Limited Brands, Inc. - Shareholder/Analyst Call

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Limited Brands, Inc. (LTD) October 17, 2012 8:30 AM ET


Amie Preston

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

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

Martin Waters - Executive Vice President of International


Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

Oliver Chen - Citigroup Inc, Research Division

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

Barbara Wyckoff - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Janet Kloppenburg

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Omar Saad - ISI Group Inc., Research Division

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Marni Shapiro - The Retail Tracker

Jennifer Black

Erika K. Maschmeyer - Robert W. Baird & Co. Incorporated, Research Division

Laura A. Champine - Canaccord Genuity, Research Division

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Amie Preston

Good morning, everyone, and welcome to our annual investor update meeting for Limited Brands. We're glad that you can all make it. Also, I want to welcome everyone that's listening in on the webcast. I'm Amie Preston. Just need to cover a few formalities and then we'll get started.

As everybody knows, the dreaded Safe Harbor statement so any forward-looking statements we make today are covered by the Safe Harbor statement and our SEC filings. Please remember to silence your cellphones. We've got a great day planned for you today. We're very excited. We're glad you can all make it. And now, it is my pleasure to introduce our CEO and Chairman, Les Wexner.

Leslie H. Wexner

Good morning. Every time I'm introduced by Amie there's terror in her eyes. She's afraid what I might say or do. Relax. I'm only kidding.

Well, welcome, everybody. And I think there's a number of people that are with us by webcast and a number of the leaders of our business aren't here today. They're doing what they're supposed to be doing, either in stores or at home, somewhere in Asia, doing the work of the work to get us ready for the holiday business. I was -- just lead off with kind of a mood setter. We talk a lot of in the business about the mood elevator and just a quick idea is we all wake up some mornings and you don't want to get out of bed, you didn't even have breakfast and you're positive you've already had your burnt toast. It's other days you could take on the world, you just can't wait to go at it and that's a pretty normal human state to be at different places on different days. And if I could coach you as a group or as individuals, it's a good thing to know. I try to ask myself this before I shave or certainly when I'm driving to the office, where am I on the mood elevator? Because if I'm at the bottom, pessimistic, angry, whatever, bitched out, it's not a great day to make decisions or have meetings. Because -- yes, we can all identify with that. And there's other days where I'm so enthusiastic, so optimistic, just feel appreciative and grateful for everything around me. I'm looking at trees and birds and people and kind of big stupid grin and that's the highest place on the mood elevator.

So just a good thing to know. So I would hope today that you're in a really good place on the mood elevator. I am. Right at the top and I think for a lot of reasons that you will hear today. And what got me ascending to an even higher level was last night coming into town. I stopped by and saw our new store in 34th Street which had a quiet opening, and the week before, I was in London. I went there 3 months before that store opened, deliberately I didn't go to the opening because I had real work to do. And so I was riding pretty high after seeing the Bond Street store and optimistic about what I would see at 34th Street. And to kind of set a challenge for you after you see the Bond Street store and certainly, all of you had the opportunity today, hopefully after this meeting to wander down, I think those 2 stores are simply the 2 best stores in the world. Not our 2 best, the 2 best specialty stores, maybe retail experiences in the world. That's a tall statement, but I'm that optimistic. It's really good and I think it reflects an understanding and a thinking about the enterprise, the business that we're in, retail, it's optimistic in terms of it having been insightful and forward looking. I think it'll be much discussed, and very seldom am I that enthusiastic about our own work. I tend to be critical because I know we can do better and I know we can do better than these 2 examples of stores. It's going to be hard. So I'm in a really good place.

Today, to set the agenda for the program, let's start with Stuart Burgdoerfer. Most of you know Stuart, CFO, and then follow with Martin Waters, the President of International. And then I think we can take a break, if time allows, and then I'll wrap up with some remarks and we'll have a lot of time for questions. So I would hope it's a very good day.

Martin has made great progress in our International business and great progress in understanding our business so that, that firewall that we talk about that separates our North American business from the rest of the world is successful and doesn't detract and draw down energy and time from the North American business and the core of our enterprise.

And Stuart has done a wonderful job in the enterprise and I think most of you have worked with him. You meet him in private meetings. But I've really come to appreciate the breadth and depth of understanding that he has of the business and his partnership with the operators of the business are really penetrating insights, good guardian financially, but more importantly can link the financial piece of the business, which is important, to the operations and the understandings.

And so Stuart has come a long way and I'm very proud of him and very proud to introduce him this morning. Stuart, come on up.

Stuart B. Burgdoerfer

Good morning. I'd also want to add my appreciation for you being here and welcome for those here in person and those participating on the web. Les, thanks for those kind words, very much appreciated.

So I'll get into the numbers and the slides pretty quickly, but I'd do it in the same spirit that Les shared in terms of kind of what's on my mind and what am I feeling. I'm feeling 2 things. I'm proud of what our business has accomplished over the last 3 or 4 years and you've seen the results, many of you own our stock and follow our company closely and we are proud as a management of what has been accomplished.

But more importantly, frankly, I'm even -- my state of mind is even stronger in terms of how significant I think our opportunities are for future growth. So we are proud of what we have accomplished. But again, the strength of you about our opportunities for growth, which we'll talk about today, that feeling is even stronger. So very optimistic about the near-term and the longer term for Limited Brands.

So let's get into some materials and meet some numbers. As we started and ended the presentation last year, and as I'll start and end this presentation, this is a meeting largely for our shareholders. Other partners are here today, bankers and insurance companies and rating agencies and so on, but we're really focused today on a review of our business including how we're performing for our shareholders. What's in front of you is information about shareholder returns over a 10-year period and you can see there's a list of very good companies there and they're broken down into quartiles and the good news is on a 10-year basis, we're in the top quartile and you can also see at the bottom of the page reference points for the S&P 500 index and the S&P retail index and our results substantially above those levels of performance.

The next few of this is the same information on a 5-year basis and you can see that we're moving up the list, which is a good thing obviously. That would be our goal is to maximize the long-term shareholder return for our owners and then on a 3-year view, even higher on the list.

So we're not confused at all about what the ultimate financial scorecard is for our business -- for any business, public or private, and that is producing return for shareholders. Again, the scorecard from a financial standpoint and our results have been very good.

If you're wondering why the 1-year column isn't there, I looked at -- reminded myself of what that is this morning. I think with dividend return, our 1-year return is about 40%. So not too shabby, they're 40% over the last 12 months.

So we are very focused on it, measuring ourselves against good companies. I'll talk later and you've heard us talk about 3 International specialty retailers. Uniqlo, Fast Retailing, the Japanese company H&M and Inditex. And we look to them mostly in terms of learning and setting new goals for ourselves from an operating income rate standpoint and a growth potential standpoint, but those companies are on this list and we're doing pretty well versus those companies as well in terms of our shareholder return.

So good returns for our shareholders and again, we'll talk about how we're going to continue to produce those returns through the day today.

What's driven that? You're familiar with our earnings per share growth. The 288 is at the high end of the most recent external guidance that we gave in August, but we have grown the earnings of the business pretty substantially since 2008.

And as you're familiar, those that know our business but maybe for those that are newer to the story, we are very committed to returning excess cash to our shareholders. And we do that primarily through 3 basic vehicles: Our regular dividend; share repurchases; and special dividends.

Our regular dividend over the last 3 years, we moved from $0.60 to $0.80 to $1. On a special dividend basis, we've paid out $8, $8 of special dividends over the last roughly 2.5 years and we've been an active repurchaser of our shares. And as you can see on the slide over this period of time, we've bought that shares in aggregate at $25, which certainly looks pretty good in relation to the current value of the business.

Very committed to returning excess cash to shareholders. $13 billion is about equal, I'm approximating, about equal to the current value of the company.

So we have returned $13 billion, which is about equal to today's value of the company, a pretty extraordinary statistic.

And 3 years ago, in this meeting, October of 2009, the management of the company announced its intent, its goal, its commitment to achieving a 15% operating income rate as a percent of sales. Many of you -- how many people, show of hands were here in that meeting, October 2009? Fair number of people in attendance that day. Maybe some people were skeptical about whether we'd accomplish that or not. We certainly saw that as a very challenging goal for us at the time. Our operating income rate was 7.9%. But we worked work very hard and recapped how we have made the progress that we have and we have surpassed the 15% level of operating income rate, and I'll talk later again about the potential for us to be in the high teens and bumping up against 20% operating income as a percent of sales as we move forward.

But we said we were going to do something. There was some debate as I've mentioned before about whether we should provide a timeframe or not. We were so committed to getting to this level that we went public and we said we were going to do this by 2012 and we were nearly a year early in achieving that result.

How did we get that done? 3 things on the chart. At the end of the day, they may be the most important 3 things in terms of a review of our performance over the last 3 or 4 years.

As you know, it starts with great brands and great categories. Brands and categories with emotional content. Victoria's Secret and Bath & Body Works are the clear, clear category leaders, the category defining brands, very important to understand, and we're in great categories. We're not in a very crowded apparel, a set of categories and that wasn't an accident. The business took steps over about a little more than a 10-year period to get out of the general apparel business and to really focus its time, its energy, its resources, its capital on these 2 category-leading brands. And in terms of assessing the company, its performance and its potential, there's a reason why it's #1 on this list and in many respects, it's the most important thing.

The second area of this chart in the middle of the page is, describes what we as a management have been most focused on and what we will continue to be focused on. And it's a list that may appear boring or not particularly insightful, it's simple in its nature. But it's really important that we continue to execute these things very well, a focus on customers and doing things really from a customer point of view, a focus on core merchandise categories, bras and panties and shower gels and anti-bac soap and home fragrance. Our focus on inventory management. Our focus on speed and chase, we'll talk more about that. And then the focus on getting even better in-store selling and operations.

And then lastly, a very hard thing for you to judge from the outside in. But I joined the company in 1998, I can tell you and I've been in some other organizations over about 25 years of my own work and the experience, the alignment and the focus of this management team is as important as anything again that you could assess about our company. Because when everybody's pulling in the same direction, it's so powerful in terms of how well a business can execute its plan and the good news is we've got a pretty experienced team, we're focused and we're aligned and it's very powerful in a business like ours.

Inventory. I've said many times, I'll continue to say it, because it remains my focus if inventory gets out of control I would expect to lose my job, it's a very clarifying statement.

When I wake up in the morning, Les, I remind myself of that and it gets me focused for the day. This is a chart of retail sales over time, that's the blue line, the higher line and then inventory growth over that same period of time. And you can see over this period that inventory has pretty consistently grown slower than sales. And in fact, over the whole period of time in aggregate, there's been about a 800 basis point spread, sales growing about 800 basis points faster than inventory.

One little blip there as we were rolling out systems for Victoria's Secret in the Spring of 2009, but again our focus is on growing inventory slower than sales.

And that's not about the CFO trying to wring out the last dollar of working capital. It has nothing to do with that, it's a nice side benefit. It's about having fresh, compelling assortments for her when she goes into our store or she's online. If we're turning our goods faster, the likelihood that those goods that she's seeing and experiencing in the store are the right goods, and we'll talk more about it.

Growing expenses slower than sales. Pretty important thing to do if you're trying to improve your operating income rate, which we've obviously made good progress on. And you can see the same format of chart sales growth and then expense growth over time and you can see that there's a pretty consistent gap with expenses growing slower than sales. That remains our ongoing commitment, but it's not our strategy to be the low-cost competitor. That's not what we do. That's what Walmart does. That's not what we do.

The thing to probably really understand about how we think about expenses is where do we invest and how do we invest to drive sales and margin dollars and how do we really strike those trade-offs. I'll talk more about that later in terms of some investments that we're making, for example, in store selling.

Probably first heard this, I don't know, 8 or 10 years ago, Les has said and continues to say. It's certainly memorable for me. I'll share it again with you, many of you have heard us say this. Inventory will make you sick and real estate will kill you. And so this pie chart, which we've put in front of you pretty consistently over the last 3 or 4 years is an important snapshot about the health of our real estate.

And you'll notice at the top of that pie chart that less than 1% of our stores, less than 1% of our stores, about 23 stores or specifically as of this period of time 23 stores out of nearly 2,700 stores have negative after-tax cash flow. Only 23, less than 1%.

Said another way, 99% plus, more than 99% of our stores have positive after-tax cash flow. That's about great brands, that's about good locations, that's about right store size. We don't have a looming store low-productivity issue like some other retailers can have and that's a good place, that's a sign of strength and quality in our business.

So the quality of our real estate and the quality of this measure, this statistic, is very high.

So I've talked about inventory, talked about real estate a bit, let's go to the balance sheet for a second. I've used the form of this chart several times before. This is a chart with 40-some numbers on it, I'm not going to go through all 40, but let's start with a couple that are circled. So this is -- -- the circled numbers are adjusted debt to EBITDA, a measure of leverage. And the first timeframe in the chart is in the year 2000, when our business was a very different business and our leverage was about 3.4x and you'll notice at the top of the page that our balance sheet debt was $400 million.

If you go to the far right of the chart, our forecasted end-of-year statistics, you'll see the same 3.4x. But what you'll also see is that we have balance sheet debt that went from $400 million to $4.5 billion, which may cause concern if you were looking only at that piece of information.

But what you'll also notice on the chart is that the lease-related leverage has actually gone down over this period of time. While at the same time, the EBITDA number, our earnings, our cash flow have gone up. Why is that? Because our business is dramatically different than it was in 2000. In 2000, we had a lot of apparel brands that were low-productivity brands with a lot of lease obligation and not a lot of profitability. And through the transformation of our business, it really improved the quality of our balance sheet and our cash flow, which gave us capacity for more balance sheet debt.

