeast, as we would say, right? So this one's going northeast. Very important to us, another measure of speed. We can talk a lot about the speed, about speed, it's a priority for us, but it needs to be measured. And one of the most fundamental ways to measure speed as it relates to buying inventory is churn. How's the churn.

Now it's our goal to have -- to only focus on inventory churn and nothing else as it relates to inventory. Of course not. I mean, you've got to think, are you in stock? So key items in our business, they're measured every week and reported on us, studied and discussed, by style, by SKU, reported. So it's not just about how do we improve turn and being blind to the customer effect to that, if you will, or balancing that with are we appropriately in stock in the business.

With respect to churn, one additional thought that comes to mind is each of our businesses have term goals by category, merchandise category. And you would imagine that they would be different, PINK panties versus fine fragrance at Victoria's Secret Beauty. And that's probably pretty straightforward. You would expect us to have goals, but what I want to share with you is none of the businesses have fully met those goals. So we've made a lot of progress on churn, as the chart shows, but we've got goals out there that we still got a lot of opportunity to realize ultimately to drive more full priced selling, better margin rates.

Speed and agility. We've talked a lot about it. The important thing is there a lot of people involved in this effort. So the merchants, obviously, planners, financial people, our sourcing people, our sourcing partners, logistics partners, distribution partners. It's a key priority for the business, cross-functional by definition, and we've made a lot of progress. We've chased a lot of goods in season. Sharen Turney's got a sales trend at Victoria's Secret, she and her team. And we're approving more inventory, and they've going after it. And those dollars are real. And I can't get more specific about specific about it, but those amounts are very real, very significant, making customers happy and driving more profit. We're measuring agility, open to buy, key priority for the business, made a lot of progress, more to do.

Okay. I covered a lot about inventory and expenses. So Les, who's been doing this for a while, pretty experienced, inventory will make you sick and real estate will kill you. Okay? So inventory is really important, but real estate is even more important. Why is that? Most of our leases are 10 years. The financial commitment related to a store is big. You've seen this chart before. Many of you have. We've updated it. So more than 99%. It's interesting. More than 99%, what does it mean? But it's more than 99.0% of our stores. Less than 1% aren't cash flow positive. This isn't an accident. We have strong brands. We've got a great real estate team led by a guy named Jamie Bersani, he and his team, have good relationships with developers and landlords. This is about great brands, smart decisions overall about locations, store size, buildout of stores, et cetera, and we're in a good place. And we actively manage it. I'll talk a little bit more about square footage when we get to some discussion on square footage in a bit.

How does the balance sheet look? I'm probably a little biased, but we think it looks great. And so with the information that's on the page is you've got balance sheet debt. You've got lease-related debt. You've got a ratio of earnings or adjusted debt and EBITDAR. And you can see the leverage over time in 2000 with less balance sheet debt but more lease-related debt. Our leverage was 3.3x. We're forecasting again at the midpoint of that earnings guidance. At this year we'd be at 3.6x. What's behind that is the lease-related debt in 2000, a lot of that was associated with apparel businesses we no longer own. Those apparel businesses were not nearly as productive, not nearly as profitable as Victoria's Secret and Bath & Body Works, so that lease-related leverage has been reduced in connection with selling and spending on those businesses. And the businesses we have today, again very productive, very profitable. The balance sheet is in good shape. Our after-tax cost to debt is just over 4%. We're issuing, essentially, with investment-grade covenants, no real restrictions on our business. So we think we're in good shape.

We're forecasting -- and again, forecast or forecast, we work hard to beat forecast where we can. But we're forecasting $1.5 billion of year-end cash. As we think about the minimum cash needed to fund the working capital of the business, the seasonal working capital of the business, we would need to start the year with about $600 million of cash to fund the seasonal buildup of inventory as we approach the holiday season. And that's without touching, without touching, $1 billion revolver that we have, that we just amended and extended.

So the point is cash and liquidity, very strong. Balance sheet's in great shape. We've tried to manage it proactively. We've tried to take advantage of what we think are very favorable debt markets and feel very good about it. Part of that comfort level is related to the maturity profile, shown here. The maturities are staggered out well. There's nothing due in the near term of significance. So again, in good shape.

So that's all about the past. So how do we think about the future financially? We'll work through some pages and then get to your questions. So operating income rate. Les mentioned, we think about -- we work to study and understand 2 particular international retailers: H&M and Inditex. And you probably want to know, why are those -- why those companies? Or who is Inditex? And the reality is they're large-scale, international retailers, bigger than we are, more profitable than we are, certainly international in scope. And they've done a very good job with their businesses, and that's recognized in the marketplace. So we aspire to that. And as we think about it conceptually, and again, this could come off the wrong way, don't mean it to, but if we think about the quality and the nature, the emotional content, the pricing power of the Victoria's Secret brand in relation to the Zara brand, we think we compare okay, pretty good. If I we're picking Victoria's Secret versus Zara, no disrespect intended, they're a very good company, I'm feeling pretty good about Victoria's Secret. We are -- same with Bath & Body Works.

So if economics ultimately start with the power of the brand and the emotional content of the band, and they do, and the nature of the categories, intimate apparel versus personal care and beauty versus straight-up apparel, we feel like we should get to those levels. And this is not about are we better than they are, it's that they're very good. They've done better than we have. We admire that. We're studying that. And we should be at or above those levels.

So past the 15%, announced 2009, approaching it. We'll get there soon. New goal, not putting up a time frame, a logical question would be, when are you going to be at the high teens? Not putting on a firm date on that, but we're absolutely confident. Hopefully, based on some of the logic I just described, that we will be there. So high teens operating income rate.

All right. How are we going to grow? We've talked about the quality of our brands and the quality of the categories that we're in. We've talked about that focus on core merchandise categories. So in the United States and Canada, in North America, do we think there's opportunity to grow our sales and profit in the bra business? Absolutely. Panties, shower gels, anti-bac, home fragrance. So that focus. We've grown those businesses a lot over the last several years, and we see more growth. We don't limit ourselves in market share thinking at all. We don't even pay attention to it. How do we create market? How do we serve customers, create emotional content and grow in those core categories?

How do we grow adjacent categories? Examples: swim, sport, lounge wherein -- with something we call internally, supermodel essentials, the loungewear part of Victoria's Secret. Other personal care and beauty categories both in the Victoria's Secret business, and importantly, in the Bath & Body Works business. That leverage of speed to drive more full price selling. Our biggest expense is markdowns, probably true for any retailer. And that focus on speed is intended to maximize full priced selling, which drives revenue growth, obviously, and profit growth.

And then this focus on the customer. And again, we'll be a little general in it, and Les will comment more about that. But we think we're just doing okay with respect to really serving customers. And obviously, we don't feel good about that. So we're working hard to really think about what she needs and how we better serve her in the store, on the web, however we engage her. Big opportunity.

So from that, we see a lot of sales growth. And as I will mentioned here in a second in another slide, we're getting back to those high levels of productivity that we had before. So as we drive sales growth, we'll start to think, and we are starting to think about it, it's reflected in our numbers, about expanding square footage. Okay? More sales already at very high levels of productivity to present the full assortment to satisfy the customer, you start to think about more space.

Okay. Space. Productivity. This is a chart about Victoria's Secret sales per foot. Okay? Forecast for 2011, $721. Prior high watermark, $731. Does that mean, by the way, it's impossible to exceed $731? Of course not. That's not how we think about it. But this is the total. This is the result of the portfolio. And as you start to get to those higher levels, and again, there's a wide range by category, by store, et cetera, you start about adding square footage. And we are.

So what more specifically are we thinking about? This is amazing to me, and it's alluded to on the page. And the one thing in particular that I want to comment on is on this opportunity for us, and it's a big growth opportunity. I think you would be surprised to know that less than 10%, less than 10% of the Victoria's stores in the United States have the full PINK assortment. So how is PINK doing as a business? Very well. Okay? So what do we offer to our customers in 1,050 locations? We're only in about 10%, or less than 10% are we offering that full assortment to. Huge opportunity.

So as we think about the square footage that we need to satisfy that opportunity, and I'll use, hopefully more conservative math. But I certainly, and this is a wide range I'm going to share with you, but I get from $500 million to $1 billion in sales growth to address that opportunity with more square footage for PINK. $500 million to $1 billion. Big range, understand, but I get to that number. Okay?

Then with respect to the Lingerie business, which is a bigger business than the PINK business. There is also opportunity to rightsize space, meaning in some cases make it bigger, to make it flow better from a customer point of view, and to expand that space over time. And then we've talked about adjacent categories. You're familiar with some of those categories. We talk about it with you regularly. Sharen does, and others, too. And we see a significant growth opportunity related to those categories. So we are of a mind that we're going to start expanding space for Victoria's in the United States.

Now you may recall that we have expanded space before in the Victoria's Secret in the United States. So how are those stores? How does that decision look today? If not unlike doing a hindsight on share repurchases, when we look at share repurchases in the spring of 2009 when the stock was trading at $6, we weren't feeling very good about $24. We were sitting here at $42 and we're feeling very good about $24. The same is true with this investment that we made. So we did expand square footage for Victoria's in the United States over this period of time, and sales have gone up 36%. The sales per foot, sales per selling foot in those stores is just over $750 a foot, pretty good. Pretty good. Actually, very good.

Okay. Profit dollars. Take dollars home to the bank, right? Rate, you don't take home to the bank. You take dollars home to the bank. Profit dollars are up 20%. And the investment returns, as we calculate it, are well in excess of our cost to capital. So as we think about those, that investment, that initiative, a reflection on it, as we sit here today, with the improvements and other aspects of the business that we talked about, it's worked out very well. So some of this time frame and how you think about it and when you look at it.

Bath & Body Works. Sales per foot, chart's going in the right direction, not quite at the same levels in terms of getting back to that '06 level. But again, the '06 has an extra week in it. And Bath & Body's improvement has been there. And when Bath & Body needs investment in the United States, we will invest in that business. We don't see it in the same way or to the same degree as we do the Victoria's business as we sit here today, but we certainly see the potential over time.

