L Brands' (LB) Q1 2016 Results - Earnings Call Transcript

| About: L Brands, (LB)

L Brands Inc. (NYSE:LB)

Q1 2016 Earnings Conference Call

May 19, 2016 09:15 AM ET

Executives

Amie Preston - Chief Investor Relations Officer

Stuart Burgdoerfer - EVP and CFO

Nick Coe - President and CEO, Bath & Body Works

Martin Waters - President of International

Analysts

Christina Brathwaite - JPMorgan

Brian Tunick - RBC Capital Markets

Richard Jaffe - Stifel, Nicolaus

Kimberly Greenberger - Morgan Stanley

Dana Telsey - Telsey Advisory Group

Betty Chen - Mizuho Securities

Paul Trussell - Deutsche Bank

Anne-Charlotte Windal - S C. Bernstein

Lorraine Hutchinson - Bank of America

Omar Saad - Evercore ISI

Anna Andreeva - Oppenheimer

Lindsay Drucker Mann - Goldman Sachs

Michael Binetti - UBS

Operator

Good morning. My name is Laurie and I will be your conference operator today. At this time, I'd like to welcome everyone to the L Brands First Quarter 2016 Conference Call.

I will now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer for L Brands. Please go ahead.

Amie Preston

Thank you. Good morning, everyone, and welcome to L Brands first quarter earnings conference call for the period ending Saturday, April 30, 2016. As you know we released detailed commentary last night, which is available on our Web site. Given the shorter length of our call this morning, we will make some brief introductory comments in order to allocate more time to your questions.

As a matter of formality, I need to remind you that any forward-looking statements we may make today are subject to our Safe Harbor statement found in our SEC filings. Our first quarter earnings release, additional commentary and earnings presentation are all available on our Web site lb.com. Stuart Burgdoerfer, EVP and CFO; Nick Coe, CEO, Bath & Body Works; and Martin Waters, President of International are all joining us today.

All results that we discuss on the call today are adjusted results and exclude the 2016 pre-tax charge of $34.5 million or $0.07 a share related to the actions at Victoria's Secret and the 2015 pre-tax gain of $78.1 million or $0.23 per share related to the sale of our remaining interest in the third party apparel sourcing business.

Thanks, and now I'll turn the call over to Stuart.

Stuart Burgdoerfer

Thanks, Amie, and good morning everyone. Although we delivered first quarter results above our initial expectations, we were not satisfied with our overall results, as adjusted operating income declined to 4% compared to last year, primarily driven by a decline at Victoria's Secret. We had a range of performance across the company in the first quarter with PINK and Bath & Body Works delivering strong results and weaker performance at Victoria's Secret lingerie and Beauty. From a macro perspective, we did experience a deceleration in trends through the quarter but we are focused on what we can control and we have opportunities to improve our execution.

It's important to note that we have made significant changes in the last couple of months at Victoria's Secret. Making organizational and leadership changes, exiting merchandize categories, exiting nearly 300 people from the business and changing our promotional strategy. We're making these changes proactively from a position of strength and following a record fourth quarter and 2015 for the brand. Our revised outlook for 2016 will reflect the impact of the actions at Victoria's Secret as well as incremental cost related to our plans to develop China as a company owned business. Our brands are strong and we're energized about our opportunities for growth. We will continue to leverage these in the business and be flexible and agile in our approach in order to maximize profitability.

With that I'll turn the discussion over to Nick.

Nick Coe

Thanks, Stuart. So I think the only comment I would add from the notes that went out last night is I've sent an amount of time in the stores over the course of the past few weeks so I’ll comment on those observations. And I think firstly we remain pleased with the traffic and the energy that we're seeing in the stores. Secondly we appear to be keeping customers pretty engaged through the newness and the compelling stores that we're telling, which is really important for us when you think about the destination brands that we really need to continue to keep engaged.