And oh, by the way, over that same period of time, the capital markets have been pretty favorable in terms of borrowing money on an after-tax basis just over 3%. Imagine borrowing money at just over 3% on an after-tax basis. So we've taken advantage of that. We think it's important that we have a balanced capital structure, that we have an obligation, in fact, to minimize our cost of capital which should include balance sheet debt. That's what we've done -- the leverage and aggregate consistent. We feel very good about the health of our balance sheet.

This page provides some perspective, not against our company but against other retail businesses. At the left of the chart is information about leverage for certain retailers that have gone private and have levered their balance sheet and you can see on the page that their leverage is north of 6x.

In the middle of the page, you'd see our business along with some other retail businesses including the 3 International companies that we talk about -- Fast, H&M and Inditex. And then at right, you'd see domestic or United States-based retail businesses. You'd see that the median at the right side of the chart is about 3x leverage, mostly driven by leases. And so as we look at this, we believe our total leverage again about 3.5x, 3.4x is well within the norms of the industry that we're in. So just another reference point that causes us -- or supports our conclusion that we're very comfortable with our leverage.

The business generates a lot of cash, which is obviously a good thing. Very profitable business, cash flow is very important to the business. As we think about the 4 or 5 most significant things to ensure that we manage well and with discipline, obviously cash and liquidity is one of them.

What gives rise to that is generating cash in the business. You can see the results here, operating cash flow over time and free cash flow over time. This year, we're projecting between $700 million and $750 million even after our regular dividend that leaves a lot of excess cash to determine how we might best return that to shareholders.

So that's some review of where we have been and a snapshot of where we are in our business. Let's now talk about the potential of our business, where are we going and how do we think about that potential.

We talk about these companies a lot within our business. These companies being fast, Uniqlo, H&M and Inditex. Why are we so obsessed with these companies? Because we're always looking to get better and we're trying to think about what is our potential. And we look at several of these companies and I'm rounding and generalizing a little bit, but at least in 2 of the 3 cases, they've gone from about $10 billion in sales to about $20 billion in sales. I'm rounding, and they've done that while maintaining operating income rates in the high teens.

So we have evidence, if you will, within our business that we share with our executive leadership about we can go from about $10 billion to $20 billion or more in the relative near-to-medium term. We can do that in a very profitable way. And in fact, on an International basis, we've got a couple examples right in front of us to look at and to study operationally and to learn about how they've accomplished those results.

So you can see H&M with an operating income rate of about in the 18%, 19% range. You can see Inditex very consistently in the 18% range. You can see our improvement. You can see Fast Retailing, they've gone through some rougher periods recently. But even in that business, they're certainly solidly in the mid-teens.

We've moved up a notch, Les talks about this simplistically, but importantly, in terms of are we gold, silver or bronze in the retail Olympics. So we think we're on the podium and we're going to work hard to continue to move up that podium, if you will.

So that's some information, some perspective about the potential for our business from an operating income-rate basis. What's going to give rise to it? So you can say, well, okay, that's a numerical chart. Yes, that probably gives me some confidence that Limited Brands has more profit potential within it. But how are you going to do it? How are you guys thinking about it?

So this chart lays out some things. And there's some material on each of these. As I mentioned before in terms of review of the past, it all starts with great brands and great categories. The business has been very focused on speed. We'll talk a little bit more about that. And again, it's such a powerful concept in terms of driving full-price selling and reducing markdowns, having the right goods for her at the point of sale.

We'll talk about our focus on store selling and execution and what results that's generating for our business. And then we'll talk about square footage growth and the opportunity that we see in our Direct businesses. All of that leading to sales growth in North America.

Speed and agility. It does all start with inventory discipline. If you're overbought by hundreds of millions of dollars and we have had that experience now in our distant past and we'll never get there again. But if you're overbought, substantially over bought, it's hard to really think about getting faster. What you're thinking about is how do I get out of all this stuff and how do I maximize my cash yield if I'm substantially overbought. So speed must start with a foundation of discipline and control around inventory.

And while I'm very focused on it, and I am, what's really important is the leaders in our business are focused on it. There's a real depth of discipline, focus, trade-off, balance, discussion around how to manage inventory well. And it's important, the most important balance point is what is the #1 dissatisfier in any retail business? That you're out of stock.

So we could reduce our inventories further and dramatically. And at the same time, you might be out of stock on key items. So what's really amazing about the company in terms of its progress on, and there's more for us to do here. But its progress on inventory is while we've improved turn, and I'll share some stats on that, and reduced inventory levels in absolute terms, our in-stock levels as I've shared with many, have gone from the mid-80% to the mid-to-high 90s on key items.

So imagine taking this inventory out, getting lean or turning goods better, and from a customer standpoint, being in stock 10 to 15 percentage points, more often again into the mid-90s to high 90s on key items.

Lead time reductions. We've made progress, but there's a lot more for us to do. We believe generally, and I'll get a little bit more specific in a second. Generally, we reduced our lead times by about 50% and we think there's an additional 50% reduction in front of us. What that results in is having a lot of open-to-buy and agility within the season.

So if you're fully bought 6 or 9 months before the season starts, you don't have any flexibility. The customer responds and reacts to it, to what you're putting in front of her, but you can't do anything about it, because it's all bought. That's not the position that we're in. We're in a position where we've created a lot more open-to-buy within the season, a lot more agility within the season and that gives us an opportunity to read and react and chase the winners.

From my standpoint, how do I contribute to that? How do people that I work with most closely contribute to that? It starts with measuring agility.

We really frankly weren't measuring agility 3 or 4 years ago. We're measuring it now every week. What does that drive? Discussion, trade-off, improvement. So that's the kind of work we're doing on speed and agility. All of which, again, results in more full-priced selling and a reduction of markdowns.

This is a graph on inventory return. You can see over this period of time, we've gone from about 2.7x, this is as a business, to about 3.7x.

I know you guys, many of the sell-side folks, maybe some of the buy-side folks calculate inventory turn. As you know, it's hard to do off financial statements. We have looked at Inditex and H&M's turn, at least as we can deduce it from financial statements. We think they're in the low 4s, in the low 4s based on financial statement information. We're getting there, we're getting there. More to do, more opportunity for us. Certainly, we have more personal care and beauty in our business than they do, which tends to be, by its nature it's a little bit slower turning. We've made good progress. We have certain categories that are turning in excess of 6x within our business, meaningful categories.

So we've made progress here, more to do. Each area of our business has goals, inventory turn goals that are beyond the numbers that are on this page. So we continue to push for further improvement in many ways. A key indicator of, are we really getting faster in making progress on speed?

This page is just another cut on the numbers and we put this together recently for an internal meeting and it caught our attention. And so we thought we'd share it with you. And again, we're not trying to break our arm, patting ourselves on the back, because there's so much more for us to do. But in terms of just another way to look at inventory, so this is information from 2008 and reflect -- also reflects a 2012 full year forecast, again, at the high end of our guidance range, sales, operating income and inventory. And it's interesting that we grew sales or we expect to grow sales about $2.4 billion and we will have about, I'm rounding, about $100 million less in inventory over that period of time.

So maybe the inventory turn stat from 2.7 to 3.7 doesn't really get your attention in the same way as growing your sales $2.4 billion and having $100 million less of inventory.

And again, I can't say it enough, this is not about the bean counter trying to squeeze out working capital. This is about how do you have fresh assortments for the customer in stores and online.

and if you've got more agility, the right amount of inventory, you're much more likely to have that.

A little bit of information, a couple of examples on speed and agility. Some of you may have heard these things. I want to share it more broadly. And again, these are just color on the business.

So at Victoria's Secret, we're in a Monday night meeting, we're reading what's selling and what's not selling based on that review of sales both quantitatively and qualitatively, people being in stores, not just reading reports. We make some judgments about what we want to buy, what additional buys we want to make, what do we want to chase. So those orders are placed. They're made, in many cases, in the case of panties, they're made halfway across the world. And then they're shipped back to Columbus, Ohio, and then they're distributed to stores across the United States and in Canada. And we're doing that in 12 days: order, manufactured, back to the United States from halfway across the world, then distribute it to stores, onto the selling floor in 12 days. We never would have thought that was possible 3 or 4 years ago. We were measuring things in months. So you go from months to weeks to days. And that, psychologically, is really important. We'll start thinking about how do we really start measuring certain things in hours. But really getting to that focus, because again, if you can read sales results and be back in stock on items 12 days later, what do you guys think the odds are of getting that right? People think, even the bean counter could probably get that right, right?

Bath and Body Works, similar example. PocketBac, a great category. Same kind of definition of time, 17 days.

The additional statistic for Bath & Body Works and this is pretty dramatic is 3 or 4 years ago, 5% of the replenishment goods for Bath & Body Works, 3 or 4 years ago, 5% of the replenishment goods for Bath & Body Works had a lead time of 10 weeks or less, 5%. Today, it's 80%. From 5% to 80%, 10 weeks or less. It's amazing. And there's more for us to do, lot more opportunity here. But that focus on speed, really important to our business.

Okay. So that's some things about speed and inventory turn. And again, all that leads to full-price selling, improvement in merchandise margin, improvement in sales, first of all. Improvement in sales, sales dollars and merchandise margin dollars and margin rates.

Let's move then to store selling and execution and we're going to talk about something that within the business we call market intensification, because it's a very intensive effort, broad-based in select markets.

It starts with having a very ambitious goal, a goal like having a 20% operating income rate. That's part of the DNA of our business, which obviously starts with Les. He doesn't start with kind of continuous improvement and small, incremental change. It's about big, bold goals, which drive dramatic thinking and dramatic results. And certainly, having bold goals is absolutely a part of this store selling and execution improvement effort that we call market intensification. Goals like, how do we double the volume in a given market, in a good market? So how do we double the volume in the market?

Then we -- the business really focused on talent and training. So how do we make sure that we have the right management leading a store? How do we think about the full-time, part-time mix of associates in a store?

If somebody works in a store 4 hours a week, how good do you think they are at selling bras? You think they're very good at that if you do it 4 hours a week? Probably not, right?

If you do that, 20, 25, 30, 35 hours a week, you'd probably be a lot better at it, right? So how do you think about full-time, part-time mix, same with Bath & Body Works.

How do you think about training? How much are you investing in training? So imagine, a dumb bean counter -- I'm making fun of myself -- a dumb bean counter, would say, geez, if we spent 2 hours less per associate on training and I multiply that by the number of associates per year, we employ a lot of people, we'd probably get to a pretty big number, right? We could save that amount of money.

The converse of that is if we invest more in training, so that she's more comfortable, more confident about the product that she's selling, the likelihood that she can convert a customer to a sale obviously goes up.

So what we're really trying to think about is how do we invest to drive sales in existing markets, starting with bold goals, focusing on the team and their training, their motivation, their incentives. How do we think about the real estate and the store environment? Les remarked about 34th Street and what that represents and a dramatic expression of the Victoria's Secret brand, but how do we think about real estate more broadly in terms of how much space do we have? Are we arranging the categories in the best way? Is the flow of the store best from a customer standpoint? Have we really thought about where is Lingerie versus Beauty versus Pink? Do we have the right fixtures, et cetera? Do we have the right amount of fitting rooms? Are we really thinking through how the store works, if you will, and what the experience is for the customer?

And then lastly, while you can tell that we're very focused on management of inventory including how it flows to all stores, in these stores, how do we really get maniacal about making sure that we have the right goods in these particular stores?

The product of all of that, and we started this with Victoria's Secret in 2009, Bath & Body beginning about a year later, Victoria's has been at this for about 3 years and there's not a number here on Q&A and follow-up. We're not going to give the number. We've decided we're not going to do that and I realize that may disappoint you, but the sales results are up dramatically.

So for those of you that I've gotten to know over time, hopefully if you would judge that if the CFO is saying they're up dramatically, we're not talking about 5% or 10%. They're up very substantially. And importantly, that growth has sustained for Victoria's for more than 3 years now, growth as compared to the balance of that company.

Victoria's today is in about 5 markets doing this work and we would say that we're at the very beginning of this. You might say, well, why don't you go faster? What the key to this is the real focus and intensification on particular markets. If you go too fast, you lose that focus and intense effort.

But with that said, we're at the beginning of this opportunity. There's a lot more for us. Sharen Turney in the last earnings call when asked about our effectiveness in store selling, I think she said, in her judgment -- she's running the business -- said that she thought that we were in the first inning. So that would give you some perspective about how we perceive the opportunity to get better in store selling and execution. But this market intensification initiative for us has been working very, very well, a key driver of growth today and will become an even more significant driver of growth over the next several years.

Square footage growth. So if I were on the outside looking at a specialty retailer and there was a good concept and that concept had 100 doors in the United States, modeling it up to 400 or 500 doors is not a very hard job, right? That makes the modeling of growth and profit potential pretty easy.

We're not in that position in the United States. We've got over 1,050 or so Victoria's and about 1,600 Bath & Body Works location. So your job is a little bit more complicated.

But here is what we see. As we shared with you a year ago in this meeting, Pink, as a business, the full Pink assortment is in a very small portion of the overall fleet. There's a very obvious and significant opportunity expanding square footage for Pink.

And interestingly, as we've taken a harder look at each of our individual stores and as you can see on the top of the page here, over 950 of the roughly 1,050 Victoria's stores don't how the full lingerie assortment.

And then in addition to that, you're familiar with the call adjacent [ph] categories. So that's the swim business. That's the Supermodel Essential and loungeware business, where we're seeing very good growth. And it's the sport business where we see a very substantial opportunity for Victoria's Secret.

So you've got a clear, obvious opportunity in Pink. We've got opportunity for more space and better presentation of lingerie and then we've got a lot of opportunity for these adjacent categories.