Capital spending. So another way in addition to -- if inventory gets out of control, I'll get fired, which I do think a lot about, is I got to make sure that the 10-K is right or I go to jail, that we manage our taxes properly and some other things. We have the right cash and liquidity. But another simple job description for me is inventory, capital and expenses. Right? So capital spending. As the finance guy and a lot of others in the business, do we think a lot about it, and the answer to that is absolutely, yes. Now $590 million is more, substantially more than $445 million. We would all understand that. And it's particularly more, a lot more than the '09 level of $200 million, rounded, and the '10 level of $274 million.

So what should you really take away from this summary? And then I'll don't get more into the details. The first is our 2012 planning is still in process, but we think it's important to share with you our thinking, which is that there's growth opportunity for Victoria's in the United States. And we're going to invest in it, and that's what's really driving this increase. That's an important thing for you to understand and for us to talk about strategically in this meeting, and that's reflected in the numbers.

And the second thing we would say, and certainly the numbers bear this out, is that we will manage capital spending with speed and agility, and we will adjust based on the trend of our business. So how did we go to $202 million? Business wasn't very good. The economy wasn't very good. So we pulled back, and we pulled back hard. Our annual depreciation is about $380 million. And a place that most financial people or business people would start in terms of what would our CapEx number be as you would typically start with, Well, how does it relates in depreciation? And obviously, $590 million is greater than $380 million. But if you think about $200 million and $274 million, we underinvested in a meaningful way, appropriately, but underinvested based on the circumstances at the time, in '09 and '10. So there's some catch-up in investment in infrastructure and other things, POS systems, et cetera, that are reflected in that number. So it's an important increase, and it's important to talk about because it relates to the strategy of the business. But as we'll talk about in further slides here, we measure it, and we're very comfortable that this increase will drive a return.

So a little more information about it. We're a specialty retailer. Most of our business is done in stores. 70% of the CapEx relates to stores. It should. That's where our customers are. That's where our profit is. That's where our confidence and return is the highest. Okay? And again, the increase year-on-year related to the store investment is about an increase in investment for Victoria's in the United States. We're also investing in technology to support our international growth, to refresh and update core retail systems, to do some customer-facing technology work, as well, and that's reflected in the investment amounts.

So let's talk about return. How do we think about it? Well, we don't just think about it. We post-audit it every year, and we share those results with the Board. So this isn't just, Oh, we think about it. No. We pencil it out and we track it. New stores, about 25% return on average. Cost of capital's between 9% and 10%. So should we make investments that generate 25% returns when our cost of capital is 9% or 10%? Of course we should.

Expansions and reconstructions range between 10% and 25%, again, above our cost of capital. And investments in infrastructure, when you can measure discrete cash flows versus it's just something to, quote, enable the business. We measure those things as well, post-audit those things, and certainly work to ensure that they exceed our cost of capital.

So that's how we do it by project and by type of project. How does that return on capital roll out and add up to the company in total? So return on invested capital. As we judge it based on, again, our August guidance, we would say it's about 13.6%. Okay? Well in excess of the cost of capital of 9% and 10%, and certainly up substantially from the '08 and '09 periods.

International. Martin Waters is going to give you a great presentation, and his accent is certainly a lot more interesting than mine. But what I do want to reiterate from a financial standpoint is there is a huge, and that's not a GAAP defined term, but there is a huge international opportunity. I think you all appreciate that. That's why your interest level ended it so high. We share that view. The opportunity is very, very substantial.

The second is the profit rate for international over time, emphasis over time, we'll be at or greater than the profit rate for the company in total. Okay? We've talked about working with franchise and venture partners a lot. We've talked about the fact that, that will improve the return on invested capital. It will. It would be good otherwise. It will only be better by working with partners capital. And then, again, as probably coming through in the comment, we are building this for the long term, sustainable and long term, and we are investing.

And the international business won't have a meaningful -- and meaningful is, I suppose, a debatable term -- but won't have a meaningful effect. International won't have a meaningful effect on operating income growth in 2012. Now that may be disappointing to you, but the important thing is, we don't need it. We have -- we have generated, and we see the potential for a lot more profit growth in the United States and Canada. And so I would say we don't need it. You shouldn't misinterpret that, that is that we're not going to do it. And again, Martin and Les are going to comment a lot on what we are, in fact, doing. We don't need a profit. We're not staking all our hope for profit growth and shareholder value on an international strategy. We are generating a lot of profit growth, a lot of value in our domestic business, and we see that continuing for the next several years -- next many years, really.

Okay. Cash. We do generate a lot of cash. That's good. The CFO is and should be focused on that, focused on operating cash flow and free cash flow and CapEx. I commented earlier about where I thought we would end the year and what our minimum cash is. You'll probably be wondering, a question foreseeable is probably, Well, what are you going to do about special dividend or the next share repurchase program? And again, a few key messages around that. Balanced approach. We work very closely to the Board of Directors. A lot of money and cash flow comes in the fourth quarter. Nothing to announce today. You know what our commitment is. You know what our approach is. But a lot of the profit and cash flow of the business comes in the fourth quarter. Hopefully, that, I think, makes sense to everybody.

So I started with this chart and end with the same chart. Financially, it is about creating shareholder value, about return to shareholders. We've done well recently. We're looking forward. We see a lot of opportunity to continue to deliver outstanding return to shareholders. It's a key focus, obviously, and we've been doing pretty well.

So with that, thanks for the time in the prepared remarks, and I think we're going to transition to Q&A.

Amie Preston

Thank you very much, Stuart. If I could remind you, guys, you have an opportunity to ask Stuart questions now. You also have an opportunity to ask Martin questions and Les questions separately. So try to focus your questions for Stuart on the material that he's covered. And also, please, try to wait for the microphone, so that the folks that are listening in on the webcast can hear the question.

Question-and-Answer Session

Kimberly C. Greenberger - Morgan Stanley, Research Division

Stuart, with regard to the Victoria's Secret expansions, how are you identifying which stores to expand? Are you doing those at the natural expiration of the lease or prematurely? And are there any expected associated charges with that effort?

Stuart B. Burgdoerfer

Thanks, Kimberly. And you remind me, I want to share one other aspect of that square footage growth opportunity and how it will play to the total. But in answer to your question, the first screen is where do we think we make more sales and profit, right? So based on sales productivity, volume of the store, nature of the center, category selling, where -- the first screen, Kimberly, is where do we think we can make more profit. But in answer to your question, we've talked about it before, typically, not always, typically, the majority of cases, we're doing those moves as we approach or just are about at lease exploration, because we do want to be careful about are we writing off investments we've previously made. But I would also say, that's a sunk cost, that's in the past. I mean, you do have to look for it and say, Okay, from this point forward, what's the best way to maximize sales and profitability, and that's the ultimate screen. But we are mindful of any accelerated depreciation or write-offs. And typically, typically, we're doing -- making those moves at the end of a lease. The other thing I forgot to mention in my prepared remarks is the square footage. On the bottom of one of those pages, it says the 2012 square footage growth is going to be about flat. So what is that about? You might be confused. You guys just talk about square footage growth opportunity at Victoria's, but square footage in total is going to be flat. What that's about is we regularly close stores, regularly. Now how many do we regularly close? 30, 40, 50. What's that about? That's about the proactive management of a real estate fleet of more than 3,000 stores. And what we're doing when we close stores, typically, is we're closing a store that, on average, and I have these facts checked for me yesterday, we're closing stores that, on average, would have sales per foot of about $250. And we're replacing that square footage, Victoria's, the expansion effort I've talked about, and I also had this validated, with sales per foot of about $750. So you might look at square footage in total and say, Geez, why is it flat? And so hopefully, I just described why it's about flat. And from a business standpoint, I think we'd all rather have $750 a foot space than $250 a foot space. And again, we're managing it very actively so that we don't accumulate or built up a problem, which others can experience in specialty retail. So Kimberly, hopefully, that answers your question and more.

John.

John D. Morris - BMO Capital Markets U.S.

I think it was the chart -- my question relates to the chart on the CapEx or the cap spending, as you were just referring to there. The 2012 estimate, I think a portion of that, a big portion, 415 related to the new store, store expansion remodels. And then below that on that chart, you've got -- if I understand it correctly, a piece of that is $125 million dedicated to the incremental real estate. So if I backed that out, if I'm backing the $125 million out of the $415 million, does that leave you with $290 million, which is mostly on the POS, POS...

Stuart B. Burgdoerfer

No, no, no.

John D. Morris - BMO Capital Markets U.S.

What other spending?

Stuart B. Burgdoerfer

I'm not -- we can go back to that page but...

John D. Morris - BMO Capital Markets U.S.

I think it was Page 27.

Stuart B. Burgdoerfer

Yes, and it's store counts. Those are store counts. 125 incremental. That's the increase, John, year-over-year, not the total. So again, the key point is that first grouping of dollars, the $415 million, that all relates to stores. Okay? All of that relates to stores. The information below, John, the $125 million, is explaining the composition in most of the increase from 2011 to 2012. Does that answer your question?

John D. Morris - BMO Capital Markets U.S.

Yes. Well, POS, how much of that is on POS? And what else [indiscernible]?

Stuart B. Burgdoerfer

POS is an important piece of it, and POS is relatively consistent from 2011 to 2012. And we'll be done with POS in 2012. Roughly -- I want to try to be helpful, POS is about $40 million a year. Okay.

Unknown Analyst -

Stuart, I was wondering if you could talk a little bit about -- a little bit about your kind of in-stock inventory, especially at Victoria's Secret, and kind of what inning you think you're in, especially with SAP implementation, and where you are now and how much further you think you can go?

Stuart B. Burgdoerfer

So the question is about in-stocks at Victoria's Secret. It is a key priority. And as I mentioned in my remarks, it's something that the business and all of us take very seriously. You ask kind of what inning are we in vis-à-vis opportunity, if you will, I would say that we're in a 9-inning -- in a baseball game, I would say we're in the sixth inning, something like that. So there continues to be opportunity. But boy, the business has made a ton of progress, a ton of progress on that opportunity in the last 12 or 18 months. But there's still more to do.

Amie Preston

Okay. Sorry, guys, I think we have time for just one more question. Janet, you want to...