Thirdly for the most part, pretty pleased with customers' response to products and assortments on our collection. I think we can do better but pretty happy from that perspective. As it relates to speed, really pleased with our ability to have been able to leverage the speed model into --our ability to chase in the home business and that's been important for us not only because it's the most difficult business to chase into but also because it's still very, very healthy business for us. And were pretty pleased in terms of what we're seeing from the real estate investment and the type of return that we're getting there. So again we're relatively pleased with what's happening there and will continue to monitor that and we think we act as, as we would. And then finally as we see the marketplace remains pretty dynamic, we'll continue to leverage our most important discipline which is really the motionless thing as close as we can to the customer and then reading and reacting to help behavior.

I'll turn it over to Martin.

Martin Waters

Thanks, Nick, good morning, everybody. As you would expect, I've be spending quite a lot of time in China recently which we will now pursue as company owned. Although there's still much to do, I'm really enthused about the teams that we put together for China and the progress that we've made in resonance for the launch of our full assortment stores at the end of this year and also our direct to consumer business which will open later this year in China. I'm also very focused on growing our existing businesses in the UK which have been good and in the Middle-East which have been tough recently, as well as on improving performance in the VSBA business. All in all, I feel good about our prospects for growth and of course remain focused on the fundamentals which is also that great execution of our brands wherever we go in the world. Thank you.

Amie Preston

Thanks, Martin. That concludes our prepared comments this morning, and at this time we would be happy to take your questions. Please, as a reminder, so that we can get to as many of you as we can, please only ask one question. And Lorrie I'll turn it back over to you.

Question-and-Answer Session

Operator

Your first question comes from the line of Matthew Boss of JPMorgan. Your line is open.

Christina Brathwaite

Hi Christina Brathwaite on for Matt. Thanks for taking our question. Would the goal of replacing this preliminary product apparel merchandise, can you just walk through some of the puts and takes of exiting those businesses on this year and any quantification -- pressure that you are expecting in the SG&A reduction would be helpful.

Amie Preston

Thanks Christina. We'll go to Stuart.

Stuart Burgdoerfer

Sure. The rational first of all for the category exits is to focus our energy at all levels of the business, our resources at all levels of the business on our most significant core categories, bras, panties, beauty in the Victoria's Secret business. And we made a conclusion -- come to a conclusion that this one business was not one of those core categories that had been flattish business for the last several years, many years and we're putting our energy against those core categories to accelerate growth in bras, panties and Beauty. It is going to put some pressure on the business along with some of the promotional changes that we're making, less direct mail couponing, et cetera, but as you outlined in your question, we have some expanse savings that we've actioned as well including the elimination of the catalogue spend and a meaningful reduction in our home office overhead, which in part offsets the sales and profit pressure from the category exists and the impact of the promotional changes that we’re implementing. But at the end of the day as outlined in our commentary that we send out last night and the brief remarks we’ve made this morning. We’re making these changes from a position strength to accelerate growth in these core categories and there will be some short-term financial pressure as outlined in our guidance both for Q2 and the full year. But we’ll then work hard to beat that guidance as you would imagine and we’re absolutely confident that these changes are the right thing to do for the long-term health of Victoria’s Secret and again to accelerate growth in that business.

Amie Preston

And Christina I just want to clarify something. In your question you said we were exiting athletic apparel. That’s actually -- what we are exiting is apparel that we are now selling in the direct channel that is not carried in the stores. So it’s things like T-shirts, sweaters, boots for example. So we’re still very focused on growing our sport and athletic business.

Christina Brathwaite

Right, I misspoke. I think, I was trying to say, you’ve replacing athletic apparel or tilting that, or replacing it with more additional athletic apparel?

Stuart Burgdoerfer

Yes. Again we’re not exiting athletic apparel. Just to be clear, we’re not exiting athletic apparel. We believe strongly in the sport category. Our primary focus in that category is in sport bras, but we sell a lot of sport pants and related sport merchandise and we have strong belief in that category and we’re realizing good sales growth in that business. So we’re existing non-athletic apparel at Victoria’s Secret direct that is not carried in the store.