Victoria's Secret has surpassed its record of sales per foot. You should know that there's not a mathematical law that says that Victoria's Secret sales per foot cannot exceed $800 a foot. There's not a law that says that.

In fact, if you look at the top 50 stores at Victoria's Secret, their sales productivity is more than 2x, more than 2x the total business that carries a full assortment.

So that would tell me that it's physically possible to double our productivity within our business. And again, we are expanding square footage based on the growth that we're seeing.

This is rough math and it's labeled rough math and rough math is in quotes. But again, intending to be helpful here, so let me take you through it for a second.

And I'm rounding and generalizing but again, trying to make a point obviously, through the display.

The average Victoria's Secret in the United States is, on a rounded basis, about 6,000 feet.

And as we think about in the average mall, and again, there is no average mall and we don't manage to averages; every store is unique. But again, for purposes of discussion, let's say that the potential store size is about 8,000 feet. Obviously, we've got stores like 34th Street that are substantially larger than that and very productive and very profitable. But again, for purposes of discussion, go with 8,000 feet, if you would, for a second.

So that's 2,000 incremental feet per store. We think that opportunity easily applies to about 750 malls in the United States. You do the simple math on that and you're at about 1.5 million of additional square feet on a base of about 6 million feet for Victoria's Secret and you get to 25% square footage growth.

Well, we would achieve that over the next 3 to 5 years. One of the points, and I'll make it more clearly when I talk about capital spending in a minute is with respect to multiyear views of real estate, the key thing is we plan real estate on a 6 to 12-month kind of lead time. We read and react and adjust with respect to real estate just like we do with respect to merchandise.

So we believe that there's a very significant opportunity. Hopefully this rough math example gives you a sense of that potential is. And we'll continue to invest where we're seeing returns and we're seeing great returns, which I'll talk about in a second, and we'll adjust as appropriate. But we see the opportunity as being very significant.

And as you can see at the bottom of the page, that excludes Canada. So this is an example for the United States, okay?

So let's talk about returns for a minute. So we did invest pretty meaningfully in our expansions, particularly Victoria's Secret in the 2007, 2008 period. And certainly, as all of us were looking at that, us within the business, you outside the business and say 2008, you say, boy, how did that work out and how are you guys feeling about that? Well, in late 2008, I don't think anybody was feeling good about much of anything. But as we look at our activity, 165 expansions at Victoria's Secret as you can see on the page that we did in 2007 and 2008, how have those played through?

So you can see the size up about 50%, the sales up about 50%, the productivity at about $800 a foot, which is about the total for the company, profits up about 20% and the IRR, the internal rate of return measured on a 10-year basis at about 30%.

So if you can invest in something and get a 30% return, we'd all do that, right? So that's our assessment of these investments that we made in 2007 and 2008.

So we did a fewer number, but we did a meaningful number of expansions between 2009 and 2011, and now we have enough data to meaningfully judge how those did. So square footage up again about 50%, a little bit more, 55%. Sales up about 60%. You can see the productivity there at bumping up against $1,200 a foot, so this is the productivity in these stores today, okay? $1,150 a foot.

Profits up about 50% and you would imagine from those statistics that their investment returns would be higher and we judge that they will be higher at about 35%, again, over a 10-year period.

So we're doing discounted cash flows on the IRRs. You should know I can make a DCF look really good if I hockey-stick the out years, right? We're not hockey-sticking the out years. Our assumptions about growth and profitability in the non-actual periods, the remainder of the lease term are very conservative assumptions because it doesn't do me or anybody else any good to be overly optimistic about those assumptions.

So 45 expansions, very good results. You might say, well geez, how come they're so much better, why did they get better? A lot of these expansions were done in markets where we're doing the market intensification work that we talked about earlier.

And also the pre-period, the pre-period in these stores was when the business wasn't performing as well also. But these investments, very good investments for our business and again for you as shareholders.

So that's a lot about stores and what we're doing. We have a great Direct business. Direct understandably gets a lot of attention in the retailing world.

We've got a great Direct business. So Victoria's Secret Direct is about a $1.6 billion business. It's got about a 20% operating income rate. It has meaningful business in the core categories of bras and panties and sleepwear, a great Swim business. And the opportunity, and again, Sharon spoke about this at some length on the last earnings call and as summarized here, the real opportunity for this business is to drive very substantial growth in Pink, in beauty and sport.

We have a great asset and that asset is this business in terms of sessions on the site, transactions on the site, all the catalog marketing that we do, a great platform to grow businesses, Pink, beauty, sport.

Bath & Body Works Direct business, we don't talk a lot because it's only recently become material. We're sharing here a number with you that I don't think we've shared before which is the size of the business, which is about a $200 million business. So it's interesting to work in a company that creates a $200 million business and doesn't really talk about it very much, but we have and it's a very profitable business and it continues to grow at a very healthy pace, running about 7% of total brand sales for Bath & Body Works. So a nice business. We have a great platform here.

The other thing that we're doing that we've talked about is working to make sure that the customer has a better experience as she shops in stores and online. And you're familiar with the fact that we're working to roll out in the Spring of 2013 a full functionality where if she's in a store and we don't have what she wants, that through point of sale, we'll send it to her door, the capability that many retailers have today, but we don't that we'll have in the Spring of '13, which will be a good opportunity for our customers. And then similarly, if she buys online and she can today return in stores and is making great use of that, that approach in our business, but we can better wire that up, if you will, from a technology standpoint so that she gets her credit immediately when she's in the store, which will obviously increase her propensity or likelihood that she's going to buy with that immediate credit that she gets when she returns goods bought online to the store.

Capital spending. I want to make 3 or 4 points on this page, so bear with me, if you would, for a minute.

So let's say the 2008 level of $479 million is kind of a base level of capital spending for the business. We all know what happened in the fall of '08 and into '09 and very importantly the business as led by Les and other leaders in the business and our board, we said, you know what, we are going to get really buttoned up. We don't know what's coming at us, nobody knows what's coming at us and we are going to get very disciplined with respect to all the things that we can control, one of which is capital spending.

And in a very short period of time, we went from $479 million to $202 million.

So the reason I go back through that again, you might say, well that's an old story, it's important for you to know that either due to macroeconomic events or our own performance or some combination thereof, that if we need to adjust capital spending, we can and we will. We can and we will, okay?

We're increasing capital spending obviously. We went through the details last year about the increase in capital spending from 2011 to 2012, and you'll remember that the headline of that was, "Investment in Victoria's Secret in the United States," and we just went through some of the returns from some of those investments. Very good investments.

In 2013, and we'll update this more fully when we give annual guidance in February. We expect the capital spending will be in the $650 million range and you can see at the top of this page that the project counts will be up meaningfully. And you may wonder, well, geez, how are you doing that? How are project counts up so much if the dollars are roughly consistent? We built 2 kind of important stores in 2012, Les just talked about, Bond Street and 34th Street. They're not cheap dates, if you will. And they're great stores and we feel very good about those stores, but it's important in understanding the numbers that we don't have Bond Street and 34th Street-like investments planned in 2013. So that's how the project counts are going up as much as they are and the dollars only going up modestly.

And lastly, at the bottom of this page, ROIC, these are company-wide ROIC numbers. We do focus on returns. I trust that you know that and based on the operating improvement of the business and pretty good discipline on our investments, the ROIC in the business has moved up very meaningfully over this period of time.

I showed this slide a year ago. It's how we think about return on investment in our business. New store returns are very good, typically at 25% or better. Expansions and reconstructions can have a broader range. And not to get overly technical about this, but to be transparent with you and make sure that you understand how we think about it, doing an IRR on a reconstruction is an interesting financial exercise, why is that?

What do you assume on the cash flows if you don't reconstruct a store? Do they go on in perpetuity? Tough assumption to make, right?

So we actually do the calculation 2 ways. We do one view of the calculation that says, yes. In fact, they will go in perpetuity. We all know that, that calculation is wrong. And it results in a lower number, but a number that's still above our cost of capital. The other view, kind of at the other extreme is that you assume that all the cash flows are 100% incremental. That's how you get to the higher number.

The real answer is somewhere in between, it's a judgment. So sharing with the finance folks some of the technical detail of that, the most important thing to take away is in any case, these investments are exceeding our cost of capital, which is between 9% and 10%.

On technology and other investments that we make, if we can isolate discrete cash flows based on reasonable assumptions, we do. We build a business case, we judge that business case, we post-audit it. And it's interesting and I've been with the company since 1998, a couple of times I've suggested to Les that we raise the approval levels that he has, what products does he have to see. I've gone at that 3 times with him and each case he said no. And the reason for that is he wants to see what we're investing in, what the assumptions are and whether he believes it's a sound investment for the business in addition to all the other review that goes on in the business.

Okay, so let me wrap up. What are really the key, key takeaways? We do believe that we have great brands. We're going to work hard to make sure that they continue to be in leadership positions. Those brands, Victoria's Secret and Bath & Body Works particularly, are in great categories. Personal care and beauty and intimate apparel.

From that, the business generates very substantial income and cash flow, an important thing to judge as one is thinking about investing in a business or continuing to invest in a business.

We are very focused on the growth opportunity in the United States and Canada, in North America. Hopefully, you believe -- you're more confident after listening to some of this. And obviously, more to come this morning, but you're more confident in the growth opportunity in the United States and Canada for our business and we are very focused on that opportunity.

As we think about the International opportunity, we said this a year ago and it remains in our thinking, we are not dependent on, we are not dependent on International to deliver appropriate results for our business in terms of growth, profitability, shareholder return. We are not dependent on International.

Should that be interpreted as we don't believe in International, we don't see the opportunity in International or that we're not pursuing, Martin Waters is going to you in a minute and hopefully he'll make it clear that we are very enthused about the opportunity that we see internationally. But again, we're not dependent on it like some other companies are to generate results.

Very focused on cash and liquidity. Hopefully, you share the view that we're in a balanced healthy place in terms of the management of that -- remain very focused, been a key part of our success to date and it's a key part of continuing to grow the business as we move forward. This discipline around inventory, around expenses and capital spending.

And lastly, very committed, remain committed, action speak louder than words and you've seen what we've done in terms of return of excess cash over the last 10 or so years and more recently very committed to returning excess cash to shareholders. We think that's our obligation and is a very clear source of return for our shareholders.

And then lastly, started the presentation with a review of return to shareholders, a decent place to end in terms of how I think about how we think about the business from a financial standpoint.

So thanks for the opportunity to share some perspective with you. Martin Waters, who runs International, is going to come up. And then after Martin's finished, we'll do a joint Q&A and then we'll proceed from there. Thanks very much.

Martin Waters

Thank you, Stuart, and good morning, everybody. Just delighted to be here. Like Les and like Stuart, very high on the mood elevator. I'm thrilled to see you all. I'm thrilled to be able to talk about my favorite subject this morning.

So what I thought I would do is begin by taking a walk through our journey in International over the last 4 years. Maybe go back in time to see where we've come from in order to better inform how we feel about where we are right now.

So if I could invite you to come back to the year 2008 with me and I recognize that, that is a difficult place to go for many people, and you probably had other things on your mind, but what was on my mind at the end of 2008 was that we hadn't yet entered Canada with Victoria's Secret or with Pink or anywhere else in the world, for that matter, with those brands.

VSBA, a business that we focus on a lot now, hadn't even been invented. We just entered Canada with the BBW business, but we had it nowhere else in the world. So we were just starting to get our arms around the La Senza business that we'd acquired in 2007, that appeared to have a lot of stores in Canada and over 200 stores internationally and about 30 markets around the world with 13 different partners. We were getting to grips with all of that.

Fast-forward now to the end of 2012 and the business has a completely different complexion. In Victoria's Secret and Pink, we have 26 units operating now in Canada. By the end of the year, we'll have 5 full-assortment Victoria's Secret stores outside of North America. The VSBA business has grown incredibly quickly. It will be at 123 units by the end of this year. In a similar scale for BBW, both in Canada and internationally with north of 100 stores. And the La Senza business, while in the aggregate, looks to be about the same size, you look at the detail, it reflects a complete change in that business. We've halved the number of stores in Canada. We closed the La Senza Go business. We closed 100 stores in International. And at the same time, we've opened 200 new stores in International. We've moved from having 13 partners in International to having 6. And overall, we'll end the year with about 789 stores.

So a completely different business than the one that we saw in 2008. And I will go through the detail of each of those businesses with you in a few minutes. But before I do that, I thought it would be useful to remind everybody of the foundational principles that govern the way I think about International and the way we think about International in the business.

And it starts with the statement that our absolute priority is having healthy, growing domestic brands.

We think of our domestic brands as being our IP and if we don't have a healthy IP, we have nothing to export. It really is as simple as that.

So what I focus on is having separate, dedicated teams to support the growth of International with a view to creating 0 distraction for our domestic businesses that are focused on that U.S. opportunity.

We try to stay with the creed of having a methodical test and learn approach to everything that we do and that's really is part of the DNA of Limited Brands. And then when we are clear what the pathway forward is, we're fast and we're focused.

Thinking about our operating model, about 3 years ago, we wrote a 6-point plan for how we would go to market internationally. And I use the 6-point plan just about every day as a filter for thinking about things that we will do and thinking about things that we won't do. And everybody in my team can recite these 6 points. I'll go through it quickly.

It starts with the notion that we're aiming to have a substantially partnership-based International model, that means a franchise model.

Where we do have partners, franchise partners, we want to have a small number of truly world-class partners around the world. It's not one partner, one country. That is not our model.