Janet Kloppenburg - JJK Research

Stuart, I'm a little confused about the CapEx going up based on Victoria's Secret's additional square footage if the square footage growth is going to be flat for the year. So maybe you could help me. Are you closing more stores than you have? Or are your buildout costs higher? Are you opening larger stores? And also, on store opening, on the expansion of Victoria's Secret, is more of it coming from expanding existing locations? Or are you opening incrementally more Victoria's Secret stores than you have in the past domestically?

Stuart B. Burgdoerfer

Sure. Well, again, the increase does relate to the increase of Victoria's Secret in the United States. Janet, a lot of the information, I think, that would be helpful to you is on this page that's on the screen. Okay? It is a combination of new stores and expansions. And when you expand and reconstruct a store, in cost, it's very similar to building a new store. And again, we see the profit growth opportunity, the return from those investments being very high. And again, with respect to the square footage, we're going to be adding square footage related to that initiative. And as we've done every year for the last many years, we will close less productive stores in vulnerable malls, C malls, low productivity locations, and the square footage associated with those closures is going to largely offset the square footage growth from this investment. But there's going to be real growth here, 2012 and beyond. And it's, in '12, essentially totally offset by closures. In future years, it will start to be net, net additional.

Unknown Analyst -

[indiscernible]

Stuart B. Burgdoerfer

Yes. Yes, you'll see net growth in '13 and '14. Have we flushed that out in detail and do we know exactly what it is? Of course not. Will the conclusion be that we'll see square footage growth in years beyond 2012? I'm confident saying that the answer to that would be yes.

Amie Preston

Thanks very much, Stuart.

Stuart B. Burgdoerfer

Thanks.

Amie Preston

All right. Guys, if we can, we're going to power through here with the -- and take a break after Martin. Obviously, if anybody needs to use the restroom or anything, just get up and go. But Martin Waters is President of our International.

Martin Waters

So I'm not sure what accent Stuart expected me to use, but I'll use this one because it's the only one that I have. So Les is in his happy place, and Stuart is in his happy place. And I'm in my happy place for many, many reasons. But not least of which is because I just came from a meeting with all of our international partners. We have them in about twice a year, and everybody is with us right now. And just hearing so many fantastic stories of store openings, of customer excitement and engagement, with all of our brands all over the world, and I hope you get a sense of that great excitement as I take you through my presentation this morning.

So the 3 things that I wanted to talk about today, the first is I'll tell you a little bit about some of the foundational principles that govern the way we think about international. And I'll give you some headlines about our operating model. And secondly, I'm going to give you a progress report on each of our businesses. So I'll tell you how we're doing. And then when I've done all of that, I'll give you some expectation of what you can expect to see from us in the coming year or so.

But let me start with the slide that's on the screen, which is the scale of our international business. And at the beginning in 2010, we had about 580 stores operating around the world. And I would tell you that we believe that at the end of 2012, we'll have 880 stores operating around the world. I'll start with that to say that we are serious about international. This is a very important business for us and will be a tremendous source of growth for us. It's a very healthy add-on to our domestic businesses. So let's start with those foundational principles.

Any presentation I give about international, I always start by saying the domestic businesses are the golden goose. They are the most important part of our business, and as you heard from Stuart and you already know, incredibly healthy, and keeping them that way is our #1 priority. So I manage separate, dedicated teams for international. We try as hard as we can to have 0 distraction to the domestic business, keep the domestic folks focused on the good stuff that Stuart talked about this morning.

Other things about our approach in international. We're very methodical. We believe in a test-and-learn strategy. There is no reason to bet the farm on a hunch. We test. We learn. We roll. And when we're sure we've got it right, boy, are we focused and are we fast. And you'll hear something about that as I walk through the presentation.

Next, our operating model. And I describe our operating model in 6 simple sentences. And everybody in my team can quote these by heart because they're so important to us. So the first is we believe in a mix of wholly-owned and partnership-based businesses. And importantly, the difference should be invisible to the customer. We set the bench very, very high in terms of the standard of delivery that we expect, and regardless of whose money it is that goes into that business, the standard is the same.

Secondly, we want to work with a small number of truly world-class partners. This isn't a model where we have a different partner for every brand and every geography. Small number, world-class partners. Ideally, multibrand, multigeography.

Third, the way we think about the division of responsibility between relative brands and our partners is this, it's a highly controlling model. At relative brands, we want to own responsibility for assortment, for merchandise planning, for allocation, for pricing, for promotions, store design, even real estate approval. Very highly controlling.

We ask 3 things of our partners. We keep it really simple. One is capital. Bring some money. Second is we expect real estate capability. And the third is we expect them to be able to manage people, to run shops, to deliver our operations to the highest standard and to be expert in local practices.

The way that we get paid in this international model is primarily through retail royalties. And it's important to note that as opposed to the old way of doing things, which was a wholesale model. The reason we do that is we want to be as invested as our partners that are in retail sales. That's the most important thing, not how much stuff you sell out of your warehouse.

And the final principle that I talked about is that wherever we go in the world, we want to have our people there. So whoever owns the business, whose-ever capital it is, we will always have people in market. And they will be coaching. They'll be supervising. They'll be encouraging. They'll be expediting. They'll be working on speed. Those are the most important points for us.

So let me take you to the bulk of the presentation, which is the progress report. And there's quite a lot to say because we've been busy this year. We've opened 120 stores in 2011. We have opened or about to open 120 stores in 2011. And that will take us to a total of 700 stores at the end of this year and about $1 billion, a little over $1 billion in retail sales, which translates to about $750 million of recorded revenues. Pretty big business. And you'll get a sense of where that money comes from as I walk through each of our brands. And I'll start with Victoria's Secret, our biggest and most important asset.

Now recall that with Victoria's, internationally, we have 2 routes to market. The first is Victoria's Secret full assortment stores, like this one that's on the screen, in Toronto. The second is a format we call Victoria's Secret Beauty & Accessories, and I'll talk more about that in a few minutes. But sticking with the full assortment stores, the journey began just about a year ago when we opened 4 stores in Canada to see what the reaction would be. And we were blown away by the customer response, just blown away by it. And we've moved very quickly on the back of that and been able to secure some terrific real estate in Canada such that by the end of 2011, we'll have 11 VS full assortment stores operating and 8 PINK, for a total of 19 stores. So really moving very fast, being very focused, all real estate AAA locations in the best malls in Canada. And if you're trying to imagine what the excitement Victoria's is all about, take a look at this video.

[Presentation]

Martin Waters

I can tell you, every one of those 7 stores that we've opened this year, lines of people outside, 10,000 to 15,000 square feet prime real estate, boy, the people notice, boy, do they pay attention. And terrific way to profitability, equivalent to those that we see coming out of our U.S. business. So that gives us confidence to move to 8 or 10 more VS full assortment stores in Canada in 2012. And beyond that, of course, it informs our journey into the rest of the world.

In Canada, while it's only just north of the border from here, you learn about dealing in different currencies. You learn about dealing in foreign languages: French. You learn about remote leadership. And that has been instrumental for us and very helpful as we announced earlier this year, the opening of our flagship store in Bond Street, London, which we're super excited about. About 9 months from now, just ahead of the Olympics, we'll open 22,000 square feet of real estate. And that's retail selling space in one of the best, if not the best location in London, a world flagship for our brand and just a brilliant way to launch Victoria's Secret brand in Europe. Beyond that, we have a confirmed location at Westfield mall, just adjacent to the Olympic Village. And there'll be a third store opening later in '12 or early 2013, and that's just the beginning.

I would remind you that the stores that we have in the Canada or in the U.K. operates on the basis of being wholly-owned and have substantially the same economics, and we believe that they will, as our U.S. business.

I'm also very pleased and excited to announce today the opening of Victoria's Secret full assortment stores in the Middle East with our partner Alshaya. We will be opening in September 2012 3 world-class stores, 15,000 square feet in each of the stores, in 3 of the best malls, not just in the Middle East, but 3 of the best malls in the world. And they'll all open, coincidently, within a 4-week period in the early fall of 2012. Those stores will be our first franchise activity for the VS full assortment business, and that's with Alshaya. And again, referring to what I said earlier, a retail royalty basis so that we are totally invested in retail sales. Pretty exciting.

Let's move now to the second format for Victoria's Secret, which we call VSBA, Victoria's Secret Beauty & Accessories. And those of you that were here last year may have heard me call it T&T. I just like acronyms. And the reason we call it T&T was we started this business 2 years ago, almost to the day, with a couple of locations in airports, in Travel and Tourism airports, and just see what would happen. If we focus on beauty, acknowledging that we have world-class beauty brands like Bombshell here, award-winning beauty brands and accessories, fabulously VS-branded accessories, likely, what would happen? And again, we were blown away by the results. The customer response to Victoria's Secret Beauty & Accessories in just 1,000 square feet of space just knocks us off our feet. So referring to fast and focused, we then moved super fast to get to 62 locations by the end of this year. So we only invested in 2 years ago. We tested. We learned. We rolled 62 locations by the end of the year. And acknowledging that most people in this room have never seen a VSBA, I'm going to show you a little video that helps explain what we look at.

[Presentation]

Martin Waters

Notice the quality of the execution there. These are not corners somewhere. These are beautiful, beautiful stores, very prestigious, establishing the brand at just the right level. And we expect we build model economics at around $1.5 million, $1.5 million per store, out of slightly less than 1,000 square feet of space, 0 capital for us, exceptionally profitable. So pretty exciting. I would think in 2012, we'll open between 70 and 100 stores like this around the world. More about that later.

Let's go to BBW, our second biggest brand. So the journey began in BBW International 3 years ago. We opened 5 stores in Canada to see what would happen. And candidly, we were blown away by the results. We couldn't believe the level of excitement that was generated by opening a 2,500 square foot BBW store in Canada. We move quickly to establish prime real estate in 2009, 2010, grew the fleet. And by the end of this year, we'll be at 69 stores. Market-leading performance, profitability rates consistent with that, that we see in the U.S. Sales densities greater than we see in the U.S., a terrific, terrific business.