Operator

Your next question comes from the line of Brian Tunick of RBC Capital Markets. Your line is open.

Brian Tunick

Thanks. Good morning, everyone. I guess two questions. One, I guess Stuart, do you view 2016 being the resetting year or do you think there is potential, more pressure in 2017? I guess do you think you can grow earnings again next year? And then the second question really is on the expected traffic impact on pulling back from these promos. You’ve mentioned macro a lot in the script. And just wondering what’s going on in the core lingerie business, yet you feel confident you can pull back on some of these promos and still drive improving comps?

Stuart Burgdoerfer

So Brian, I appreciate you asking me the question about kind of is 2016 a reset year and then how do we think about 2017. One of the things I love about working for our Company and love this point to be most significantly, but the leadership team, our point of view is that while we’ve reset guidance and I’m not altering that guidance in mindset, this isn’t a reset year at all.

So we’re going to have some challenge in the near-term and we’ve done our best to outline that in our guidance. But I’ll tell you starting at the top and with some acknowledgment of short-term pressure, we’re going to work very hard to exceed that guidance and in no way do we have in our mind that 2016 is kind of reset year with no growth. Again the guidance is the guidance, but you should know and known us for long time, our mindset is we’re going to work very hard to drive great experiences for customers, very strong sales growth and resulting profit growth.

So I’m glad you asked the question, and obviously from that expecting very good 2016 after some short-term pressure. Again the guidance is the guidance and then certainly expect a very, very good 2017. So good question. With respect to the traffic generated from direct mail couponing, we’re working hard to replace that volume and that profit. And again we’re doing it for reasons that I think you appreciate from our earlier remarks in terms of doing promotion that drives trial in key categories, and at the end of the day is healthier, we believe for the business. But in the short-term it’s challenged, but we’re doing a lot of things in terms of test and rolling different ideas to ensure that we have healthy traffic and good sales results and that will be a week-to-week, month-to-month exercise listing, very actively worked on Mondays and Tuesdays every week and with good test and learning and adjustment.

Again another thing I really enjoy about the company and respect about the company is that we test, we read, we react, we are agile in our thinking and in our execution and its more dynamic right now than typical, no doubt about that, but I’m confident that we’ll read and react and adjust appropriately.

Operator

Your question is from Richard Jaffe of Stifel, Nicolaus. Your line is open.

Richard Jaffe

Thanks very much. I guess two-part question. The lost sales you described at 525 million. Could you just give us a sense of how that will breakout apparel and shoes in the direct channel and the swimwear from both direct and store. So the impact on stores versus direct? And then if you could just comment on how this is different from 2014 when you consolidated the store with the catalogue and eliminated a number of merchandize categories at that time.

Stuart Burgdoerfer

Yes. So the biggest component of that -- Richard, thanks for the question -- is the swim business. And it distorts or mixes higher to the direct channel versus the store's channel. The apparel that were exiting that we commented on early in the call, that solely indirect and the swim business was larger in the direct channels and in the store channel. I'm not going to go deep on numbers but directionally that would be the way to think about it and that's how that's how it frames. What was your second part?

Amie Preston

Yes. How's it different from 2015 [ph.].

Stuart Burgdoerfer

Thank you. So what's different about this versus the earlier exits Richard is that truly now with these changes, we will only sell merchandize in the direct channel that's sold in the store. And while we made important exits, as we all remember earlier we still had merchandize stalls and categories that were sold online that weren’t sold in the store and with this set of changes the offering will be truly the same, online as different stores and part of that frankly has been drive to take our complexity and simplify the business and focus the business. But that's how I characterize it.

Amie Preston

Thank you. Next question, please?

Operator

Your next question is from Kimberly Greenberger of Morgan Stanley. Your line is open.