In terms of who does what in our partnership, this is the way we divide responsibilities. It's a very highly controlling model. We at Limited Brands think that we should be responsible for the merchandise, makes sense, for the marketing, for the assortment, for merchandise planning, for store design, for the uniforms that the staff wear, for how we train people. For everything about the customer, for everything that, that customer sees, we take responsibility for.

Our partners, we ask to do 3 things. We keep it simple. #1, it's their capital. #2, it's their real estate, but we'll approve every location and #3, it's their people to manage. They will know more about the complexities of managing people in geographies around the world than we ever can. And that's the model. If our partners sign up for that, it's terrific. Those people that don't want to work that way, that's terrific too.

And finally, we like to get paid on a royalty of retail sales. It's very important to us that we focus on the customer rather than on the wholesale end of the business.

And wherever we go in the world, we'll have our people there. I think it's important that if we have stores in a given country that we have people there to help and to coach and to train and to expedite solutions.

So those are the foundational principles and the basis of our operating model. I want to go through each of our International businesses now and give you a sense of how we're doing. And I'll start with Victoria's Secret full-assortment stores. And our journey here began in Canada. Just over 2 years ago, we opened the first Victoria's Secret full-assortment store. We now have 16 and we have 10 Pinks in addition. And our retail sales by the end of this year will be about $200 million, pretty substantial business, very productive business and you'll be pleased to know it has economics that are substantially similar to those that we see in the U.S. business.

This brand continues to resonate incredibly well with Canadians, and I was reminded of that fact when I went to Carrefour Laval in French Québec. And saw 1,000 people lining up outside the store before we opened it. A truly staggering response wherever we take this brand.

Thinking ahead to 2013, we'll continue to open stores in Canada probably between 5 and 8 stores, and some of those stores are in plan right now.

Moving to the Rest of the World, I think everybody knows that earlier this year, we opened our first Victoria's Secret full-assortment store in the U.K. And that was in July in a place called London Stratford, adjacent to the Olympic Village. And if anybody has been there, you'll know that during the summer of this year, it was just incredible volume of people, both from the U.K., but from all over the world. And our store got off to a fantastic start, really amazing delivery of the brand experience and amazing customer reaction.

About 4 or 5 weeks later, we opened at Bond Street, a very different location, a world flagship for the brand and probably the most elevated and sophisticated retail street in the world, he says, as a Brit. And we used the 4 or 5 weeks ahead of the opening of Bond Street to make sure that all of our associates were really well trained so that they really understood customers in real life. And I'm delighted to tell you that both stores are trading incredibly well, and the way that the brand has been delivered in those stores is as good as anything I have ever seen anywhere.

Now I'm guessing that most of you haven't seen that store, so I've got a 2- or 3-minute video, which I'd like to play for you to give you a sense of how the brand comes to life.

[Video Presentation]

You can clap if you want to. Pretty exciting, I think, pretty elevated, I hope you'll agree. A very high-quality experience, very high quality delivery of the store environment and of the service as well.

Before we opened that store, we had a long time to think about the opening. And there were people in the business that said, well, we'll have our biggest grand opening party ever, have an amazing event, we'll have all the supermodels there. And we thought about it very hard and we decided, no, let's not do that. Just don't do that. Let's just open the door super quietly and focus on the customer. Our job is to delight the customer, let's not distract ourselves by having lots of tourists looking and lining up outside Bond Street. Let's just focus on the customer.

So we literally kept the hoardings out, outside of the store until the night before. When it was quiet and dark, we took the hoardings down and we just opened the doors. And what you just saw in the video, was our store manager just talking to his associates, there was nobody lining up.

So at 9:00 in the morning, on the first day of the opening of our first store outside of North America, we had like 2 people outside the store.

So at 9:00, it was quiet. At 10:00, it was building. At 11:00, it was busy. At lunchtime, it was packed.

Word spread, like that, and it's been packed ever since. Very high quality experience, as I said,

probably the best fitting rooms, definitely the best bathrooms in London. Wonderful experience. Every single part of the store just sings out quality, delighted with the way that came out.

And an added bonus for me is the Pink business. And this is the back of the store in Lancaster Court, where Pink has its own entrance and a terrific response from the U.K. consumer to this brand, which again, is very, very encouraging.

Moving away from the U.K., my immediate focus is in the Middle East where, within the next month, we will open our first VS full assortment store in Kuwait, and then followed by 2 stores in Dubai, in November.

Very exciting time for us. It's no accident that we have a wholly-owned business in the U.K. and we have a franchise business, our first ever franchise for Victoria's Secret, at the same time, and we'll see. We'll very closely monitor the performance of that franchise business and see how it goes. We've set very high expectations for our partner and they know what good looks like and we'll see.

What I can tell you, thinking ahead to 2013, is we already know enough about the amazing response of the U.K. consumer to say we will open more stores in the U.K. in 2013, probably 3 to 5 more stores. And there's a very important point here about how we think about International.

When we see great success in our 2 stores in London, our mind goes to, terrific. The U.K. is a great market, let's open more stores in the U.K., let's focus on the U.K. because we know that it works. It doesn't go to, great, we have 2 stores in London that work, let's try Milan. Let's try Paris. Let's try Barcelona. Uh-uh, that's not the way we think about it. Let's focus on a market that's really working and build our capability there.

So that really is how we think about the VS full assortment stores. Our second format within International is VSBA shown here in Malpensa Airport in Italy. And this business began just about 3 years ago, with first tests in Brazil and Argentina, and other locations around the world.

We've grown it rapidly this year, probably about 1.5 units a week and -- 69 stores, so we'll end the year with 123. And of those 123, about 1/3 are in airports or travel retail locations and about 2/3 are in malls. And they're geographically spread around the world because we wanted to see how this concept would resonate with consumers of all shapes and sizes. And amazingly, it works everywhere, incredible productivity. The stores are about 1,000 square feet in size, and I imagine that a sales revenue basis of $1 million a copy would be good. We're actually averaging $1.7 million across the 100 that we have open today.

So a tremendous business that has 0 capital and every one of these units is operated by a franchise partner.

Here are a few shots of some recent openings, so that I hope you can get a sense of the quality that there is in the business. This is Kuala Lumpur. There's a couple here from the Middle East, in the UAE, this one in Abu Dhabi. I think there's another one here in Ben Gurion, Israel, where we have 2 stores in the airport just opened, again doing incredibly well. And hopefully what you see through looking at these pictures, is that the visual cues tie back to our full assortment stores. We absolutely think about it as one brand, 2 formats. We have a little video that's shorter than the last just to bring this one to life.

[video presentation]

[indiscernible] It's easy to scale and it's pretty easy to run. The picture that's on the slide just now shows you how we're learning about some adjacent categories. One of the wonderful things about this business is the discovery that small leather goods, accessories, sunglasses, and other accessories work incredibly well with the Victoria's Secret brand. And that opens up all sorts of possibilities for us going forward.

In 2013, I think we'll probably open between 70 and 100 stores like this, pretty fast. Why such a big range, between 70 and 100? Well it depends on the real estate. And we'll only go where the best real estate is available. So -- model something around that kind of level.

Turning now to our third International format, Bath & Body Works. Again, the journey on Bath & Body Works began 4 years ago in Canada, and delighted to say we have a market leadership position in this business. We have 71 stores open. We have annualized retail sales north of $175 million and, again, like Victoria's Secret in Canada, we have economics that are substantially similar to those that we see in the USA -- very, very productive business. And I can tell you that, visiting those stores that opened in the first wave of stores 4 years ago, they look terrific. They look as good today as they did when we opened. Very high quality delivery in this brand. And you should expect to see us continue to open stores in Canada in 2013, probably in the range of 7 to 10 stores, again, taking only prime sites, only best real estate, when it becomes available.

Elsewhere in the world, the BBW business has grown pretty rapidly in the last 23 months. So less than 2 years ago, we opened our first store in Kuwait, we'll be at 44 by the end of this year, 36 of those are in the Middle East. We have 5 in Turkey that opened earlier this year and we just, within the last 6 weeks, opened in Russia and in Poland. Very exciting for us. Again, I have a little video to play you of BBW in Eastern Europe.

[video presentation]

It really is the best fragrant body care business in the world. It's amazing to see, wherever we go around the world, people are taking the tops off and smelling and just enjoying the experience. Everywhere we've tried it, BBW works well.

This store, by coincidence, was our 100th store outside of the USA that opened a couple of weeks ago in Poland. Again, very high quality delivery of the brand.

In 2013, I would estimate that we'll open between 20 and 30 stores, in addition to those that I talked about in Canada. So moving at a steady pace of building capability in the International business, and all of these stores will be franchise based.

Turning to our fourth and final International format is La Senza. And La Senza is really our turnaround business, as you know. But when I think about it, I prefer to call it our restart business, because it really is -- it's a start over. We have changed everything about this business when you compare it to what it looked like in 2007 and 2008. We changed the management team. 95% of the team that work on the La Senza business have been with the business for less than 2 years. We've changed the store design, we changed the positioning, we've changed the categories that we focus on, we've changed absolutely everything about the way that we go to market.

And it's fair to say, as you know, that it's been heavy going in Canada. We have closed a lot of real estate. We've had to exit stores that were way too big, stores up to 20,000 square feet in size. We've had to exit stores where we've had 2 stores in the same mall, where it can only sustain one store. We've closed lots of off-pitch locations.

But we now have most of that heavy lifting behind us and we have a fleet that's about the right size, at 160 stores, and about the right square footage, at something around 3,000, 3,200 square-foot, delivering about $500 a foot.

More important for me than the economics of the Canadian business are the repositioning work that we continue to learn about and develop. And the goal here, as you know, is to create a proposition that trades alongside Victoria's Secret and has its own clear white space that is distinctly different from Victoria's Secret. I'm going to play you a video now that shows how I think that comes to life.

[video presentation]

Very, very different than Victoria's. We think about the brand as 4 words: young, sexy, obvious and value. And that position is really starting to gain some traction in Canada.

We have clusters of stores. We have markets in Canada where we're seeing double-digit growth. We have stores in Canada where we've entered with Victoria's Secret, that $200 million intimate apparel, 600-pound gorilla and we've got double-digit comp growth. So we are seeing absolutely green shoots of recovery in this restart business. And we feel very confident that we can get the business properly turned around.

The restart in the rest of the world has been somewhat easier now that we've shrunk the base of partners down. So 85% of this business is now in the hands of 6 core partners. And we have 360 stores open right now, covering 33 geographies, and our partners want to continue to open more stores in 2013. We have good performance in places like Russia, we have good performance in places in Southeast Asia. Our Middle East business is very strong and it's likely that we'll open about 25 more stores in International in the coming 12 months.

I don't want that to distract from the fact that the main event is fixing Canada. We need to see sustained performance of improved comp sales, same-store sales in Canada, on a consistent basis month-after-month, and not winning those by -- through promotions, but doing that at full price, regular selling.

So that really is the priority for the business. And looking at photos like this of the store being delivered, it's very clear to me how this positioning, a 2,000 to 3,000 square foot per store, can absolutely thrive alongside Victoria's Secret, with its own distinct clear positioning.

So that really is our story in International. If I close by saying, the recap for the year that's just closed is, a lot of heavy lifting to reorganize the La Senza business. At the same time, opening about 200 new stores, operating in 33 geographies around the world with 4 different formats, it's a pretty complex business.

We have learned a lot in the last 12 months and we are very clear that it's easier to open stores than it is to run them.

Our focus is on running them. Our focus is maniacal on the customer experience. So for 2013, I prefer to lead with a headline that's about delivering the best possible customer experience everywhere we already are, rather than headlining the number of stores that we will open. That said, I've just told you, we'll open a lot of stores in 2013.

So that's my story. I think we'd be delighted to take some questions, if I can invite my friend, Stuart, to come back up to the front. Amie, I think you will look after us in terms of who gets to speak and we'll try to answer your questions.

Amie Preston


If I could just remind everybody and ask them to wait for a microphone, so that people that are listening in on the webcast can hear the questions. And also, we'll be taking questions from the web as well. So if anybody wants to submit a question that way, we will be happy to take it. Tom?

Question-and-Answer Session

Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division

Stuart, can you talk a little bit more about that mix of higher full price employees, is that a Victoria's Secret-only implementation? And kind of talk about the cost factor as well as the returns. And Martin, would you mind talking a little bit about pricing in the U.K. and Canada relative to the U.S.?

Stuart B. Burgdoerfer

Thanks, Tom. So being very thoughtful about the mix of full-time and part-time associates applies, Tom, to both Victoria's Secret and Bath & Body Works. Victoria's Secret is further down the path, if you will, in terms of really thinking about that, but Bath & Body has the same opportunity to really sort it out, which goes back to the basic premise of it, which is if you got associates working more hours in stores, they're going to be more comfortable with the assortment, selling, confident, able to engage with customers on a more effective basis. So that idea applies to a lot of retail businesses and, particularly, for us at Victoria's, at Bath and Body and, for that matter, at La Senza and, to a much smaller extent, any retail business. With respect to the cost of it, the costs are obvious but there are some, in addition to getting higher rates of conversion, more selling, there are some other elements to the equation. So typically, when you have more full-time associates and the right associates, your turnover is a lot lower. And one of the things that we've seen is -- we've done this work is a substantial reduction in turnover and, as you would imagine, there's a lot of cost associated with turn. Hiring people, training people, et cetera. So we're not going get overly specific, Tom, on the nature of it, but certainly, we are in business to drive sales and drive more profitability, trying to be very thoughtful about striking the right balance, but we're very clear-minded about the opportunity to have better selling effectiveness, through more full-time associates.