And as I talked about with Victoria's, the experience that we've had here has given us confidence to move further around the world. In addition to opening 5 or 10 more stores in Canada, we took this business to the Middle East. And it was 11 months ago that we opened our first stores in Dubai and Kuwait. Now Dubai, I kind of -- which is on the screen here, I kind of thought would work because everything works in Dubai and it's fundamentally a tourist location. It would probably be fine. And Kuwait, I had no idea. Kuwait, very little tourism, probably 0 awareness of BBW, or so we thought. That store opened at about $7 million or $8 million. Unbelievable. Blown away. So we've moved super quickly to get to 20 BBW stores in the Middle East by the end of 2011. As a reminder, we opened the doors 11 months ago. By the end of this year, we'll be at 20 doors. We moved pretty quickly. And here's a little video of what they look like.

[Presentation]

Martin Waters

Those big scissors are coming in pretty handy at the moment. So 20 stores by the end of '11. I'm getting worn out with using the scissors. 89 stores in total outside of the USA by the end of this year. And I would plan for -- I'm planning for 25 to 30 more BBW stores in 2012 outside of North America. And our focus is the Middle East, but we have confirmed openings, we're under construction right now in Turkey, 2 fabulous locations in Istanbul. And early in the new year, we'll be opening in Russia. And I know a little know little about the Eastern European market. I know it's fragrance led, and I'm a 100% confident this brand is going to fly there. So lots of good stuff happening with BBW.

Let's turn to our third brand, which is La Senza. La Senza, we think about as 2 businesses. There's the Canadian business, about 240 stores, $350 million worth of sales, and has been operating at, essentially, 0 operating income for the last 3 years or so. Undoubtedly, a turnaround business. The second part of La Senza is the international business. And the international business has grown to 290 stores this year. We've added 50 stores. That business has always been profitable and continues to get more profitable, and will grow even more as we build it to scale. Those 50 stores that we opened this year are not because we think it's a good idea, but because our partners are invested in this business and believe in the future of this business and have put their own money into it. And boy, are they seeing the rewards of it, and we will, too.

So let's just talk about the positioning of La Senza. The honest truth of it is that we changed everything. We changed everything. We changed the customers. We changed the management. We changed the store format. We have changed everything. And the focus of this business is really around 4 words: young, sexy, obvious, value. That's all you need to know about La Senza: young, sexy, obvious, value. Fundamentally younger proposition than Victoria's, very, very different positioning. And it will trade at prices that are substantially lower than Victoria's and operate out of stores that are about 2,000 square feet as opposed to the 10,000 to 15,000 that we need for Victoria's.

So that's really the story as far as the repositioning goes. Our business in Canada has been tough this year. We've seen comps that have been essentially flat in the aggregate across most of 2011. And that's against the backdrop of Canadian retail that's really tough. We're seeing traffic in malls down double digit every single month of the year. So Canada is tough undoubtedly. But actually, we're seeing a subset of stores. We're at the right size and we've got the right talent where we're achieving 10 percentage points higher comps. And those stores have very, very sound economics, indeed, and the customers are responding incredibly well to the new positioning.

And so pretty exciting stuff. I would tell you about Canada, that probably the chain is a little bigger than we would expect it to be. And as the opportunity arises, we will close some stores as and when it's prudent to do. But we do have a little bit of a legacy of some oversized stores in this business.

That's the Canadian piece. If I take you to the international piece, every day, I turn on my BlackBerry, I see new store openings from all over the world. And they all look like this. We have 79 stores now around the world that have been repositioned to this new way of looking. One from Indonesia came in earlier this week. Here's another in Turkey. Our partners are absolutely behind this brand, and they're seeing tremendous results.

I want to play you a little video, which gives you a final dose of Katy Perry, I promise. And then we won't do any more. Final dose of Katy Perry, which we take in courtesy of 3 of our partners. And I've stitched 3 separate videos together to give you a sense of who the customer is, how she interacts with this brand, and why it's a good idea to own a brand that has a substantially different position than Victoria's Secret. Play the video, please.

[Presentation]

Martin Waters

So 525 stores. I would imagine that in 2012, those same partners that have opened 50 stores this year will open 60 to 70 stores. And we'll continue to see great penetration with this business. Pretty satisfying to see the change, and pretty satisfying to see the response so quickly. When we acquired this business, there were about 14 partners for La Senza International. And each of them had a flag planted in different countries around the world. We changed all of that. We have 6 partners that we work deeply with and closely with, that we see every 2 months either in their territory or in our territory. And the focus is on those 6 partners that can really deliver the business for us. And every one of those contracts has been renegotiated so that we have a retail royalty. So that our interest is in retail sales rather than just selling stuff wholesale. Fundamentally different business than the one that we acquired 4 years ago.

So that's the -- that's the essence of the progress report. My summary would be: 120 stores opened this year; accelerating that by 50% to 180 stores in 2012; 3 powerhouse Lingerie brands; and a BBW business that's resonating with customers all over the world.

I said at the beginning I'll tell you a little bit about what you can expect for us -- from us in the next year or so. And let me do this geographically, because I've thrown a lot at you in the last few minutes and you're maybe wondering where the focus is. So let's just recap geographically with a map of the world. So let's start with VS. Our focus in VS, full assortment: Canada, as you know; U.K. opening in 2012; and the Middle East opening in 2012. 31 stores, full assortment stores by the end of '12. Add to that, appearing in red dots, had 145, 150 VSBA stores opening in airports all over the world. I don't mind where airports are. The regulatory environment is not the same as the local market. So we'll open any airports wherever and wherever there is good business to do. And I would tell you that we're only in, right now, we're only in 8 of the top 50 airports in the world. So there's tons to go at. And we'll open in malls with a focus on the Middle East, Eastern Europe and Turkey.

Overlay on top of that, in blue, BBW, at 125 stores at the end of 2012, focused on Canada, the Middle East, Turkey and Eastern Europe. You see the pattern emerging. And then add to that, La Senza, which will be at about 580 stores and substantially building on those 6 partnerships that already exist today. Not looking for new partners, not looking for new flag planting territories, looking to build a serious penetration in markets where we already operate. So that takes us to about 40 countries by the end of 2012. It's quite a lot. It takes us to 880 stores. And I've recapped this, the date that I just talked about, on a simple chart for you, so no new information, and this is my final slide, which is the facts of 2011, the start and end, and then the projection for 2012.

So for me, it's all about building the foundations of a healthy business, a balanced portfolio of brands, of geography and of operating model, all underpinned by an infrastructure that really works and investing in that infrastructure not to deliver profit tomorrow, but to have a long term, sustainable healthy business forever.

So I'm happy to take any questions that you have. But I know you may be bursting for bathroom break. We can go either way. Amie, what would you prefer?

Amie Preston

Why don't we do about 20 minutes or so of questions, and then we'll take a break.

Martin Waters

Okay. 20 minutes of questions.

Unknown Analyst -

Martin, could you give us a little color on thoughts around pricing of product outside the U.S.? Maybe a little bit on fulfillment and distribution as well?

Martin Waters

Yes. So 3 thoughts on pricing. In the old days, when I began my international career 15 years ago, you could price stuff whatever you wanted to around the world because nobody knew, it didn't matter. It's not like that anymore. Second thought is in the U.S., we probably have the lowest priced market of the developed world. So that gives us up-pricing potential in almost everywhere that we would be interested in. And the third thought is related to the first. There is an insult factor in pricing. And we're working to avoid that. The world is getting flatter. So it's important to us that we look closely at market norms and that we expect the customer to be in tune with what our prices are around the world. So expect to see some upside but not too much upside, keeping fairly close to that U.S. price before local taxes. As far as distribution and logistics are concerned, we acknowledge that we're pretty new to international retail. Three years, I think, we've been going. We're certainly not new to international logistics. Les has been moving stuff around the world at lightning speed for many, many years, for decades. So we probably have more experience of moving stuff around the world than most. And I would tell you then, the 44 countries in which we operate right now, I don't think it's a hurdle. Really, I don't think it's a hurdle.

Unknown Analyst -

Martin, I looked at the slides on the globe and I didn't see a lot outside of Victoria's Secret Beauty stores for Asia, China in particular. I'm wondering if you can just talk about how you think about that geography?

Martin Waters

I sure can. In fact, I can about talk it very much in realtime because tomorrow afternoon I will be on a plane to China. So I'll be spending the next 10 days of my life in China. That big, top right-hand portion of the map is a huge opportunity. I spent 7 years of my life in Asia, and it's a market that I probably know best of all of the international markets. I'm very, very excited about the potential for all of our brands and when we've got more to say, we'll tell you. A very exciting opportunity.

Unknown Analyst -

Martin, I was hoping for more of an answer to this question. Could you talk a little bit about the Direct business? As you launch into these new areas outside of Canada, are you launching the websites at the same time with your partners or on your own? And are you doing it for La Senza, Victoria and Bath & Body? And how do you approach the beauty business for Victoria's Secret, is there a separate entity for you in those areas?

Martin Waters

Okay. I think I got the first of the question. So a number of points there. So the Victoria's Secret Direct business is already shipping to, I think, last count, about 100 countries around the world. So that is a very productive business for us, very profitable, and it's growing very, very quickly, indeed, very rapidly. So we're very, very happy with the performance of that business. We elected not to talk about it today to stay focused on retail. And as far as online strategy is concerned, of course, we should have an integrated offer. So wherever we go, we would expect consumers to digest our content, be it on the phone or online or on the web as well as in bricks and mortar stores. As far as the e-com part of that equation concerned, I think that can come later. I'm not in a hurry to open in the U.K. and the Middle East with a fully-fledged online business. I think the e-com elements of that we can take one step at a time. Recognizing that, we already ship to 100 countries around the world. And I think you asked -- I think your question on Beauty was around do we see VSBA different from flagships? Is that where you were going? Yes.

Unknown Analyst -

[indiscernible]

Martin Waters

Absolutely. I talked at the beginning about the 6 principles that underpin what we do. And control, and I say this in a good way, and I say it to our partners, control is very important to us. Think about the highest standards of franchising around the world. You could take McDonald's on the one hand, lots of experience of franchising. Maybe we prefer to think about 4 seasons. When the customer experiences a 4 seasons, I don't know who's money it is that built the thing, I don't know who's operating. It's just the highest standard. And that's why we have control, we want to ensure that we have the highest delivery. So be that through pricing or assortment or replenishment or in-stocks or store chaining, very high control. So going first and foremost to market with VSBA, Victoria's Secret Beauty and Accessories, doesn't flush me at all. We'll establish those businesses in those categories ahead of the full assortment stores and the delivery will be the same. I would expect the pricing to be the same, I would expect the assortment to be the same, fully integrated.