Kimberly Greenberger

Stuart. My question is on inventory. Here at the third quarter I think you said is up 3% at retail and I think you got mid-single growth at the end of Q2 has been a touch higher than your inventories been running. I'm wondering if you can comment, are there some pockets of excess inventory here in the first half of the year that you think you need to work through in the second half and sort of medium to longer-term what sort of inventory growth rate do you think is appropriate for the business.

Stuart Burgdoerfer

So our thinking about the inventory and inventory discipline hasn’t changed, and I'm not saying that because it's convenient. It just hasn’t changed. With that said we are experiencing some short-term sales pressure for the reasons described in the context of the sales. So Kimberly it's going to be up mid-single as we outlined. In terms of any significant pockets of inventory that we're concerned about -- we're not -- and we're very focused on ending the spring season clean and at the right levels and that's requiring some pretty intensive energy right now. But it's a discipline that's very important to us and while mid singles are a little ahead of sales, certainly not dramatically ahead of sales and we were working it actively to get to that result. But again not intending to have any significant pockets of inventory in the business that we won't have dealt with through the semiannual sale activity as we wrap up the spring season.

Amie Preston

Thanks, Kimberly. Next question?

Operator

Your next question is from Dana Telsey of Telsey Advisory Group. Your line is open.

Dana Telsey

As you think about Victoria's Secret business, and the people and product changes, how do you think about the guide posts of how that business changes go forward with its new product introductions, how are you thinking about integrating loyalty and what does this mean for the long-term top line growth of the business. Thank you.

Stuart Burgdoerfer

Yes, I mean Dana, at the risk of thing repetitious, which I'm certainly not intending to be, we're making important changes to the business. So just again to step back in an effort to respond to your question we think that reorganizing the business into three units; Victoria's Secret lingerie, Victoria's Secret Pink and Victoria's Secret Beauty, each of which have the stores and direct activity under common leadership for those three businesses, we think that's an important change in organization that will simplify and focus the business on those three broad categories.

In terms of guide posts or objectives, the purpose of all it is to ensure that we're focused and to accelerate growth in core categories. Obviously Pink has been our strongest performing business over the last several years and that sales trend, that sales performance has continued in 2016. Beauty has been the weakest of the three businesses, and as we shared in our commentary, a new leader joining the business at the beginning of this month, and it will take some time, a logical question we get asked understandably within and outside the business is how long will it take to substantially improve the term of that business, and it is a bit longer in lead time and cycle and approach development activity than some of our other categories, but with new leadership and again the focus through the organizational changes I mentioned certainly optimistic that we'll see an improvement in trend there.

And then the lingerie business is the core in terms of bras and panties, a new leader coming in at the beginning of September with very substantial experience and an existing strong leadership team. So an additional resource in leadership -- leader coming in to strength in that team, but coming from a good base, and again optimistic through these changes that it will accelerate growth and all the measures, whether customer satisfaction, sales growth, margin improvement, inventory turn, those are all the things that we'll be driving towards.

Amie Preston

Thanks Dana. Next question please.

Operator

Your next question is from Betty Chen of Mizuho Securities. Your line is open.

Betty Chen

I was wondering, if you can talk a little bit about the thinking behind China making it company owned versus franchise, and sort of the timing what now and kind of when we can expect some contribution from that business? I know that there's already been 26 stores? Thanks.

Amie Preston

Thanks Betty, we’ll go to Martin for that.

Martin Waters

Hi Betty, thanks for the question. Yes, China is obviously a massively important market for us. We’ve been very engaged in the last 12 months with our partner, who've done a terrific job. Really they did a great job and standing up some 26 VSBA stores. But as we look forward, and we think about the shift scaling opportunity of the market and we combine that with the complexity -- the intrinsic complexity that there is in China, particularly around regulatory affairs, around how we build our stores, how we operate those stores, it seems to me that we’re going to be doing most of the heavy lifting anyway. It makes sense that we should be in it completely.