Martin Waters

I think on the pricing question, Tom, our position is pretty straightforward. In the old days, I think you could go to markets around the world and you could charge whatever you wanted because nobody knew what the host market pricing was. The world doesn't work that way anymore. Everybody knows what pricing is. The world is getting flatter and smaller. And so our view is, that our pricing, for all of our brands, needs to be within 100% to 130% of North America. And we're fortunate in that North America is probably the lowest priced developed market in the world, so there is up pricing just about everywhere we go. Specifically in the U.K., our pricing is about 15% higher than it is in North America before local taxes.

Amie Preston

Kimberly, in the front row here.

Kimberly C. Greenberger - Morgan Stanley, Research Division

I'm wondering if you can talk about the percentage of Bath & Body Works business that is replenishment. You talked about 80% is on 10-week or less reorder. What percent of their business is replenishment? And then you mentioned the opportunity to further reduce lead times by 50% from here. Can you just give us some examples of what you're working on right now that would have the impact of further reducing your supply chain and your lead times from here?

Leslie H. Wexner

Kimberly, the replenishment portion of the business, and I'm working from memory, which is always a little bit dangerous, but I want to say it's 50% or 60%. It's a very substantial portion of the business. Obviously, fashion has become importantly -- increasingly important for Bath & Body Works and, frankly, also for Victoria's Secret. For new fashion, newness is important in any retail business. But we've seen over the last 2 or 3 years that fashion has become even more important for Bath and Body and for Victoria's Secret. But replenishment is a meaningful portion of the business. With respect to ideas about further opportunity, all of this, frankly, starts with a mindset. And if you said, what is the most important thing about how to reduce lead times, is it systems? Or is it industrial engineering or what is it? The most important thing is a mindset. And trust me, the discussion of speed within the business as -- it starts at the top. The discussion about the importance of speed, the opportunities of speed, start with that mindset, start with bold, ambitious goals, start with a mindset, again, as I mentioned earlier about going from months to weeks to days, in terms of how we think about things, and there's a lot of measurement, Kimberly, about what we're doing. In terms of the approaches and be a little bit general on purpose, because some of this is pretty important to us as a business, but it's that internal mindset, it's how you work with your sourcing partners, it's how you think about proximity of production and developmental work to your business. We've mentioned a little bit about an initiative that we've got going on in the Greater Columbus area, a beauty park for personal care and beauty, that's about having proximity to our business. So it's a range of tools and techniques, most importantly a mindset, having very ambitious goals. We've made good progress and there is a lot more in front of us.

Oliver Chen - Citigroup Inc, Research Division

It's Oliver Chen from Citigroup. Regarding the longer term opportunity in your analysis of peers, being in the 20s in terms of the margin, where do you think the opportunity is for you, in terms of gross margin versus SG&A? And secondly, could you speak to the near-term opportunities with execution of product? And related to holiday, how would you prioritize what you're most excited about versus last year?

Stuart B. Burgdoerfer

On the first question, in terms of what -- where will be the improvement come from, from about a 15% operating income rate to about a 20% operating income rate, the most important thing is to drive sales growth. And the reason that, that's important is, through sales growth, you get leverage on occupancy and other expenses. So sales growth, expense leverage, we do believe that there is further opportunity to improve merchandise margin rates so that will also be a contributor to the operating income rate improvement, but I believe the expense leverage piece will be more significant than the merchandise margin rate. Not that we don't believe that there's a lot of value in the things that we talked about, but there is a balance point about reinvesting in the product to make sure that she's getting the right value from her perception, and being careful about competitive umbrella and things like that. So it will come largely through expense leverage, driven by sales growth. With respect to holiday plans and maybe at some risk -- Les may be wanting to comment on that some in his remarks. We're excited about a lot of things, but our focus is on core categories, so it starts with those things for holiday. The businesses are doing a lot of good work in their core categories and we're very optimistic about how we're set up for holiday. We think we'll have a good holiday.

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

It's John Morris with BMO Capital. Two-part International question, I think, for Martin. One is the 3 to 5 U.K. stores that you talked about, can you tell us more, size-wise, how those compare to the Bond Street store, the flagship's normal-sized stores, what-have-you, and those are company-owned as opposed to franchise, I assume. And then, Asia, your updated thoughts on Asia. You guys have looked a lot towards the East, done a lot of research there, but it sounded this morning like you wanted to penetrate the U.K. a little bit deeper before you think about expanding possibly to Asia. Would that be the case or could it be something that could be simultaneous?

Martin Waters

Great. Yes, thinking about the size of stores. Bond Street is a one-off, it really is a one-off. We should not be thinking about more Bond Streets in terms of where Victoria's Secret full assortment goes. The store at Stratford is much more representative of how we will build out this brand internationally. So think about 10,000 to 12,000 square feet of prime space in a mall, single floor, big, wide open frontage, and the stores that we open in 2013 will follow that pattern. In terms of where they will be, we'll be looking to have a little bit of a depth test to go to some areas outside of the capital to see how the brand resonates there. So that's how we're thinking about that. Your question on geography is a good one, and you're right. We started in the Middle East and we started in Eastern Europe because we like those markets in terms of the availability of a great partner, a lot of consumer demand and economic environment that looks to support profitable growth and we've been thrilled with the response. So our response to that is great, let's do more of that. Let's build out those markets and go forward there. As far as Asia is concerned, very exciting. The business that we have in Southeast Asia for La Senza and for VSBA is terrific. It really is terrific. We are very aware that China will be the biggest market on the planet at some point. We just don't feel pressured by the time to go and do that immediately. We've got so many building blocks to put in place. We've got so many near-term growth opportunities in front of us. We think China and the rest of Asia is out there but we just don't need to hurtle towards it, and I think China will always be there.

Unknown Analyst

[indiscernible] So given the potential of a potential change in tax law next year, is the board considering a special dividend before the end of the year?

Stuart B. Burgdoerfer

There's 3 or 4 points on that. First and foremost, our commitment to returning excess cash to shareholders is clear. And that's been evidenced in lots of ways. So that commitment continues. Second point I would make is, we generate a lot of our cash in the fourth quarter, right? So one wants to be thoughtful and make sure that things play out the way that you would expect that they would play out so we try to be thoughtful and a lot of our cash generated in the fourth quarter. We are aware of the potential for increases in taxes related to dividends, we're all reading that in the paper, and we're reading the same newspapers that you guys are. We're pretty certain the tax rates on dividends aren't going to go down, pretty sure that they're not going to go down. So we'll put all that into the mix and management will think about it and then, as the question contemplates, we'll have an important discussion with our board, we have a very thoughtful board, which includes a number of folks that have substantial experience in the capital markets and we'll have a good discussion. So that's the update on that. We'll know when we know.

Amie Preston


Barbara Wyckoff - Credit Agricole Securities (USA) Inc., Research Division

Could you talk about Victoria's Secret Direct and the evolution of the mix, minimizing apparel over time? How should we think about that for next year?

Stuart B. Burgdoerfer

Let me take it, Amie, or you want to have Les comment on it? I don't have -- Barbara, I don't have a lot to add beyond what I've said and what Sharon remarked on in the most recent earnings call. So to reiterate that, first and foremost, the business is a great business. It's a terrific platform to continue to grow Pink and sport and beauty. So that's really important and is really important to understand that there's more growth in that business for bras and panties and sleepwear, and swim as well. So our overriding focus is on the categories that are also sold in the store. And we believe that there's substantial growth opportunity through an intensified focus on those categories. With that said, the apparel portion of the business is a good business and so you may be wondering, well, what's up with that? Is it a profitable business, is it a good business? It is a profitable business. And it is a good business and the customer values those choices that are offered to her online and through the catalog. But with that said, our business is about focus on best-at or core categories. And shoes and jeans and a lot of the different things that we sell in that apparel mix are not truly core, and so they will be deemphasized. Does that mean that we're going to run away from those things dramatically? No, that would be a foolish thing to do, from both a customer standpoint and a financial standpoint. But in terms of emphasis and focus, it's on how do we put almost all of our energy, pages, effort, all the different things that really drive growth in a direct business, against the categories of business that are also sold in the store and we believe that there is substantial opportunity in those categories. So hopefully, that gives you a perspective on it. I think we're exploring that and working it hard and it will sort itself out or reveal itself over time, but a lot of opportunity for those categories. I mean, think about how quickly we can grow the sport business with the Victoria's Secret Direct platform that we have. Very exciting opportunity.

Amie Preston


Janet Kloppenburg

Janet Kloppenburg, JJK Research. Stuart, you talk about the 25% growth opportunity from the square footage expansion of Victoria's Secret. I think that's a 3- to 5-year opportunity, I'm not sure. And I'm also not sure how that comes out, in terms of total annual square footage growth. I think last year when -- in the year we're in now, we're basically flat because of store closings. So I'm wondering, if we should be thinking that square footage growth rates should be moving incrementally higher? And for Martin, I was just wondering in terms of store openings, company-owned store openings internationally, obviously U.K. is slated first. Asia you're thinking about and may do over time, but should we be thinking that Western Europe would be your next step after England?

Stuart B. Burgdoerfer

So Janet, 3 or 4 points on square footage. Number one, and it's the reason that we put the example in the material, is we do believe that there's substantial opportunity for square footage growth at Victoria's Secret. So that's why we put it on the page. It would be likely over a 3 to 5-year period that we would realize that growth and we adjust our real estate plans all the time, as you would expect that we would. That would be the important thing to do. We don't set a plan in stone and say, come hell or high water, that's the plan we're going to do. We're going to read and react, and adjust as appropriate, but we believe there is a very substantial opportunity. So you asked about, and reasonably so, what's the effect on total square footage, or kind of how does that play through? As you know, over the last several years, we have both opened new stores and expanded square footage in connection with remodels, but we also are regularly closing 30 or 40 stores, typically in C malls, typically at lease expiration. And what we have found is that's an important thing to keep a real estate portfolio healthy, which is why we have that awesome looking pie chart with 99% of our stores being cash flow positive. So if you thought about it, like taking care of -- planting a tree or a bush, I mean it's the regular maintenance of the store fleet. What I would say about the effect of closures, in relation to additions of square footage is, that as a general rule, the sales per foot for new stores and remodeled stores, the sales productivity is about 3x the sales productivity associated with the square footage that we are -- that's associated with store closures. Lastly, what I would say, Janet, is what I would expect, and this is one of these a little bit. But over the next few years, we'll start to see net additions to square footage that overcome -- where those square footage growth is overcoming the effect of the closures, not so much in '13, and we're still working the plan and we'll give you details, as we always do, in February. But importantly, big opportunity, new square footage, much more productive than old square footage, and it's important that you keep -- that you regularly close a few stores to keep the real estate portfolio healthy so that you don't build up a problem.

Martin Waters

To the question about international growth, so the only places where we'll use our own capital and be wholly-owned, are the U.K. and Canada. So if you do the math on the slides that I just showed you, you'll see that about 20% of our store openings next year will be wholly owned and about 80% will be franchised. On the second point, what do we do with the VS full assortment stores after success in England, I think we'd do more in England. We've got 2 things going on in that we just started a business in the U.K. that's less than 2 months old, and we're just about to start a business that's our first ever franchise for Victoria's in the Middle East. I think that's enough. I don't want to be distracted by, "I wonder what happens next." Let's just do that and make sure that really succeeds and that we deliver that with extreme quality. So I'm sure that the story will unfold over time, and we promise to keep you updated. But right now it's about focus on what we've got.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

It's Lorraine Hutchinson from BofA. Stuart, I just wanted to follow up on Janet's question about the Victoria's expansions. On average, it seems like a big increase in square footage per store. Will many of these have to be relocations or do you have adjacencies that you can use to expand the stores?

Stuart B. Burgdoerfer

Well, thanks for the follow-up question. Another really important thing to understand about expansions is that it is truly one store at a time. And so while I wanted to demonstrate the opportunity in aggregate per square footage growth because it is a real opportunity, as I think you appreciate in your question, it's one mall at a time. In certain -- we have -- one of the great things that we have is we have great mall locations. We really do. And Les and Jamie Bersani runs real estate. The team have done a really good job ensuring that we have great locations in the important centers in the United States. The dilemma that, that presents is that if you can't get a neighbor to leave, which they typically don't want to leave great locations. Then you’ve got to be really patient and forego an opportunity or you’ve got to start thinking more about having, for example, freestanding Pink locations so that you don't miss out on the opportunity. So it is one store at a time. General rules don't apply other than to say there is such an opportunity for sales and profit growth particularly related to Pink that you'll see, you've seen it this year, you'll see more of it next year where we’re going to get our activity related to freestanding. Pink is going to go up because we can't get the space adjacent to the great Victoria's location that we already got there.

Omar Saad - ISI Group Inc., Research Division

Thanks. It's Omar Saad from ISI Group. Two quick questions, could you address the idea that La Senza is kind of repositioned in Canada. Any thoughts on the opportunity to bring that south of the border to be a complementary brand to Victoria's Secret? And then just quickly on the London store, I was there last week, a lot of people with suitcases obviously, looking to load up on product. Any insights in terms of where tourists are coming from to visit the store?

Martin Waters

Great question. So in

[Audio Gap]

over the world in that store. We also know through our VAT refund business that there are people that are transacting with us that are then taking those goods overseas. I think it's fair to say that in September, you see a lot of Middle Eastern customers in London, so that was a high preponderance. And during school holidays in Europe, you'll see more Western tourists. But overall, there are people from all over the world on Bond Street. It's just a phenomenal advertisement for our brand, I think. On La Senza, I mean, yes, of course, we see an opportunity for La Senza in the U.S. I'm happy that you asked. We think there's an enormous opportunity. Given that the brand has a very different positioning than Victoria's with that young, sexy, obvious positioning. We have a saying in the business that is, you don't get to eat dessert until you've eaten lunch. And our lunch is that we've got to fix Canada. We've got to get Canada to a sustained level of performance that we feel confident in, and that's not because we don't think the business will work in the U.S. until it works in Canada, it's not that. It's a question of focus. There is a management team in La Senza whose job it is to make that business work, and we're very, very focused on that first. I'm happy you asked the question.