Unknown Analyst -

Can you talk a little bit about merchandising differentiation? Does it differ at all by region or by country? And lastly, the high-teens operating margin target that was discussed, how do you see the international business relative to that goal?

Martin Waters

So the risk of sounding like Methuselah, in the old days, everything you sold and everybody needed to be different because customers look different everywhere and they behave differently and cultural taste were massively different. I don't see that anymore. I used to go to Germany 10 years ago and I'd see everybody wearing orange pants or red pants. And, wow, they were really different from people in the U.K. I don't see that now. We all wear the same stuff. We all take our cues from -- in realtime from media. So I think the extent to which the offer needs to be different around the world has reduced significantly. And our experience in the last 3 years has told us that what works here, works there. The bestsellers here are the best sellers there. And that's very largely true. I would think about it as 90% the same, 10% different. But if you just want an example of the sort of thing that might be different, I was looking at one yesterday in coconut. So coconut is a terrific fragrance and ingredient for us in Bath & Body Works. And in the Western world, we would foresee it as being quite sophisticated, a little bit edgy maybe, quite aspirational. When you go to the Middle East, it's not that at all. Coconut is not aspirational, it's a very low brand ingredient. So that's an example of where a little bit of local knowledge helps you. But those things are at the margins, really. Talking of margin, your second question, what's the profitability rate? I think Stuart said in his slide that our goal would be that whatever we do in international is at least as profitable as our domestic businesses and even accretive to that. And that's our goal, with building a long-term business that should be at least as profitable as the rest of our organization. The keyword to underline is long term. You build a sustainable, enormous business globally by investing in capability, investing in people, investing in all of the things that allow you to build a big business rather than taking those to the bank tomorrow. So we're very cautious about things, don't expect too much from us in the near term. Our goal is a long-term goal. The economics are very thin.

Laura A. Champine - Cowen and Company, LLC, Research Division

Martin, it's Laura Champine with Cowen. When I go to Paris and I see women Secret stores selling lingerie that's not nearly as sexy as Vicky's, and then I come home and at the end of 2012, you'll have 6 full-line Victoria's Secrets, it doesn't feel at all fast or focused. Why isn't that a triple-digit number, much less, double digits?

Martin Waters

You could do that if you wanted to. We've never opened a store outside of North America. Never. Our first one has been in the works for over 12 months. We've moved ahead of the opening of that to open 2 or 3 locations in the U.K., 3 in the Middle East, without opening a single store. We could just say, we think that this is going to be wildly successful and we'll bet the farm and we'll open in numerous geographies with numerous stores. I think that's a really terrible idea. We haven't figured anything out yet. We haven't figured out how to make this work. And if you need to it -- if you believe in operating at the highest standards of delivery of this brand, it's a really good idea to test it before you roll it. A really good idea. So that's what we do, that's our DNA, it's the way this company works. We don't just bet the farm. We test, we move very quickly when we know that it works, and very, very purposefully. So you won't see that from us. We wouldn't just say, we think it's a good idea, let's do 40, not in our DNA.

Amie Preston

One last question here.

Unknown Analyst -

You talked about there's a binary model, it's either wholly-owned internationally or franchise. Is there something in the middle ground, a joint venture, where you have an equity stake, where you're more directly a participant in the profit stream? And a second question, I'm just curious, when you look at the beauty accessory formats in the airports, do you view that as seeding those markets and is really a test in terms of if Victoria's Secret is applicable in a full retail model, or is that so different in terms of the sites and the economics of an airport that it's not telling you or directing you that way?

Martin Waters

Great question. I'll take the second first. I think, definitely, when we open a VSBA, it gives us an indication of how that local consumer will respond to the brand. It gives us an indication of that. In and of itself, that's a good idea. When we see that, that works, it actually gives us a great profit stream as well. So it's kind of 2 for the price of one. What I would tell you is, that we haven't opened any that don't work. So the notion of testing and seeing what we learned kind of goes away because VS works, it works. The appeal of the brand is real. And over time, I would expect us to see a mix of full assortment on VSBA stores. And you're right to dwell on the first question of, what do you mean by franchise. The way I think about it, and I encourage my team and people in the business to speak this way, is let's talk about people that we work with as partners rather than franchisees or licensors or whatever it is, it's just money. Whose money it is isn't that important to the way we deliver the offer. So absolutely, we're open to different capital structures that don't look like a pure franchise agreement. That's just simply money. As long as the fundamental economics of the business is there, as long as the customer response is there, and we're open to that. Right now, it's either wholly-owned in the U.K., Canada or it's franchised primarily in the Middle East, Eastern Europe and Turkey.

I'm sure you'll get the chance to ask questions of Les but maybe...

Amie Preston

Great. Yes, thank you, Martin.

Martin Waters

You're welcome.

Amie Preston

We're going to take a short break. If everybody could be back in here and seated by 10:15, we'll resume the program with Les.

[Break]

Leslie H. Wexner

Working? Okay. Well, that's very nice. Thank you. What a treat, regular coffee. I began by saying I'm in a good place. Listening and reflecting on some of the details, I think I'm even in a better place. So I'm borderline euphoric.

I want to talk, really, about in 3 subjects, and drill just a little bit deeper. One, talk about what got us here. This improvement that Stuart diagrammed for you in the performance of our business and the kind of relentlessness, I believe, that we're building into the thinking and the culture of the enterprise of just believing that we have to get better. No matter how well we do, it always could be better. It always could be faster, it always could be improved. And I think that notion of getting better is very different than continuous improvement, because I think continuous improvement makes me think of something mechanical and wonky. And getting better is very much of an individual challenge. And I think as we look across individuals, the leaders, the teams of the business, what I'm hearing back are those words. I'm trying to get better. I'm working at getting better. I have ideas about getting better. And I think building that into this, with the culture and the DNA of the enterprise, is quite significant.

We talk an awful lot about the focused, fast and frugal. And they go together. So the narrower focus, we are specialty retailers, it means that we're in the niche businesses, hopefully the product lines that we're in, the brands that we have are very narrow. The narrowness and the quality of what we do creating emotional content and we're very focused. We're not looking to go very far from our core, and the harder we work, we see growth in our core businesses, in our core categories.

And the world, clearly, is getting faster. No one is working to maintain their cadence, no one is striving to get slower. And when we talk about speed, what makes my heart sing is that when people that we're talking about speed and saying, it takes us so many weeks to get something done, are now talking about speed in minutes or hours. And so even the notion of we're going to decide this tomorrow, it's more like we're going to decide this, and then tomorrow we'll have time for you to do something else.

And somehow that notion of being fast, fast in response to customer, fast in everything we do, fast in our decision-making relates to, if you would, being frugal with resource and time. Resource, financial resource and time. So that notion of frugality has a financial dimension. Internally, it means financial, it means time efficiency. None of us can make more time, but if we could use our time efficiency, frugally, then we can presumably have a higher output. Most importantly probably to me today, is to talk about our domestic growth. And third, I want to touch on international.

So let me challenge you. But what -- beginning with what got us here, I think what got us here probably began 3 or 5 years ago, not being particularly happy with what we were doing. Clearly the business was growing, clearly the business was doing okay. As some of you have followed us and know the editing process that we went through. But the insight that drove that, and I think it really crystallized probably in '08, is that what had got us to where we were wouldn't get us to where we wanted to be. And so what I'd always say internally, say it a lot to myself and my family, is what got us here isn't going to get us there.

But looking back at '08, I thought that we were at an inflection point. Sadly, it was -- as the world was kind of cratering through the summer and clearly in the fall of '08, our debts were really cleared for action. We stayed focus. We were not distracted by things outside of our control. And we set our goal to be in the top 3 of specialty retailers on a global basis in terms of financial performance. And we put quality of earnings ahead of growth.

And one of the things that comes from experience is that quality is probably more important than quantity. If you have quality, if you have foundational strength, if you have very, very good ideas, you can figure out pretty quickly how to expand them. If you get growth pushing you, it will drive you to very funny places. It has, definitely in my career, happily, I think we collectively have learned the lesson. It's the quality of what we do is the foundation for our future.

And that notion of the quality of earnings -- we, unless the world turns to worms, will get a 15% operating profit this year. And after that, we want to march to 16% and 17% and 18% and 19% and 20%. We can see our way to that quality of earnings, and we see it in our domestic markets. The growth we used in North America, but when we -- as a summary, but we were talking about domestic growth, we're talking about the 50 states, not Canada. So we believe -- firmly believe, that there's a way to double the business and more than double the profitability in North America. And we're going to stay fast, we're going to stay focused, we're going to figure out how to do things better and better at every part of the business, from store up, how we receive goods, how we think about customers, the customer experience, whether it's in the fitting room, the cash wrapper or the washbasin, testing the product.

And clearly, this growth of the domestic business and the focus on the quality of what we do, which we measure against the quality of our earnings, is about building brands that can be global. And the strongest conviction that I have, and I've not seen this ever violated, is that brands that are not strong in their domestic market over time don't work internationally. Things that don't sell here won't sell there. And you can't export bad intellectual property very long. The natives figure it out. And the notion of the litmus test of consistent growth and improvement, growth in market share, growth in productivity, most importantly, growth of profitability, shows that we're progressing in our domestic market, that is the 50 states. And we have the opportunity, I believe, in about a 5-year period to double the business in those states.

So this intense focus on the domestic business puts us in a unique position, most of our competitors, U.S. domestic competitors, and international competitors, grow internationally because they have to. They have to. I don't have to reference the domestic competitors because you know them and you know their patterns. You literally know them. I don't know them very well. But the international business -- I mean, Sweden is a small place on a relative basis. Spain is a small place. So that Sara has to grow internationally because they, very early in the growth of their business, completely saturated their own domestic market.

Most international competitors in specialty retail, and they'll come to the U.S. break their pick. It just doesn't work. Now and the U.S. market is so competitive, so different, the compression of price, the issues that Martin Waters talked to, is that this is a tough place to make a living. And if we can continue to improve the quality of our business, grow our business here, then we can grow our international business quite separately. So this big focus on the domestic business.