So when can you expect this should start to make a contribution? Well the sales contribution will start at the very end of this year. From a profit point of view, I don’t really know. Our experience in the UK is that it takes two to three years to get a business from the investment phase to the profitable phase. And it really depends on the amount of time that we take to build it. Our goal here is to be in it for the very long-term rather than to take short-term gains. Hope that gives you some insight.

Betty Chen

Martin, do you see the customer behaving any differently than you've seen in the U.S. or elsewhere?

Martin Waters

Well, the business that we’ve got right now is the beauty business and that performs remarkably similarly to the rest of the VC business globally. One of the neat tricks about the VSBA businesses is it’s a replication model of what we do here and the sales patterns that we see are very broadly similar everywhere. To the extent that lingerie will be different, well, don’t really know. Find out at the end of the year, when we open the stores and you’ll be the first to know if u call me.

Amie Preston

Thanks Betty. Next question please.

Operator

Your next question is from Paul Trussell of Deutsche Bank. Your line is open.

Paul Trussell

Just wanted to ask a question regarding the catalog. You mentioned that you had tested over the past year reducing the distribution. Maybe you can just give us a little bit more insight on the results of that test and thoughts overall around catalog impact. And then just secondly, with the sales guidance adjustment that was made to flattish comps, can you just speak more specifically about where that down take occurred? Is this simply a slowdown expected across each of the banners equally or to what extent is this more of a beauty biz step down lingerie et cetera?

Amie Preston

Great, okay. So with respect to catalog, we did test the elimination of catalog into significant markets for a year, and saw a relatively small to no impact on sales. And if one does simple math on it, need to get a lot of sales or meaningful amount of sales to take for the catalog. And round numbers, we were spending $125 million to $150 million a year on the catalog and we ran it again for a year and two significant markets, and didn’t see a significant change in sales. Separately, and I think importantly for the whole business in the fourth quarter 2015, we reduced our catalog activity by nominally 40%, and demand in the direct channel was up, if I remember right about 15%. So both based on two markets every tested and significant reduction in activity in our fourth quarter last year for the whole business, it made us confident that while there might be some sales pressure certainly from an operating income standpoint meaning that it paid for itself on NOI basis, we felt that this was an appropriate change to make in our business. Importantly one of the things that we try to do as we say, if we were starting this business today in current context 2016, would you start with, one of your major ideas being a catalog, a paper based catalog sent through the mail, as one of your key if not your key marketing activity for a global brand. And as we thought about it in that way, along with the numerical test and financial evaluation, very comfortable with the change that we’ve made.

Separately, with respect to your second question on sales guidance and the reduction in comp guidance, I’m glad you asked. It’s important to know that as we outlined in our overall remarks, that we have a range of performance in our business. So in terms of the sales reduction, we haven’t changed our assumptions about Bath & Body Works at all. Bath & Body Works grew operating income 15% in the first quarter. There will be some occupancy pressure in that business in the latter half of the year in connection with the remodel activity for the wipe on in Bath & Body remodels, but Bath & Body is running a very good business.

As we also outline the PINK business, very strong. So I wouldn’t want outside analysts or investors to think that L Brands has a broad based concern about sales trends. We actually have important parts of our business, most notably Bath & Body Works and PINK that are doing very, very well and we've got some pressure in other parts of our business, in part due to changes that we're making in terms of category exits and reduction in promotional activity, but some weakness in the Beauty business that we've been experiencing now for some time. So a range of performance -- overall, yes we've taken our numbers down but it's on it's due to various specific things in only certain portions of our business. Thank you.

Amie Preston

Thanks. Next question, please?

Operator

Your next question is from Anne-Charlotte Windal of S C. Bernstein. Your line is open.