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Neely Tamminga from Piper Jaffray. Stuart, I have a question for you. Switching gears a little bit away from store into technology. Could you talk a little bit about some of the agility you guys have around the technology, projects to help really -- help the backbone of this company? And one thing I'm thinking of specifically is just the role of customer service, and the viewpoint of customer service has really been changed and redefined by eComm in the last 3 or 4 years. So what sort of discussions are going on about free shipping for your returns 24/7, same-day delivery. I think Les was the first person I met with an iPad, okay. So I know that technology matters at this firm. So if you could speak to that, that would be great.

Stuart B. Burgdoerfer

Well, that's a great question, and I'm sure my perspective and Les is now or later may want to embroider on it as well. We have a lot of discussion about technology within the business, as you would imagine. Importantly, we invested in a lot of core systems as you're familiar with in the, call it, '05 to '09 period, an important enabler to what we're doing now, not the driver of what we're realizing but an enabler to. We've invested, over the last couple of years, finishing up, a replatforming of our POS system. I mentioned in my remarks, investment that we're making to improve the customer experience at Victoria's as it relates to buying online and returning in stores and -- door. In the Direct business, we also are regularly investing in various improvements to the website and the backbone of that business. So those are things that we're doing. What we're really talking about though is the relative importance of technology in our business. What's most important is the product. What's most important is the product. What's most important is the emotional content that if you walk through 34th Street, you'll experience, in terms of the emotion that, that store environment creates for our brands. Businesses can get overly focused on technology and forget about those core things that she's looking for, and we don't think, at least for our business, that technology drives a lot of emotional content, which, at the end of the day, is the most important aspect of our business. Does that mean that we're not going to invest anything in technology? No, that's not what I said. But what I would say is technology is not how Limited Brands, how Victoria's Secret and Bath & Body Works wins. The way that we win is great product, great store environment, really well-trained, knowledgeable, helpful sales associate delivering a great experience in our stores, which is the substantial part of our business, both our growth and our existing business. And then reasonable investment in the Direct business to stay relatively current, not looking to be the leader in technology, but looking to not get "too far behind", where it's really a problem for customers. The last thing I want to comment on, Neely, that was part of your question, and I want to be careful about this, but you got to be really careful who you imitate. So Amazon is a very large business and certainly, by many measures a very successful business. But you didn't see them on our operating income chart about who we're aspiring to from an operating income rate basis. And so because I think their operating income rate is pretty low, I mean last time I looked. And so I -- and I'm not -- Amazon is a company that should be respected, and we certainly do respect them. But when you're selling commodity goods or goods that you can buy in lots of places, then you got to do some of those other things that companies like Amazon are doing, free shipping et cetera. We have the benefit of you can only buy Victoria's Secret product in one place, you can only buy Bath & Body Works product in one place -- from us. And so the need for us to do some of the other things that people are doing is not as great. You got to be very careful who you follow because they may be pursuing a model that doesn't work or certainly may not work for us. So a lot of discussion around those things, who are you following and why and how do you recognize the strengths that we have that you can only get our stuff in one place. And so there is a lot of discussion about it, and where the discussion always comes back to is great product, great store experience, great experience with the sales associate, good experience online but not leading with technology.

Marni Shapiro - The Retail Tracker

Hey, guys, Marni Shapiro, The Retail Tracker. I have a bunch of follow-ups to a lot of the questions that have been asked. And they'll be quick but I'm going to fire them off. So Martin, La Senza, if you could just clarify how young, young is, at La Senza versus Victoria's Secret, because I'm curious if it will compete head-on with PINK with a different sensibility. Stuart, you talked about, in real estate, the expansions, if you can't find a space adjacent, you would look to maybe open freestanding PINK stores. And I've seen some very nice growth, finally at VSX. And I'm curious, you've dabbled in standalone VSX stores in the past. Would you consider dabbling in that as a standalone format? Or would you choose to put PINK in standalone and maybe expand VSX back into that space? You also talked about on technology. Very clear about the point of sales shift from store to home won't be out until spring, and while I agree that technology does not provide any emotional content, I do think that long lines over Christmas provide emotional discontent. And so I'm curious if you can talk about mobile commerce and what you're doing in the stores over the holidays because, I think, particularly, for you guys, the lines do get very long and you have again dabbled in that. And then the last one is just is Henri Bendel even still on the radar screen? You keep quietly opening up a store here, a store there. It's a great brand. It's a high-end brand that you seem to have and never want to discuss.

Martin Waters

I'll take the little La Senza question really quickly. So young, sexy, obvious value, and we point that proposition at a 23-year-old customer is how we think about it. Of course, defining ages for brands is a dangerous thing. It's about an attitude rather than a number. But think about a 23 year-old customer distinctly different from PINK, which is collegiate, by nature. Stuart, you want to take the real estate and technology?

Stuart B. Burgdoerfer

Yes, 2 or 3 questions there. So with respect to freestanding locations and specifically, how would we think about sport, the reality is we're testing right now, is what I would say. Probably in terms of a balance point right now, sport probably better within the overall Victoria's Secret box, if you will, or location, the logic of that is. in starting a new concept for businesses to get people to go into your store, right? And one of the real advantages that we have in starting new concepts within the Victoria's store is you're drawing off the footfall that's naturally in the Victoria's Secret location. So I would say, it's naturally in the Victoria's Secret location, so I would say that would be our bias right now. But as you're aware, and we've got lots of examples in this business, Bath & Body Works started on a table at Express. So we're not afraid to go to freestanding concepts once it makes sense, which we're obviously doing that with PINK. So that sport, I would say, more likely in the near term within the Victoria's box.

With respect to technology and and specifically, your question about emotional dissatisfaction on long lines are investment in mobile point-of-sale in the store. Specifically, to your question, "Have you got a long line on Black Friday or in December,?" we recognize that, and our investment in mobile point-of-sale both at Bath & Body Works and Victoria's, is up dramatically. And so we understand your point, and we think we're taking good action and making appropriate investment to introduce a substantially greater number of impasse units in a much larger number of stores to meet that peak need. And I think there was a third...

Amie Preston

Yes, I think on Bendel, Les is probably the person to best address that. So we'll cover that when -- later on today. Right now, I'm sorry, we're out of time for questions. We're going to take a quick break, 15 minutes. So come back at 10:45, and we'll spend some time with Les. Thanks.


Leslie H. Wexner

I'm going to try to be brief and, if possible, get you all out of here by 11:30 with ample time for -- try to ask and I'll try to answer some questions. I thought this morning was -- it's exceptionally good, it was very good for me to hear the business described so succinctly and clearly by the guys I work with, some of them. But I think if all the leaders, the senior leadership of the business -- here, it would have been the same story. I don't know if it would have been as effective for you because you'd have thought it was rehearsed, but we do think a lot alike. I'm just -- yes, doors are closing, people are coming together. For this morning's session Allan Tessler was here who was our Lead Director. And I think it was very important for Allan to meet some of you and hear the explanation of the business. For him there would have been nothing new because it would've been most of the same materials and the same charts and -- that he had seen before in director's meetings. One person I do want to embarrass and introduce is my wife, Abigail. Please stand up. Abigail is a reformed Davis Polk business lawyer and mother of our 4 kids and a director of the company, and a very good director of our company. And she may want to answer questions that you may want to ask too. I think what Stuart and Martin said was so complete, I'm going to try to add it in my remarks, but it all begins in the business with a view about our brands and creating brands that have emotional content. And those brands, and I really like saying it, that we're the category dominant brands, both Victoria and its subsidiary, Pink; Bath & Body and its subsidiary White Barn Candles. Those 2 major brands, Victoria and Bath & Body are the market leaders, but they're the market leaders in the world. We may not be globally represented with bricks and mortar, but we are the dominant lingerie and personal care specialty store business in the world, and that's a long way for us to have come. And that both of those brands have high emotional content. I was reminded at our last board meeting, we spent about half a day with Victoria and then half a day with Bath & Body, and after the Bath & Body meeting I felt that the directors of the company were somewhat let down because well Bath & Body, how does that hold up to Victoria and to Pink? But I had to remind the directors that Bath & Body has enormous emotional content, different than of Victoria. But to that soccer mom, that housewife, it's kind of Oprah Winfrey and Martha Stewart and a bunch of others wrapped into one. And I have to remind you that, that brand is no slouch in terms of emotional content. Their loyal are probably more fanatic than Victoria loyals. They know more product, they know more about what's coming next. They phone the stores, they tell their friends. They're on social media, broadcasting how they like a soap or a flavor or when is Forever Red coming and just all kinds of stuff. And what we didn't know is how that would then translate to international markets. We knew it existed here but I don't believe in market research. I believe that we