And quickly, how we're going to do it. Stuart gave you examples of square footage in Victoria. We talked about the growth of PINK. In looking at this growth, when you break it down by brand, I believe our biggest growth will come from Victoria's Secret and it will come from PINK. There's just so much potential in these brands. And it will come from core categories. So in Victoria's Secret, the growth of the bra business, the growth of the panty business, the growth of sleepwear and loungewear and the growth of their beauty business, these are all significant.

To give you a number, the Victoria's Secret Beauty business is about $1 billion business in the United States. And Sharen and I both agree that the potential of the Victoria's Secret Beauty business in the United States is about $2.5 billion. As good as the Victoria's business has been, Victoria's Secret Beauty has improved in profitability, but we have not grown volumes significantly. We've grown volume insignificantly in the last 5 years. And we're getting really serious about the beauty business in Victoria's. You're talking about picking up about $1 billion of volume.

The PINK brand of Victoria is over $1 billion business. We think the potential looking at proven performance, square footage performance, across a cross-section of stores where we have the full assortment and we have real estate or separate PINK stores takes that brand to perhaps $2.5 billion to $3 billion in 5 years. The assortment exists. Our physical space and store execution skills don't. So that's a happy kind of opportunity. So we've got, nominally, $1 billion plus growth in PINK. $1 billion in Beauty. And probably in lounge and sleepwear inside Victoria, there's another $1 billion. And there's a sport business that can be developed and there's a swimwear business that can be developed.

And again, the development and the growth of Victoria in the United States dominantly in stores, but also online and how that customer shops across the channel and builds loyalty and frequency of purchase. What that means to the Victoria brand at large, I'm talking about all parts of Victoria, including PINK is a substantial opportunity.

Bath & Body is a bold big brand too. Clearly, Victoria is the biggest and the boldest. But Bath & Body has enormous opportunity to grow within their core categories. And those cores being the Signature Collection, antibacterial sanitizers and home fragrance. I believe that their home fragrance business, that is part of Bath & Body, probably can double in size. We have real traction in that category. We hadn't been very good at it for very long but we're really making progress. The sub -- the segments of customers that Bath & Body can reach is much broader than the segments of customer or product lines that it does reach. And what I mean by that is there's dominance in, I should say, hand sanitizers, shower gels, moisturizers, is that most people when they take a shower wash their hair. So if you think about the segments of body parts that were not fully matured, fully developed and quite significant for Bath & Body, whether it's hair care, whether it's skin care. Or if you think about it in segments of customers, the focus of Bath & Body very deliberately is on kind of a soccer mom. But there's a whole teenage segment. There's a kid segment. There's a guy segment. If you think of segments by gender or body parts or prices or technologies, my view of Bath & Body is we've just began to fight. The brand has traction. It has power. It has an incredible loyalty from its customers.

But funny enough, from inside the business, I mean, probably all of you have sensed the loyalty and the emotion that people connect to Victoria or PINK. I spent time in Bath & Body stores and it's a club. I mean, it's the same kind of, I don't know, emotion that I think women feel to Oprah, that it's that kind of thing to Bath & Body, it's the most unbelievable thing. And that's loyalty, that positive perception, seems to have spread virally around the world.

There's obvious growth in Henri Bendel. It's emerging, we're getting traction in New York. By the end of this year, we'll be at 18 stores in the product lines that's it's in: small leather goods, handbags, jewelry, gifts. We think we're building a very unique brand that has enormous profit potential. And probably for its size, sheer size and the amount of exposure that it has in our brands, it probably has equally high to Victoria, positive perceptions internationally. It's a tourist destination for travelers when they come to the United states. It's kind of an amazing thing, and we're really progressing. We think the potential for Bendel, we can attain at least 200 stores in the U.S. in about 5 years, probably the biggest potential is international in terms of numbers of stores, airports, good shopping precincts, whether they're malls or street locations, it would not be hard to imagine any of the 2,000 or 3,000 foot Bendel stores that we've opened on Bond Street or Sloane Street or any shopping center that's moderate or above it anywhere in the world. So a lot of opportunity.

Talking a little bit about La Senza in Canada. I think we're on the right track, that we've turned that business, literally, inside out. I mean, whether it's the leadership of the business, we fired all our customers, hired another batch, repositioned the store design -- when we bought the business, their best selling bra bandwidth was 38. And a year ago, it migrated to 36. Now it's 32. So this notion of being young and sexy and value and obvious, we're just getting traction with it. Now we'd have to develop the internal skills to really grow that business and sort itself out.

In Canada, it's getting an incredible reception, beyond my imagination, on a global basis. When Martin talks about franchise partners, we fired a significant number of franchise partners and closed a significant number of stores. We had a franchise partner in China and we fired them a year ago and closed the stores because the stores were an embarrassment. The partners that we're now working with, much to my amazement, there's a pool to open 50 stores. We would have been I think quite content and we said this to all of our partners, you don't have to open more stores. We really want to figure out this business, we have a lot to learn, and we don't want you to get ahead of us. We're getting 20% comps with your stores. What you're doing makes sense to us. We want more, better, faster. So the growth that we have seen this year and predictably, the growth that we will see next year in the international stores, we'll hold back or try to hold back because we're not confident that we built the talent and the experience to support this business.

Again, the question comes up, and I want to shift now to international. The international business and we've watched this, I've watched Benetton try it, I've watched Next, I've watched American competitors, and there's something really funky that happens in international specialty retailing. Sometimes what works there doesn't work here, and what works here doesn't work there. And brands should be able to migrate. Clearly, we think the world is getting at a -- increasingly getting flatter, so that things should work. But one of the things that I think we've learned, and it's foundational in understanding, is we don't need international business to hit our growth objectives. And what I don't want to do is have the international business be the millstone that we trip over or that pulls us down because it is so glamorous. And we've deliberately, and we thought about Canada for a long time before we bought La Senza, we wanted to buy La Senza, because it had scale in Canada and had international experience. We did not deceive ourselves that it was a Rose Garden, but it would give us the third-largest lingerie brand in the world. Victoria first, PINK, and then La Senza. So that was kind of good. Having saturation, perhaps above saturation stores in Canada, gave us, at scale, experience in another country. So I think we know more about Canadian real estate today and Canadian customers and shopping habits and holidays and labeling than any other American retailer, because we began at scale.

We're paying some dues for some of the lessons that we've learned, but we've also began international at scale. 300-ish La Senza stores around the world. And when Martin came on board visiting those partners and finding out what they were bitching about, what they were unhappy about, what we weren't doing, and very carefully I asked them, Who do you do business with on a franchise license, JV basis, that really makes sense to you? What did they do? And we've been very deliberate in what we've done. I may have told you this last year at this time, we've had stores open for several years in Canada and Diane Neal made a one-day trip to Toronto. I let her go. So if the President of Bath & Body had 40 or 50 stores in Canada, and she got a hall pass just to go see them to satisfy her curiosity. Sharen Turney just went 2 weeks ago to Toronto for a day to see what was going on there. We run Canada as if it is a very foreign country. Because it gives us a training base then to understand how to run international operations.

We could run Canada as the 51 state, but then we learn if we use -- we burn the learning experience of an international market, transferring things, different holidays, different labor rules, different patterns of performance, different kinds of real estate. Their culture is close to ours, but it's different. So the question, Why can't you have double-digit growth? Because we can't train ourselves that rapidly to be competitive. England is kind of easy. Different country, different -- it's a big damn ocean to cross, and there is a pattern of American businesses going there and being successful. Just to give you an insight point of view, I'm tough as nails about this. What are we going to do for the grand opening party? For a while, maybe 6 months ago, I was getting at least an e-mail or an inquiry internally about the grand opening party in London for the flagship stores. And the answer was, We're not having one. It's just another store. Focus on the domestic business. Please, don't help me.

A couple of weeks ago, somebody was at -- wanted to know if I could give them the date, a few people. I said I'd give them the exact date of the opening so they could clear it on their calendar. I said, "Why have you asked?" And they said, "Well, we want to be there for the grand opening." I said, "I'm not planning to go." It's just another store. I'm more interested in remodeling stores in California at 34 Street and the operations of the business. The numbers taking -- growing our business, growing volume but growing profitability and taking a $10 billion U.S. business to $20 billion is enough to wind my watch. And the international business, although it is an enormous opportunity, is different.

The question came up, "Why can't you rapidly expand in Paris?" I don't think there's 3 people in the company that speak French, and none of them are store managers. Several of us were in China a year ago looking at retail. And we spent almost a full day with folks from Apple in Shanghai. They had a dozen people, either the Chinese language -- who could speak Chinese, could speak Mandarin, or a year before the store opened, had, had a year of Chinese language lessons in the United States. And then they went there a year before the opening. These guys are really smart. You have to speak the language, you have to be inside the culture. How do you train store managers or district managers or regional managers for stores in Paris? Where do we bring them to? Paris, Indiana? Do we have store managers in Columbus that can speak French? Or district managers, people that can speak in their language.

So the fundamental thing about our thinking about international growth is, we see the opportunity, we're humbled by the opportunity, but we have to build a really basic set of skills: language skills, communication skills, people who have a full-time job here are working better and working hard at getting better at what they do, that's what they've got to do. And the international will grow as fast as we believe we can build the support and the experience to grow. It won't go away. It will get increasingly more competitive. And we don't want to take a giant leap forward and then have a giant leap back, and have the kind of disease that spreads to the balance of the company.

So we know that what we're doing in international is significant. 900 stores isn't exactly messing around. And clearly, with building more experience, some IT support, understanding how things work, we could probably compound that if we let it go at a magnitude of 50% a year and compound that for multiple years.

We recognize that China is a major market. We have one financial executive that I'm sure of who speaks Mandarin who lives in Columbus. But before we make that great leap forward, there would have to be a lot of language lessons and a lot of traveling, people that were comfortable, and even having fundamental understandings.

Opening stores is easy. Running them is hard. Delivering the same quality brand experience globally is really tough. And we're going as fast as we can go and the limitation isn't capital, the limitation isn't demand, it isn't -- we see the limitation is just our own experience and each country is different, and how do we build that experience?