Anne-Charlotte Windal

Two questions if I may. So the first one is a big picture question. So we're picking the long-term view. What does the VS business look like in five years down the road? So what's the contribution from PINK, Lingerie, Beauty, Sports and where would you like this business to be in terms of operating margin. And then I was on wondering if you could also give us a little bit more detail on the impact from the category exit. So if you could help us think through the seasonality of this $525 million business that you are exiting, what's the cadence of the exit and the expected impact to the comps in the back half of this year, and then through a fiscal 2017 as well? Thank you.

Stuart Burgdoerfer

Okay, so in terms of what's the Victoria's Secret business looks like in aggregate and advising [ph] the major component five years from now as a mindset and in terms of goals that we aspire to in our business, in many periods we accomplish, we're looking to grow the top line sales in major parts of our business on the low side at 5% per year and on the high side when we're really doing well 10% or 15% per year. So in terms of what are we trying to get done top line wise over the next five years, it would be growth ranging from 5% to 15% depending upon category and frankly how well we execute.

In terms of the operating income rate for the Victoria's Secret business, this is one of the best brands in the world, and from that brand equity, emotional content leadership position, when we execute really well, we have pricing power. We deliver emotion, great customer experiences, differentiated from competition and that creates pricing power which ultimately creates productivity and margin. And so with that belief, and we got to work hard to continue that leadership position, we believe the operating income rate for Victoria's Secret should absolutely be high teens, if not 20% when we think about our own history and the best in the world. So hopefully that gives you some sense of our thinking and what our goals are over the next five years.

In terms of the exists and their seasonality, we will sell through the swim that we have -- the swimsuit business that we have in stores in the spring season and to the extent that we have some swim inventory remaining after spring, we'll sell that through the fall season 2016 in the direct channel, that's our current thinking and our current plan. With respect to the apparel exit, again that's mostly or fully I should say in the direct channel and we'll sell that both in the spring season and to some extent into the fall season. So we're looking to -- particularly in the store side of the business move through the inventory. This is about swim at pretty reasonable taste to simplify store level execution and frankly to pre up space through other categories like core Bras and sport and other things, but we won't be as urgent with respect to the swim and non-go forward apparel exit in direct because it doesn’t create the same kind of complexity from an operational standpoint in that channel. So in terms of dollarizing that by a quarter, it's going to be more dynamic but hopefully that's helpful to you in an overall modeling sense.

Amie Preston

Thanks. Next question, please?

Operator

Your next question is from Lorraine Hutchinson of Bank of America. Your line is open.

Lorraine Hutchinson

Stuart, the comments around the catalogue testing were very helpful. Can you provide any color around what you've done to test cutting the promotional cadence and what results you've seen there? And then what portion of the $525 million of discontinued categories will hit revenues this year versus next?

Stuart Burgdoerfer

Yes. With respect to the change and promotion and testing of that, we have pretty reasonable measurement of attached sales and the view of incremental sales related to our historic promotions, meaning we have pretty good analytics around what we got from that activity historically. And what we’re doing now as I think you appreciate is we’re looking to replace that activity, which was -- we called it customer relationship management. What it really was, was couponing through the mail in many respects. And we’re looking to substitute that with various category level promotions in particular that drive trial of key categories.

That activity and the results from that new activity or being evaluated every week and so that will be dynamic. And while the nature of the offers that we utilize through direct mail, which most typically were a free panty and $10 off of a bra, we concluded that A, we’ve been running that for a long time; B, a lot of customers came and they got the free panty and didn’t buy anything else. And so we think there is a clever way, a smarter way to drive traffic that's more healthy for the brand. The details of that are being literally worked every week, including test key promotional ideas in the business.

So hopefully that gives you some sense. It would be easy to return to the prior approach and we know what it’s worth. We have a pretty good sense of what it’s worth. What’s important here is we’re making important changes in the promotional approach to the business for the long-term health of the business. It wouldn’t be hard to turn that stuff back on in our collective judgment. But the right thing to do for this business is to have smarter ideas about driving trial and driving traffic versus get a free panty and $10 off a bra.