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you really have to try things, make observations with real customers. And Martin referenced that in -- going to Poland and Russia and Middle East with different brands and different formats because we don't know what will work. And our International business and our domestic businesses are test and then respond. And typically responses, respond to the big stuff and the easy stuff. And sometimes the big stuff and the easy stuff isn't the emotional stuff. So that looking at the growth of the business, that's a fundamental understanding that we're -- we have -- we're looking to develop, redevelop and re -- and evolve these highly emotional brands that are market leaders in their categories. And that differentiates us from virtually every other specialty store competitor, because there's -- I don't think in my quick scan, there's been a category-dominant specialty retailer that's had the kind of dominance that Victoria or Bath & Body has in their category. And that it took us a while to get to that. And Stuart mentioned the migration away from apparel and into a -- building on our foundational skills of buying and selling and our real estate skills and marketing skills away from apparel and to learning new categories. So from a foundational point of view, that would be an important thing to see. The other thing that I just want to amplify a bit is some of you, perhaps most of you, I'm thinking in this -- in the room today, would have been in this room in the fall of '08. And that was just about when it was hitting the fan or maybe it was 30 days before it hit the fan. And when I look back at that period, and Stuart's -- his charts speak for themselves, is like for us to emerge with the power that we have over a period of time saying, "What the hell happened?" Because this wasn't a fast track to run on, and in fact probably going into very choppy seas and a lot of headwinds, what happened? And I want to talk about that because for us it was a very clarifying moment. Nothing new but it really put a renewed emphasis on the quality of what we do, just a simple quality. And putting quality ahead of quantity. So that the notion of quality at every effort, quality of how we develop loyals. Quality of the talent and the enterprise. Quality of written [ph] inventory management. Quality of our relationships in the fall of '08 with real estate developers and manufacturers around the world because everything had to go back to basics. Everything had to go back to basics and I'm a firm believer that quality, if you don't have a substantial and firm foundation of quality, you can't get the quantity. And if you do, that quantity, the house is like a house built on a weak foundation, you can build it pretty fast but it will collapse in the first breeze. So we got very focused, we got very fast. And we also went back to pretty basic thinking. And I think Abigail remembers it was a very quiet period for me because I was just very introspective, I wanted to get it right, I felt the responsibilities and the risks of leadership. And what do you do in that period of the winter of '08 and going into the spring of '09, I went back to some pretty basic things, retail is detail. I didn't invent that phrase. A man I never met, actually coined it, I think his name was Malcolm McNair and he taught at the Harvard Business School. But retail is detail. It was way back when Professor McNair was teaching it -- and it is today. And so understanding the details and being able to execute the fundamentals and redefining those fundamentals, and putting them in to contemporary terms or what are those fundamentals and how do you execute when the world, as an extremist, was a guiding principle. The other one is how basic and simple our business is. This is really an easy business. We buy stuff and we sell stuff. Now the buying part is not easy but it's simple, buyers make decisions, designers design, we quantify, we qualify, quantify and quantify what we buy and then hopefully we get it right when it's delivered to the customer. But simple motto, we buy stuff and we sell stuff. And I mentioned before how my heart was singing on all of our retail operations. And it culminates on seeing 34th Street, but seeing the performance of thousands of stores across the country. And the profitability of 99% of them -- we're pushing to get to 100%. But those fundamentals and those details, and how simple the business is and yet I look at retailers on a global basis, how few of them understand stores? They know have them, and the notion of -- they push things through. But as you shop around, how many store, how many multiple store, even individual shop operators just whatever the size, scale or store you visit, whether it's online or in a brick-and-mortar situation, do you really believe that they have insights into operations? When you think about supermarkets, you can think about automobile dealerships, you can think about Victoria, the store design, the delivery of service, do they really have this understood and recognizing that the retail wheel is always turning. So we have this group of fundamentals, which I don't think have ever gone or will go away, have gone away, they get redefined -- that the execution requests so many moving parts in these fashion businesses. So many SKUs, so many stores, so many people, so many places. And nothing of any of this damn business just happens until people, exactly like ourselves, say, "I'll take it." So we plan, we scheme, we can muck around with technology and all this other stuff. But that magic moment when somebody says, "I'll take it", and then we have to be happy and then maybe we have the opportunity to begin building brand and to begin creating oils [ph] . So as I look around critically, very few retailers on -- in my judgment, understand the store side of their business. They have them and I'll look at the evolution of fixtures, design, layouts, marketing and it doesn't tootle my flute. It's just like -- they look substantially the way they looked a decade ago or 2 decades ago, no insight. So this -- the fundamentals of the business that we began focusing on and really relentlessness of understanding those fundamentals, refining them, sorting out priorities and doing a few things that would produce the many in the business. And we were saying in '09, we're going to shoot for a 15% operating profit. And today now benchmarking in a retail Olympics and say, "We see 20 in sight." We've said that internally, we never quite broadcast it. So I think we'll get there sooner rather than later, and basically what man has done, man can do. So I think our brands are as good as theirs. I think our talent is as good as theirs. I think our customers are the same as theirs. Now the question can we execute? No secret playbooks that the standards have been set, and it's challenging, I think, to the whole enterprise to say, "Okay, now we're in the retail Olympics." Not competing against either this guy down the block or somebody else 1,000 or 2,000 miles away, but the best in the world. And think we deserve, we've deserved, because we've earned the right to say that we're competitive with the best in the world and now we're looking roughly to be on the pedestal, with bronze, silver, gold, but we're going for the gold. And that is a quality direction. We are just simply trying to do it and I think it's within our range. And the foundation of all these is quality. So that everything we do is founded in quality. The relationship with customer, the relationships with talent, the idea of speed and agility, you can't get to speed and agility without quality of thought and quality of relationships. I can't make people who are making stuff for us run faster. I just can't make that; they're independent guys, they service other customers. So partnering with them and getting them to realize that it's in our collective interest to find new ways, to break new grounds, to do business with us, to give us a priority is -- it comes from the quality of the relationship. The quality of our real estate is superb but we recognize the quality of the relationships that we have to have with our developers. And I'll tell you, we stood alone in that horrible period of the winter of '08 and '09 when our real estate guys went out to every developer, major and minor, made a house call and didn't ask for a 10% rent reduction. We said, we're okay, are you okay? Is there any way we can help? Can we pre-prepay rent? We're solid, we're not losing our loafers [ph] guys, we don't want -- we appreciate what you've done and if you have any problems let us know. Did the same on the manufacturing side too. Unique in the world. But we have a longer-term view of the quality of the relationship. And then and thinking -- looking at the execution of parts in the quality of the store operations and rethinking it, full-time people, better service, it's really hard to build a loyal relationship in a bar, restaurant, automobile dealership, Bath & Body Works and Victoria if every time you walk in the door, you're seeing a strange and unfriendly face. And so when you go back in and somebody happens -- remembers you on sight or remembers you by name or you can call up and say did the new stuff come in or show it to me, and they say, "I remember your size, your color, you liked fresh balsam, and we've got the new candles and you'll be delighted. We're rethinking every aspect of the business and trying to produce the highest quality relationship. The second thing is that when we talk about focus, it's our relentless focus, that narrow focus. What are the real priorities and we -- making sure we have them set and then we -- looking at all the dials and reappraising the situation, saying are these still the priorities? Did something come up? And sometimes the things that come up are very compelling. And we describe those as bright shiny objects, interesting music, maybe there are even sexy ideas that have high emotional content but the money isn't there. So they're not really the priority. Martin, the example that Martin gave you about the opening of the store in Bond Street, I was there 3 months before it opened, to make sure the construction was going okay and was there last week. Martin went for the opening, nobody went. No party, no nothing, it's just another store. Bond Street is unique but it wasn't a distraction. I had much more important things to do like running a business than going to a cocktail party on Bond Street. And that thinking about -- that priorities, what are the big issues? Let's stay on them. And stuff is always hitting your windscreen. The question is, is it urgent, is it important or is it just kind of interesting and distracting? These flagship stores will open in the Mid East, very compelling to go there and visit Alshaya and Company, this is a major deal for them, maybe I'll make the trip in the spring. Christmas in North America is much -- is more important to us. And that relentless focus on fundamentals, priorities, big deal issues and making sure we're taking inventory of those issues so that we get them right. Let me give you an example, an amplified example that Martin gave is that everybody here probably is very curious about the Bond Street store. It's a flagship, it's London, that's a very sexy thing right? And I'm very proud of it. Even Martin said, but we have these 125 and maybe will get to 250 of this Victoria's Secret Beauty stores, which average about $2 million and take no capital. And it was an idea, 3 years ago none existed, and we'll -- we could get to 200, 250 of them next year and there's no sigh in the room. That's really important. You think about ROI. Think about risk and think about International business and that even the subtlety of looking for 6, at most, regional partners, building relationships with them, taking the time to build a real continuity of relationships them understanding us, us understanding them, building the international organization that can go there and work on the ground to open stores, to train people, to approve every real estate transaction globally. Wasn't in our toolkit 4 years ago. And to some of our franchise partners, I have to tell you the notion of approving real estate drove them frigging nuts. What do you care, it's our money? It's like -- it's our brand, buddy. We send somebody out to look not only at the center but the location. And we don't like stores that have steel beams in the middle of them. We want to be next to John's or whatever it is. The quality is the quality. You do it, we do it. It's really a partnership. We'll support you better than you've ever been supported. But 250 stores, the potential in that business goes into I don't know how many thousands -- thousands because now we know testing and experimenting that it works everywhere, everywhere. It's even more ubiquitous than Starbucks. I'm just pausing for -- surprises everywhere. Having used those as an example, with great confidence, and Stuart says what if the average of Victoria store is 2,000 feet, then you ran up the numbers and he says, "Well there's some deducts for closing." That's like you're looking at lent. What if it's 3,000 feet, what if it's 4,000 feet? We're not projecting that, we're saying, we're really serious about the sport business and people might speculate that people in the sport business kind of, pretty common knowledge have stores that are about 2,000 to 4,000 feet. We can't put a 4,000 foot store inside a 6,000-foot store and have a 6000-foot store. We believe the potential of Victoria's Secret Beauty domestically, North America, will more than double. And swim will grow, and Supermodel Essentials and bras and panties so you should see probably a substantial growth because that's where our capital is, that's where intellectual property is and you will see as we -- as we maybe concretize the numbers, you'll see substantial growth in the domestic market because we've proven the potential is there. Market by market, experimenting with different stores and different sizes, different formats whether it's Pink sport, expanding Victoria frontages and that coupled with market intensification, I believe we have the opportunity in both Bath & Body and Victoria's Secret to double the existing business. Some of it will be square footage because of additional new businesses that are adjacencies and important to the evolution of the brand. If we had none of those adjacencies, I believe the business has the potential to grow in the existing businesses that exist in Victoria. You could almost do it on Pink, almost do it on Pink. I'm very optimistic about Pink and the larger store format. And the evolution of that brand and the operation of that brand from end to end, from concept to buying to execution. So we don't look at same-store growth as a given but we've tested different schemes, whether it's fixturing, store design and marketing and we believe that priority exists in North America. Then the question is kind of what about this brand, what about that brand? And it's like well, we keep looking, keep reviewing the situation because of the opportunities that we're looking at today are different than the opportunities that we had in hand proven 3 years ago. The striking example is the Victoria's Secret beauty & Accessory business. It doesn't even on our things-to-do list. So we have 2 things on our things-to-do list -- that and Bendel. 4 years ago, Bendel was much bigger and had a higher priority -- and up jumped the devil. These $2 million stores that take no capital that work all over the world. The gating factor in all our growth is our development, our experience, our thinking and how quickly we can build an organization that can support what we're doing. So having played this game a couple of times -- if they build it, the talent will come and it's not exactly that way. So we're -- we see a substantial growth in the domestic businesses. We see substantial growth in International. We don't see any capital limitation. But for moving neighbors out of stores, no limitation in real estate. We don't see one in base of supply. The real limitation we have is how good we are and do we have, as leaders of the business, confidence that we've built a people foundation that can support this kind of growth. When you -- when we talk optimistically, and maybe it's realistically, realistic in that we can do it optimistically. We can do it in 5 years, doubling the North American business. Easier said than done. The math works out pretty quickly, the human experience at running this business at twice its size, the development of the talent just here to support it, let alone finding talent to run an International business and giving them time and grade. Martin gave the example of deliberately not opening the store on Bond Street before the Olympics, but deliberately opening the smaller store in Stratford 4 weeks before Bond Street, so that everybody who is going to work in Bond Street had 4 weeks of real store experience in a Victoria store in London. Now we've got 2 stores so the third store is relatively simple, to train managers, to train staff and to build an organization and we believe for the businesses like the U.K. business and we learned it from Canada, that the intensification in these markets requires organizations within the market. So pretty easy to open up -- I'd tell you it'd be damned easy for us to open up 30 stores -- 30 Victoria stores in the U.K. next year, 18 months maybe 50. But an organization that can run 30 or 50 stores at not only a satisfactory level but with increased performance at store ops, HR issues, all the distribution, replenishment, maintenance issues that follows it -- can't push it. It took my mother 9 months to make me -- it takes a long time to build an organization that's going to run a -- let's say potentially a $1 billion business in the U.K. And no hurry, U.K. isn't going away, China is not going away, so we're sorting ourselves out and I'm very, very optimistic about our international business. And the foundation of it again is our domestic business. So at this point, and I think internally we talked about it, never said it publicly but internally our goal is to be the best in the world and to be the best in the world for a sustained period. No one week wonder. None of this we opened 10 and closed 8, Roman candle kind of stuff. So I think there's a substance if you look back at the history of our business in the U.S. domestic market, the same substance we believe we have the nucleus of and the foundation of in Canada, looking to build that in other geographies like the U.K. and on a brand level, working with partners to build foundational relationships. And they're very eager to invest the capital. We're the ones that are holding back. Because we don't think they have the time and grade yet of living with us and we have the fluency of dealing with them as we deal with ourselves. So that notion of being high on the mood elevator, to -- just to get to the Olympics is a big damn deal, to know that you're on the pedestal, one of them, and then you have a good shot of going for the gold and having it for a sustained period of time is a unique opportunity and challenge. I'm very energized about what we've done and perhaps even more optimistic and energized about what we are yet to do. Thank you, Al. You can direct questions to me, I'd be happy to answer them or not. I've got Stuart and Martin here. Personal ones you can direct to Abigail.

Jennifer Black

Hi, Jennifer Black, Jennifer Black & Associates. I'm really curious about your thinking on, with Forever Red launching. And I've heard it's your biggest launch at Bath & Body Works and I'm more interested, are you taking Bath & Body Works further upscale? Are we going to see -- is that what you're thinking behind this?

Leslie H. Wexner

Well, the -- a great question, Jennifer. We're seeing a -- we've been working, and Nick Coe has been doing a great job in elevating just the performance, the teamwork, the abilities of the Bath & Body business. And it manifests itself in the core Bath & Body business and in the White Barn business. We're beginning to think again now about freestanding White Barn stores because we can't put the assortment and we can't reach our volume potential. So that's a big growth vehicle that we're kind of putting in the queue. Forever Red, if you'd see the world in terms of good and better and best is that Bath & Body has an enormous base of good and Forever Red, I think is in test very successful launch of better. And we don't know what the shape of that pyramid is, I would suspect, at least, in tests so far, one, it hasn't, that the better hasn't traded-off, it hasn't been traded off against the good. So in the stores where we've tested it, good has stayed in its size and better has been an increment, which I think is what we need. How many better fragrances and forms we can support, I don't know. I would guess it's somewhere in the magnitude of $500 million of incremental volume if that just based on the test and how it's going. And I think -- but it also is reflective in our thinking about the brand is gravity brings all things down. And so, in -- if we have fashion specialty businesses, which we think all of our businesses are, we constantly have to be getting them up and introducing better products, better forms, better formulas, better laces, better constructions because we don't want to get just the force of gravity bring down the products and the brand. So it's a strategic issue and this is hopefully is a tactical success.

Erika K. Maschmeyer - Robert W. Baird & Co. Incorporated, Research Division

Erika from Baird. I know that your #1 focus is the U.S. business, or North American business for the holidays, but to ask a U.K. question. As you learned from the business there in the first couple of months, is there anything that surprised you? I guess, how similar is the assortment relative to North America operationally? What are some of your learnings there that you're looking for in addition to the people side, to feel comfortable with growing and then potentially grow throughout Europe?

Leslie H. Wexner

Good question. I'll give you an insight into our thinking. As we have expanded and try different brands in different places and a lot of the input, thinking inside the business, people we interview, people that worked other places, and everyone says well you've got to fine-tune this for Canada and fine-tune that for the U.K. and Mid-East, they got to fine-tune this, they got issues, sizes and colors, emotion -- emotional responses and we've begun in our International businesses and say, "Look, if we modify what we do when we come into a market, we have no bench to reference." So we just go and say, "We do what we do and this is what we do. And if it doesn't work, then will fix it." And our experience, including the U.K. to-date has been, it's about the same. Surprisingly, we're only weeks into this. We'll probably take a more serious look after the first of the year. But sizes, color, shopping patterns, there's some belief in the business that English women buy more bra and panty sets than Americans and Americans buy more separates. I don't believe it, but they're bigger, they're smaller and it's about the same, just looking at size information. Surprisingly -- I'm trying to say -- the surprise we're kind of finding how much business Bond Street does on a Sunday? Who knew? Mid-Eastern women buy very sexy lingerie, who knew? And kind of a Midwestern kind of healthy good for you brand like Bath & Body, that people, native dress in the Mid-East want to smell like caramel marshmallow or buy fresh balsam candles or whatever. I mean, it's amazingly consistent and I don't know -- and I think it's probably, I don't know if everybody has this experience, or they just like the brands and somehow they find the best of it. But I thought we would find more variance and happily, we're not. And I think if we would have artificially decreed what we did, we would -- it would have been -- gone down a real slippery slope of correcting from no base that we would understand. Who knew that people all over Mid-Eastern Turkey celebrate Halloween? I don't know -- they do. Unless it's American tourists who are buying pumpkin candles and jack-o'-lantern or, I don't know, pumpkin soap or whatever, it's like same stuff, so good news for us. Martin, is that substantially -- okay, don't want to screw up.