There's probably a potential for more than 100 stores in Turkey. There's no one -- I think there's one person now inside at the home office in international who speaks Turkish. You're going to do business in Turkey, you have 100 stores and you have multiple brands, you have to have that kind of fluency. We got into a -- I was going to say an anecdote -- we got into a dispute through our partner in Turkey about a store design issue in the best shopping center in Istanbul, Istinye Park. The place I've been probably 4 times. And we were really at loggerheads. And I'm thinking, "What the hell?" I mean, I think God is on our side. What we're trying to do is the right thing. The Turkish developer has developed their -- met the man, utmost respect, I say, "Why doesn't he understand what we're doing here?" I was chatting with Bruce about this. And he said, "You know, the manager of Easton, Yaromir Steiner, is Turkish. Maybe we could call him up and we could explain to him in Columbus, Easton in Columbus, what our problems are and he could explain our point of view to the guy across the table in Turkey." What was just going to be a nonstarter, completely balluped situation, we're not going to open the store. We pulled back. This is it. You guys are unreasonable. We got to a very quick understanding.

So the notion of international being so significant, we recognize the significance. And the notion, again, of building the foundation, the talent, the experiences necessary, country by country, and not getting ahead of ourselves, this is just how we see the world. We think it's healthy. I know it's different than other people, probably not with some of you would drive us to. I'm kind of fascinated with doubling this $10 billion business in the United States and see the path to it, and we're going to keep the discipline.

So what got us here probably will get us there. We're going to stay very buttoned up, we're going to work very hard at getting better, at being focused, we're going to work hard at getting faster, and we're going to work very hard at being frugal in time and money and not to let distractions take us off our business. We're going to grow from the core and protect our intellectual property here. And the measure is simple, are we doing better here? And if we're doing better here, we know we have the opportunity to do well there.

So the notion of building a sustainable model in categories where we're world leaders, specialty retailing and beauty, with Victoria Beauty and Bath & Body, in lingerie with Victoria, PINK and La Senza, those are the core challenges that we have. And we like the fact that we're market leaders. And we are, I think, very realistic about the skills that we don't have. It seems to me that the more we know, the more we know we don't know. And so that curiosity and introspection, I think, is helping us.

I'd like to leave time for questions. So hopefully, you might formulate them.

I want to -- just to change the phase. I admire Stuart and Martin's deck skills, obviously, these guys have MBAs. I don't. Sometimes I say I don't proudly but -- I never developed deck skills, but they do and I admire their skills, and I don't talk well from electronically projected notes. So just to lighten things up a little, we have a commercial. It's a very special one, I want to show it to you. It will debut once, the day of the fashion show, which is November 29 on CBS. So just to give you something lighthearted, let's roll the commercial.

[Presentation]

If you think it was a long commercial, it was. It's 1.5 minutes, produced in Prague. Michael Bay directed it. We did it -- most of you know Ed Razek, it's his imagination that went into it. This is the first time we've had 8 supermodels in a commercial. And the intention is to open the fashion show with it on November 29. Can't give it to you now because it's kind of a secret. And the intention is to show it once then, and then it will only spread virally. So this is not a commercial that will run many times. Our experience with these kinds of commercials is that the audience that we get and the follow-on on this kind of commercial for Victoria's gets greater viewership, as great or greater than the Super Bowl. So we're really proud of this. Ed did a good job. Watch CBS, November 29.

I'd like to try to answer questions. Or if you have, you can direct them to me, to anyone, maybe Amie can...

Amie Preston

Les, we're going to start back here with Brian.

Brian X Tunick - JP Morgan Chase & Co, Research Division

First off, for Les, just some comments on the continuity of the business momentum, leadership changes at Bath & Body Works I guess are coming, VSD had a change in management. How are you thinking about continuity as we move into next year? And then for Stuart, a question on the operating margin target. Usually give us sort of a divisional breakout, how you think about that 15% goal, this new high-teens, where does the delta come, from the divisions or the other segment?

Leslie H. Wexner

I'll let you go first, Stuart.

Stuart B. Burgdoerfer

Thanks, Brian. The Victoria's and Bath & Body businesses are approaching an operating margin that is in the high-teens. So the other segment, and you understand the nature of our business and our reporting, that other segment is going to be certainly part of the equation. But there's more leverage in Victoria's and Bath & Body, so it's going to really come from somewhere there and through the other segment.

Leslie H. Wexner

The transition of leadership is always a very difficult thing in businesses that are driven by talented merchants. And we are in a fortunate situation. The -- I think the character of our business, kind of the values, the ethics, the standards, the behavioral part, coupled with the leadership brands and the performance, I think we're in the best possible place to recruit and we're developing talent. So we have an advantage. Interesting, though, in the transition of Diane Neal at Bath & Body and team, their life issues in place has been grounded, and I talked with Diane yesterday, she's coming to Columbus next week and probably the week after will make a sample shopping trip in a store at the Vuitton, and no one has to jump in the deep end of the pool, but those are the vulnerabilities and these will be exceptionally smooth. I think Nick's has been very smooth. I, again, talked with him yesterday. He talks to Diane regularly. She's in Columbus for Monday night meetings and working on things. So his learning curve, I think is accelerated and supported. So we're in a pretty fortunate place. I think the last thing that comes to mind, I think the businesses are pretty good at teaching. When you go into a different scale job or you change brands, it's not easy. But I think we've become pretty good at teaching.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

In expanding the square footage for the PINK concept, it looks like some will be standalone stores, some will be expansions of the overall Victoria's Secret stores. Can you talk a little bit about the performance of the standalone stores and the pros and cons that go into the decision to open those standalones versus as part of a larger VS store?

Leslie H. Wexner

Yes, it's a great question. When you get into this issue of replacement of real estate, what I'm concerned about -- let me back up to the remark that Stuart made, is if you're over-inventoried, it's indigestion. If you've got bad real estate, too much real estate, real estate in wrong places, it's really a terminal or a very dread disease. You just can't take a quick markdown and get past it. And so our primary focus is recognizing the strategic importance, or the strategic liability that real estate can be, and we comb through it. I mean, I can't tell you the minutia of the details, store by store, visits to shopping centers by our real estate guys to evaluate. When they're adjacent to a Victoria store, both benefit, because we're not driving traffic from 2 locations on the mall, and maybe people getting lost in between. So we work at adjacent space and properly size Victoria and PINK. And so the real estate work -- probably, if we said we didn't care about adjacencies and we were a little less finicky about quality of location within existing malls, good malls, we could probably pick up 200 stores in a year. But that wouldn't be smart. So we're very patient to make sure that we get the things that we want. So and that's true about the whole business. Just a mindset. We want to have really good locations. We want them to be forward-facing. We want to make sure that as the business -- as businesses change and their assortments change, the allocation of space across categories, new whizbang ideas about texture and display change. But it's complicated. Let me give you an example. It kind of demonstrates -- it hopefully demonstrates in a positive way the detail that we think about things. Say you have a $10 million Victoria's Secret store, and you're just running it really well. We've got a lot of those kinds of stores in Chicago. And we really focus on improving the quality of the manager, the quality of the customer's experience. And the volume of the business goes up 50%, way beyond what we ever had estimated that store could do. And the proportion of bra sales to total sales goes from 40% to 60%, roughly. You now need twice as many fitting rooms, which means, probably, you're going to have to remodel a significant part of the store and you're going to make trade-offs between selling space and fitting rooms. Just like you get into that kind of detail when you think about product, size of store, and then cross-brand selling. So we're really good at it, but it's meticulous work. And just, I can't tell you the level of detail. I mean, hours of Sharen's time could be spent on allocation to make sure she's making the right capital and profit decision.

Unknown Analyst -

Les, I'm wondering if you think about integrating the e-commerce experience here in the U.S. with your store's experience, and what are the hurdles to that integration? And secondarily, why not lead with e-commerce internationally, developing domestic language websites and maybe some foreign distribution centers to support that business as a way to identify customer demand and maybe the right markets for stores?

Leslie H. Wexner

I mean this is the most respectable kind of way, because we think it's a dumb idea. It's an obvious one, but it's really a dumb idea. Putting it in a harsh way. Why would you set up an e-commerce business to support a business that doesn't exist? So, say, let's open half a dozen Victoria's Secret stores in the Mid East and prove that there's a market. We'll learn something about Mid Eastern customers. We'll learn something about the acceptance of the brand. That has a big capital investment. And then e-commerce can follow. Now we asked ourselves that question, How do we do it in tandem to get e-commerce ahead, we're actually shipping, I think victoria's Secret ships into 200 countries around the world. So it has an enormous presence. But there hasn't been a business that we've opened with any local market, just the brand appears, and ta-da, there's mobs of people. Isn't that crazy? In 2 shopping centers in Moscow, Victoria's Secret Beauty stores opened, and just looking at the first week, 10 days of sales, that would be $2.5 million stores and 800 feet. Just opened. So say how much better could it be if you had e-commerce, if you had marketing, if angels landed. And say, probably, it would be better. We're just having trouble opening stores, which we're really good at. And looking to speak different languages and the stuff that goes with stores. The e-commerce business that we have, that's run out in North America, is a pretty sophisticated one, super profitable. And there's just a limit to how many things we could do simultaneously, ibid e-commerce, China, South America, I mean there's -- we have this abundance of opportunity and we're just picking very carefully. And for us, the hardest thing and the most important thing is store execution. Because if we deliver bad brand experience in the store, that contaminates the brand. And we have wonderful word of mouth. Just wonderful. And which is a surprise to us. So if we'd open stores and they struggle, then we might say we should have the media marketing, we need e-commerce for support. But we don't really need it. So it's -- and it's very complex with fulfillment and pricing and returns and just a whole bunch of stuff. So we're -- maybe in summary, if the low-hanging fruit is abundant and it matches your skills, and you can see how abundance of opportunity do that. So I want to be clear. We think about these things, we just don't need to do it. We have enough complexity gripping the e-commerce business in North America, shipping around the world, growing Victoria in the U.S., growing bra business, growing panty business, growing sleepwear business, and growing beauty business, growing Bath & Body, and La Senza, that just, we don't have the resource and we don't have the need.