Amie Preston

And Lorraine, I'll try to help a little bit with that $525 million of exited sales. So I’d say this is very big picture high level, that about two-thirds of that is swim and the remainder is apparel. As you can expect, we typically sell most of our swim business in the first half of the year and we still have that product that we’re selling through this year. So that impact will be more fully felt in 2017. The apparel business, we’re winding that down through this year. So we’ll see some of that impact in the back half of this year and then the remainder in the first half of next year.

Stuart Burgdoerfer

And Amie is outlining it particularly on a sales standpoint. There will be some margin pressure in 2016 and it's completed in our guidance. So margin pressure in ’16, margin rate pressure related to the exit activity that we're talking.

Amie Preston

Great. Next question please.

Operator

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

Omar Saad

Thanks for taking my question. I was hoping maybe you could dive in a little bit more detail around the Victoria’s Secret Lingerie category, what’s going on there. Especially in bras, I’m wondering, if you could specifically maybe address the braless trend? Is that something that's significant, lower price point or maybe higher units. Any greater details around the category outside of the macro would be helpful and where you think the opportunity to improve it is.

Stuart Burgdoerfer

Yes, Omar, thanks. So first of all, our total bra business, lingerie, PINK, store and direct, grew in the first quarter. So in aggregate, all types of bras across both channels had positive sales growth, high low-single-digits in the first quarter. There are fairly some trends in the business including the braless trend that you mentioned and I think is well known and being well covered and we’re participating in that trend in a big way, as you would expect a market leader or the market leader to do. And frankly that’s -- there's nothing new about that. We’re in a business that has different fashion trends from time-to-time. And hopefully in most cases, we’re leading those trends or certainly taking good advantage of those trends, and things like sport bras or braless, we think we’re participating well with respect to those trends.

So again total bra business including PINK up, certainly some changes in trend that you comment on that we’re participating in. And we’re working -- we’re not satisfied with a bra business. We want to grow faster than that and particularly in the core lingerie part of it and it’s not a sick business but it’s not growing at the rate we want. And it's so core to this business that that's in part why we’re making some of the organizational and leadership changes that we've talked about.

Amie Preston

Thanks, Omar. Next question, please?

Operator

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

Anna Andreeva

I guess the question to Stuart on SG&A, an increase in the guidance for the year from previous for flat, I guess help us reconcile of that despite the additional savings from catalogues and headcount reductions and should we expect additional SG&A opportunity in 2017? Thanks.

Stuart Burgdoerfer

The SG&A guidance is expressed on a rate basis, a percent of sales basis and what you are noticing in a change is the effect of us lowering our sales assumptions. So on a dollar basis not a meaningful change from the view that we had roundly three months ago. We will continue to mine for expense opportunities as we've outlined. We have reduced the home office at Victoria's Secret in a meaningful way, by the way a tough thing to do as a business leader and as business people. But from time to time we make difficult decisions for the long-term health of the business. That would be an example of more than but we'll continue to be tough minded about expenses and again the change you're are seeing in the guidance is largely about a change in sales assumption versus the change in expense assumptions.

Amie Preston

And Anna just to clarify one thing in your question, so catalogue costs actually are on buying and occupancy and therefore you are going to see that as a reduction to SG&A. Next question, please?

Operator

Your next question is from Lindsay Drucker Mann of Goldman Sachs. Your line is open.

Lindsay Drucker Mann

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

Stuart Burgdoerfer

Sure. So with respect to the promotional changes and particularly the direct mail promotions that we've changed, we came to a conclusion about that or a decision about that in late march which we implemented beginning in April. But as you would appreciate Lindsay, the specific activities that we're lapping or anniversarying from last year varies by month and there is a meaningful amount of activity in May of 2015 that we're lapping and again it does vary from that month. So didn’t see a lot of -- saw some but not a lot of impact in April. We'll see more in May. The other thing going on with May as there is the memorial day shift that effects comp we think between one and two points as well, but that would be the color on the timing of our decision around the direct mail pull back, and again, the impact will vary by month. And then with respect to big picture view of the consumer, Nick could comment on that from Bath & Body, and his accent is better than mine.

Nick Coe

Hi, Lindsay. I think she is behaving pretty consistently actually in an odd way. I think she continues to want to be excited. I think she continues to want to have a story or a compelling story telling to her, even though she has remains value oriented, but if she sees something that she likes or if she's engaged, clearly that value price fluctuates and we can see it in both ways. We see it fluctuates to really important when a compelling story isn’t told, but we can also see it become significantly less important when the product is good.

So from that perspective I think it's actually pretty consistent behavior. There's lot of talk about where is the customer, what's she doing. But from our perspective I think it's a pretty consistent story. And I think that also ties itself to traffic where we have been -- we've seen pretty consistent levels of traffic. Now we're having to work very hard to maintain the traffic, given the modest assets, but my overall point of view is that the traffic is there, we're working hard to get it and her behavior is consistent. So at the end of the day when big periods happen, big timeframes, such as Mother's Day, she is still coming out, she still wants to participate. So kind of that's my overall point of view in terms of sort of a macro level what's going on with the customers.

Lindsay Drucker Mann

And was there any difference -- I was going to say, do you observe any differences by region or mall type?

Nick Coe

No, not dramatic differences. It's very difficult by region because regions come up, regions go down, regions come up. On aggregate that seems to be about okay. Obviously some malls are better than other malls and we have a very broad mix, because we’re not adjusting for mall. We are also in strips, power centers. Sometimes we see a different mix as it relates to products by mall. But in general, we’ve been pleased with relative consistency.

Stuart Burgdoerfer

Lyndsay, just to add-on, it really does with the point we’re trying to make, which is we had a wide range of performance in our business. So Bath and Body had a very good quarter, all metrics, all measures. PINK had a very good quarter in business. And so we’re not sensing some broad based issue, but rather specific execution opportunities which we're proactively getting after, but we’re not of a mind that there’s some major macro phenomenon going on that impacting all of our businesses, because we had a wide range of performance, including some very good in the quarter.

Amie Preston

So, thanks, Lindsay. We have a Board Meeting unfortunately that is starting and I apologize. I know we’re going to leave many of you probably in the queue, but we will take one last question.

Operator

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

Michael Binetti

Thanks for squeezing me in here. Thanks for all the detail. Obviously there's a lot of balls in the air. Just two questions really quickly on the guidance. Can you help me think about few of the changes, particularly it looks like about low teens reduction in the free cash flow for the year? The CapEx didn’t change. I think back into the net income it looks like the change is based most that net income. Is that fair or is there anything to think about related to working capital? Any change in the working capital profile in some of the business, new businesses that you’re getting into?

Stuart Burgdoerfer

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

Michael Binetti

And could you just give me one thought. You mentioned that you’re only reselling in store, online what's being sold in stores. And that’s a little bit different and what some of the other retailers in the space have been saying. It seems like it’s been more liberating for other people to say we can offer a wider array of product online than we do in stores. Do you have any thoughts and what might be different for your business versus what we've heard in other areas in the sector?

Stuart Burgdoerfer

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

Amie Preston

Yes. And Nick, any thoughts there.

Nick Coe

Yes. Hi Michael. I think, at the end of the day, what we’re trying to really achieve is a very seamless customer experience. So the brand stands for the same thing, whether you're in a store, or whether you’re online, and the benefit that we get from that and not just from a brand perspective, but the alignment of same product, same price, same cadence messaging, really drives terrific efficiency and it doesn’t confuse the customer. So I think it’s a win, win on both sides when we get very, very good alignment of the marketing message, the brand message and the product message.

Amie Preston

Great. Thanks everyone for joining us this morning. And we appreciate your interest in L Brands.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!