Unknown Analyst -

[indiscernible]

Leslie H. Wexner

It could always be better. The internal discussions we had is if we had better technology, whether it's returning in stores or cross-channel shopping, and all those things are quite real. Question is, how many things can you do at once, and you need to do them? And the debate we always had is it may be necessary or maybe it's just nice. When I look at the progress that Victoria and PINK have made and the integration of those brands across channel with the existing technologies and existing skills we have, it's pretty remarkable. So I think we can't do everything at once. So that notion of being frugal with our resource, money and time, there's just so many things that we can think about and how we think about developing those skills. No -- very few good businesses got significantly greater or better because of e-commerce. And a lot of e-commerce has made businesses that were good, bad, because they looked at the bright and shiny objects. I marvel at Apple's store skills. More impressed with their store skills than I am with their e-commerce skills. And you think of the success of their stores, they should be propagating them like rabbits, really difficult. That's a great question. I really want you to -- you may disagree with our thinking, but I think it's important that you understand how we think.

Jeff Black - Citigroup Inc, Research Division

Les, Jeff Black from Citi. You -- we've mentioned all along, and it's kind of a mixed message almost, but cultural and language barriers are going to be barriers until they're embraced it would seem. Is there some kind of concerted effort to bake those skills into the organization over time? And really, what takes you from incremental development on international to being really excited and moving in a more aggressive fashion?

Leslie H. Wexner

I have high confidence in Martin Waters' answer.

Martin Waters

I have high confidence, too. So I think it starts with hiring people from different cultures, different nationalities with different expense. In my team over the last 3 years, we've hired significant leaders -- significant number of leaders into the business. Mary Mitchell, 7 or 8 years of international experience. Ralph Johnson came out of Triumph, lived in Asia for 10 years. Lots of people. Janet Chouraki worked in Coach running their international business for many years. So we're building the foundations, but let's not believe that those people joined the business and immediately on day one know how we think and know how our brands work and know how our organization works. So we're on a program of building that capability at the leadership level and also at the store manager level. So our fundamental belief is that to run one of our stores, you need to -- outside of the USA, you need to have worked in the USA for at least 3 months in a store, as well as all of the other things that you need to do. So there's just a ton of work going on to get people from different cultures and languages into our business, preparing for the growth that's ahead of us. That's kind of the way I would answer it.

Leslie H. Wexner

You speak a different kind of English. But if the international -- I mean, in a way we're our -- a foreigner. But how many people from other countries have you recruited in the last 24 months?

Martin Waters

So we now have capability in 30 languages. We have about 45 foreign passport holders in our international business. And we have people placed in country -- I said as one of my 6 important principles, we always believe in having our people in a country. We have people in markets, in 10 countries around the world now. So, yes, we're just starting to lay those foundations. And it's one of the reasons why we don't overpromise about tomorrow. This business is about building the foundations of long-term growth, and that's a multi-year effort rather than a multi-week effort.

Leslie H. Wexner

To give you an example of that notion of finding people who have retail skills that we think match ours or experience or personalities and values, and then migrating them into or adopting them into our culture in Columbus, Ohio. And then them getting it, if you would, because they have to be the ambassadors that export it. Much easier said than done. And some of this stuff is just -- you'd say, Well, other people have done it. And it's like, Not many. And not many have done it successfully. I mean, there's been many that have -- there's been a few that have -- that open up a bunch of stores, one comes to mind, opened 60 stores in Germany in a two-year period. The next 2 years spent closing 60 stores in Germany. I didn't make that up. I don't want that to happen. But this business of bringing managers to Columbus and training them so they really get the feel of the brand, our service model, that we want you to give refunds, we want you to make exchanges. This is how we run the business. And you have a store manager, a lovely woman, who should be -- was a District Manager in Turkey, came to the States for 3 months to work in Bath & Body. And then we discovered when she went back, she really knew how to -- she really knew know how to run a store, she was a terrific. Except the 3 months that she was here, we didn't have her at any store openings. And she was the person that we were training, not only to run the stores, but to go to openings. Oops, got to put that on the things to do list. Because if you're going to be opening stores, not only that people have to run them, but they have to know how to open them. It's that level of nit and nat that you get tripped up. Just to give you other part, about the cultural part. I know, because Martin told me, that the laws in Saudi Arabia were changed, and women can now work in sales jobs. So we have a very successful lingerie business in Saudi Arabia. And it was successful even though there are no fitting rooms, women weren't the salespersons, and men were the operators of the stores. And I haven't seen the stores in KSA. But on the change of rules, business improved 40%. This is a 2-week ago phenomenon. And I'm saying, But we don't have any fitting rooms. Now you have women as sales associates, obviously, it would be obvious to me that business would probably get better, but these stores were never built -- without fitting rooms. Now we're having a discussion in Saudi culture, Do people try on lingerie or try on clothes in stores? And it's like, we don't know. So I caught a bit of a conversation yesterday about how do we know, and who do we talk to about the appropriateness of fitting rooms in the Mid East. And Mohammed Al-Shaya's nephew is doing a one-year internship with us. That's how serious we are about building a relationship with them. So he's in Columbus. So one of the questions was, Tell us about fitting rooms in the Mid East? And he said, well, he didn't know how it worked in Saudi Arabia, but he knew, as example, that fitting rooms have to have privacy. There can be no line of sight. It would be really a very ugly thing if there's any kind of even glimpse of a body, and the doors have to go floor to ceiling. So they're absolutely rooms. No kind of partition doors. No drapes. I say, Why am I telling this story? How many guys in our store design and construction department have ever asked themselves the question about the appropriateness of a certain door design in a certain culture and the necessity of fitting rooms, or powder rooms, or how transactions are handled? It's tough stuff. So and we want to make sure that we don't screw up. And we don't have to screw up. I mean, we don't need to go any faster than we can successfully grow.

Unknown Analyst -

Les, I think you touched upon this a little bit, but can you update us on the intensification project? How many markets you're currently in, and what elements from that intensification project can you roll out to the fleet?

Leslie H. Wexner

Stuart can or...

Stuart B. Burgdoerfer

Tom, we're not going to provide a lot more on it, to be honest with you. We're working to run stores better, as I alluded to. We are working some work in some important markets on that. It's important work. And because it's so important and we think it's -- we want to be careful about how much we share with other retailers, frankly, we're not going to provide a lot more about it than that. I'm not trying to be unhelpful in that view. It's very important. We're working on it. We've made a lot of progress. It's kind of like the subject of speed. Similar in our thinking about its importance and how specific we're going to get about it. So we are working in certain markets to really improve stores. We've gotten some good results, and that's about as much as we're going to share. Thanks.

Leslie H. Wexner

And bordering on what Stuart said, briefly, is that we're really trying to become much more secretive. Because it is not in your interest as investors and our interest as operators to give the recipe for secret sauce. And so we'll talk about things generally, and I think you'll find that increasingly into the future, that the performance, this is about what we're doing, these are areas, but when it gets into -- you have a legitimate need to know, and we have, we think, a real legitimate need not to tell. I think this is a great audience. So you should be hearing that pretty consistently, people say they -- we'll talk about an area of focus or how we think of something, but we won't detail it. Not if we think we've got some competitive advantage, insight, learning, that we just...

Amie Preston

Les, we're going to take one more question. I think, back here.

Unknown Analyst -

Les, I was just wondering if you could share with us your thoughts on the environment, the macro, what's going on? You see the customer every day of this year, last month was fairly strong across the economy in retail. What are your thoughts going forward, and maybe the holiday season into next year, just in general, because everyone's, obviously, very concerned.

Leslie H. Wexner

Maybe it's because of your accent or mark, I think it's just going to be dodgy. I think I know what that means. But I think the world is going to kind of glump along. I keep -- when things really bottomed, or all the lights went on in October of '08, I thought, Boy, this will be a year or 2, and people were saying this could be a longer event. And now we're 3 years past it. And I just see it kind of glumping along. You, obviously, have other world events. What we are trying to do is make sure that if there's any, I don't know, anything significant outside of our control that we're not vulnerable or at least vulnerable. So we -- referencing, you remember the slide on CapEx. Kind of on a normal basis, our CapEx probably should be, I don't know, somewhere about $550 million, $650 million of CapEx, that would look at numbers of stores and things that we're doing. That would be a good number. But when the shit hit the fan, we pulled it back to $200 million. And so that the notion of how we think about speed, as if we look at capital expenditure and capital commitments the same way. Don't want to get out there too far because when the ice cracks, it could really be -- it could be terrible. Not anticipating that. The dominant focus of the business is just to mind our business, be careful about what we're doing and get faster. And that's being faster, being more agile, gives us ample opportunity to pursue upside. And I think that's kind of the normal -- as far as I can see, that's how you should run a business. If you don't have to make long-term commitments, you might have -- you should have long-range thinking, but you really don't want to get strung out financially because the world, I think, continues to be a place where it is hard to be predictable. So I think maybe the net of it, I think we -- as that is a background, and when I talk to myself, I want to be careful, I want to be cautiously optimistic. I'm not pessimistic, and I'm appreciating the progress that we've made. And I think as far out as I can see, it kind of looks like that. If I knew tomorrow's news today, financially, I'd give up my day job and I'd be Warren Buffett or somebody. But who knows? I just to stay, keep us all thinking about the things that we control, the things that we can influence, and not spend a lot of my time worrying about stuff that we have no control over.

How sad. That was the last question. I enjoy this very much. I hope you've got a feeling about the deliberateness of the business. And I think we're in a really good place. What got us here, will get us there. I really like the game plan. We're going to stay on very fundamental things. We think that builds a foundation of sustainable growth, and builds an organization that we think we will be proud of on a global basis.

And we're not willing to take any risk to damaging our intellectual property, let alone our financial resource. So that our ability to grow domestically and internationally is dependent on soft things like, Do we have the people? Are we're gaining experience? So if we open stores there, we can open them very quickly, with the same degree of confidence that we have if we were opening a store in Milwaukee, Wisconsin, or Los Angeles, which is very, very practical stuff.

And you will see substantial growth internationally, but it's not in the model. And it's a plus, and it's firewalled off in Martin Waters' domain, and I try not to spend a lot of time in his country.

Thank you.

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