Unknown Analyst

Your Victoria Secret Beauty -- your Victoria Secret business overall has been led by Pink, the star performer here over the last couple of years, and bras and panties have been incredibly strong. Beauty has not been one of the strong call-outs for a few years and I'm wondering if you can talk about your strategies around the beauty business, particularly given the margin-enhancing characteristics there.

Leslie H. Wexner

It's a long story of shortments [ph] -- fix it. Sharen is all over it. We've hired a new leader. I'm all over it. When you see a 34th Street, and you see some of the new stores, the fixturing that we're doing, store design, products, the new products that have been launched, much more attention to detail and clearly, a trade-up in quality. When I get critical of the Victoria Beauty business, it kind of looks like a bad junior sportswear business, one of this and one of those, a lot of silly little ideas. And inside of that, 4 of the top 10 best-selling prestige fragrances in the United States and those fragrances sell amazingly well all over the world. So getting that business fragrance-based, whether it's in personal care products or sprays, mist, EDTs, regular launches at a quality level that competes with the best in the world, that's what we're focused on. It's a sweet business. You'll notice in 34th Street, just the beginnings of what we're trying to do. If you walk into fitting rooms, there's testers with fragrance, and we're just trying to make the business better as -- any way we can. Sharen has had a pretty significant influence on it in a -- maybe a 3- or 6-month time, more to come. Everybody has priorities. I do, she does, the brand does, and I think that we're just -- we let that one slide and it's -- shame on us.

Laura A. Champine - Canaccord Genuity, Research Division

Laura Champine from Canaccord. So Les, when you think strategically about the international lingerie business, not the ridiculously productive body spray stores, but when you think about the lingerie business, you probably own, by far, the best brand in the world with Victoria's Secret, why does it make sense, has it made sense, continues to make sense to launch more numbers of stores for La Senza, which isn't even in the same league compared to the Victoria's Secret brand full line lingerie stores?

Leslie H. Wexner

Well, the logic of La Senza, the question's a great one, but remember, all those international stores aren't our money. It's other people's money. And we have -- we're building substantial relationships. As we referred to you, 6 prime partners, they want to open in more stores. So La Senza is not unsuccessful on a global base. We're not happy with the performance in Canada and that performance probably has a halo effect on the rest of the world. But I think on a demand basis, we just said to our partners that next year you could have as many stores as you'd like to open and what would be the demand?

Unknown Executive

Probably another 50 to 60 stores easily.

Laura A. Champine - Canaccord Genuity, Research Division

What would be the demand if one of your clients wanted to finance Victoria's Secret stores?

Leslie H. Wexner

Well, the demand probably is even greater for Victoria's Secret stores. The full answer is we don't know that we can deliver, so we believe that we've got a very good shot in the Mid-East. We built the stores, designed the stores, have been training people for a year in how to run the store because their people have to deliver our level of service. And they have to run the stores to our standards. I'm not -- with all the positive intentions, I don't yet know for sure that Victoria works on a franchise basis. You could open up McDonalds on a franchise basis. I don't know if you could open up Cheesecake Factory or a complicated business that has a high quality of service. And behind this, maybe this gives you an insight to thinking, is that we put out lots of choices, right? Whether it's La Senza, whether it's Canada, whether it's the U.K., whether it's full line Victoria, Bath & Body, and the question about International that's come up every year, funnily enough not this year, is that why don't you guys do something? And I say well we do know exactly what to do and the obvious may not have been, who's to say, the wisest choice. So Victoria's Secret stores are hard to open and they're really like French restaurants. They're big, high level of service, complexity of inventory that may flex on the whole brand. So if we open up a humdinger in London, it's terrific. If we open up a disaster in London, the halo effect affects the whole brand. North Americans, Canadians visit London. They say this is terrible, everything's on sale, weird place. And they take home that same experience, and people broadcast it on Instagram and Facebook and all the stuff and the world goes -- the negative aspect of social media befalls us. So I think the insight is, is that we put out enough choices in brands and geographies, looking at volume and profit and capital and risk and speed, we can get a pretty good handle on the ranges of opportunities and market potentials. Imagine Bath & Body being a success in the Mid-East. I mean, we did it. That was really a long shot in my mind. And if anybody here would've guessed that Bath & Body Works would be an easy business to have in Turkey or the Mid-East, it's like you're a hell of a lot better retailer than I am with a much stronger intuition. The real insight in narrow and we've learned this, watching H&M and Zara particularly, little bit of watching Inditex, watching UNIQLO and some of their headbutts, they haven't been quite as successful but I give high marks to Inditex. The first market they were in was Spain. The second was Portugal. The third, the United States, 20 years ago. It was tough. Pulled in their horns and went to Italy and France. Now they're coming back 20 years later. The lesson? Do the easy stuff, stupid. The hard stuff, you don't have to do. So if I have one brand, I should do the easy stuff first. If I've got multiple branch, multiple formats, and I have the luxury of not needing the international growth to float my boat and I have adequate opportunity to grow in my own. We're now defining the U.S. as North America, that's a pretty fortunate situation to test, and that's what are the things that are easiest, what things really work internationally and we don't have to put a bet on one number, it isn't red 13. Now I would tell you, just the evolution of our own thinking, is when we talked about international seriously, really seriously, we're really going to do it. It was 4 or 5 years ago, and it was obvious that it was Victoria's Secret flagships in London and Tokyo. And I said that to myself so many times, I said it's so obvious, it can't be true. I just don't believe those obvious choices because -- just because they're obvious aren't necessarily true and just began a process of internally challenging ourselves, and I was a little bit stubborn about the franchise model. So we go anywhere, we got to own our own stores. I don't believe that but -- and I further believe now because I think we've proven we don't have to. But to develop franchise partners, that's very patient and serious work, and we appreciate that it's their capital. And we want to understand their financial model. We want them to understand ours. We want them to be in Columbus, Ohio 3 or 4 times a year. We want to be at a leadership level with them and their offices and their stores and go to their grand openings organizationally because it's important every one of those stores is a business and a significant capital investment, whether it's in Singapore or Moscow. We just learned a lot.

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Paul Lejuez, Nomura. Les, you got dominant market share in U.S. Are there any competitors, competitive threats that you are increasingly paying attention to here in the U.S.? And as I think about your dominant market share in the U.S., it also makes me wonder about what your aspirations are as you're starting to really commit to this U.K. market. What are your market share goal aspirations for that market and any market that you go into? Do you look to be the dominant player in every market that you're going to enter? Or might you take on a slightly different approach than what you've done here in the U.S.?

Leslie H. Wexner

That's a really good question, particularly good one. The notion of -- I believe in market dominance. If I had one store, I want it to be the dominant one in its category, in its specific geography. And I don't -- probably drive the NBA's nuts, I just -- I can't relate to market and market share, national statistics. They're kind of irrelevant because in most of our businesses, we created the market share that is being defined or we're greater than the share of the market that the market defined as the market. I just see it as a shopkeeper. So if I -- if everybody in this shopping center has a, say, apparel business does $500 a foot and I do a $1,000, I have a bigger share of this market, store by store by store. Having said that, when it comes to the U.K., yes, we can go into any category and any market knowingly believing that we could dominate the market. If you're King Kong, you've got to behave like King Kong. And we have that position in the U.S. and we want to keep that position. The second question about competitors is a troublesome one. I wish we had one that we could really tee off on, but all of our best competitors have given it a shot. GAP has, UNIQLO has, they bought a lingerie company in France years ago because their eyes were very green. Inditex with Oysho gives it a shot. H&M's tried it. All of our best competitors around the world have tried. And you've got the local, the domestic competitors. I say local because -- anyway, they have given it a try. It's a technical product. It's -- given that ladies wear bras and being able to build them and sell them is a whole other thing. And it took us about 5 or 7 years to develop the competency. We don't see a competitive wholesale brand in the world. So the challenge for us is to keep our sword sharpened and it's amazing how Pink makes Victoria's ears get pointy and their noses twitch. And likewise, La Senza in Canada, I got to go up there and see what they're doing because they hear they're opening up a lot of stores around the world. So I think we've got internal competitors that take the place of that external one, but we're constantly looking to see who -- and what I worry about is the unknown competitor, the one I can't see. But we're scanning all the time. We just can't identify them. And Victoria would be the #1 lingerie brand in the world, Pink would be 2 and La Senza's 3. So it's pretty nifty. And then you look at it by market, and to amplify what Martin said, one of the things having La Senza in Canada and then putting Victoria and Pink into Canada in the same centers, is that we know how competitive it is for all of them to be in the same geography, the same -- literally the same shopping center, same shopping precinct. And the shortcut -- the question came up about the brand, you see this supermodel image and the emotional space that Victoria has is, I think, every woman would like to look in the mirror and see a supermodel. With all that kind of Hollywood glamour, supermodel glamor, and -- but it's kind of good girl glamor. And Pink is kind of collegiate, sexy and glamor, and La Senza wouldn't market it this way, but it's kind of bad girls. This is somebody who -- I mean, we can it see so clearly now that we're working the brand and its evolving. Everything that sells is meant to be seen. This isn't stuff that you'd wear to the office and feel good about. So Martin describes it as very obvious fashion, very sexy. It's -- you're encouraging me. But it's a -- this is the kind of lingerie that it's fun when you buy it, fun when you try it and fun when you take it off. But it's -- and it's a very appealing customer because this customer is probably single or it isn't -- this is younger, more experimented and you can see it just in the stuff that you hear in stores and people -- young women, I'm not diminishing them, but literally come in the store on Wednesdays and Thursdays and talk about Friday night and Saturday night specials, what do you have new? I think that's how the world is. I'm not offended by it. But for us, it was rather difficult to invent a competitor that found different space for us to do Victoria's Secret cheaper. It's like we cut an offer on water. Victoria and Pink are very complementary. Yes, there's an overlap in some of it, but they're pretty discreet and to find a third position that was unique and different than those 2 is what we've been challenging to do. The business we bought was essentially not a very good knock-off of Victoria, and everybody in the business was very good at shopping Victoria and copying. And this is a much younger customer, much more robust, much more -- consumes more, just loves lingerie, likes fashion. So it's -- I'm very enthusiastic about it, obviously.

Dana Lauren Telsey - Telsey Advisory Group LLC

Dana Telsey, Telsey Advisory Group. As you think about Pink and you've expanded the brand into other categories, where do you see the evolution of Pink as you keep going? Because now it's intimate apparel, it's loungewear. How do you see that progressing? And just secondly, you've talked a lot about 34th Street and the Bond Street store. What do you see in those stores as you're doing more remodels this year that we'll see in the other stores going forward?

Leslie H. Wexner

It's hard to describe, give you a word picture of stores. But you shop a lot, Dana. If you saw 34th Street, you'll see Bond Street and you see Easton in Columbus, they're sisters. So that a lot of the things that are in 34th Street were things that we were experimenting, in-store design in the domestic markets and at other stores. So it's new to the world in terms of revealing in New York. A lot of the ideas in the beauty department section that's in the 34th Street store were things that we did in a deliberately remote location, Kalakala Street in Honolulu. So we're experimenting with beauty fixtures and different things and we could kind of do it under the radar. Most of our competitors don't go to Honolulu. It's good to see what we're thinking and experimenting with. But most shopping center stores won't have, let me think, 6 pairs of escalators. And they won't have traffic that 34th Street has. But when you walk through that store, you look at fixturing, the decorative treatments on the walls, flooring and flooring materials, fitting rooms, wall coverings, you'll be -- you'll see that -- many of those exact same things in stores that we're building in the United States. So we -- in 34th Street, you see an aggregation of, I would describe it as, proven parts put together, I think, in a really dramatic way. But no single part is new to the world, too critical there to be tinkering.

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

In the past, you've been remarkably accurate in your foresight regarding Christmas and wonder what your thoughts are this year.

Leslie H. Wexner

Well, I think, regretfully maybe the economy is doing a little bit better, at least regretfully for Mitt Romney, happily for us. But I think the -- I heard some statistics this morning about auto production and consumption and housing starts, and I have a friend who's a production homebuilder, M/I Homes, public company. His business has begun to turn in different parts of the country. I think right now the retailing is stuck a little bit because of the publicity of the election, which we thought would happen. We talked about it last spring. And as we're beginning to think about fall, and we said, you're going to see -- we'll see 2 or 3 months of the most negative advertising campaign about our country that we've ever seen and more dollars in media spent and will be enormously discouraging and distracting because people will be focused on all this stuff. And I think once the election -- if this were the last election and it was, obviously, going to be a landslide for somebody, or appear to be, then I think the uncertainty would be out and people would say, "Okay, I'm not going to watch TV. I don't care what CNN says, or I'm not going to pay attention to the news on the social media." I think once the election is resolved, and I don't think it's going to be significant for investors, and probably significant -- of greater significance for an audience like this, most people will say, okay, now we know and everybody will go on with their lives. So I'm kind of optimistic. I think the lull is a healthy thing. I think Christmas will be more promotional because for every year for the last 30 they've been -- I think we're better prepared. And my fundamental focus is to focus on the things that we can control, which is our inventories and the quality of our merchandise and the way the stores look and the stuff that's out of our control, just don't do anything silly but it's outside of our control. So I think it was reasonable to anticipate that this election would be a mess about a year ago, 6 months ago, through the primaries and it hasn't disappointed. And I think it's -- and then you get sad, but not insignificant things like the American ambassador being killed in Syria, behaving badly against Syria and all this other stuff in the world. On a relative basis, if I can judge this attitude, I think we're pretty good here. Europe is really foggy. I just see it in people's faces. Everybody you talk to, it's like they just -- they feel upside down and kind of standing on Jell-O and I think they have a right to, which bridges back to the question, where do you go in Western Europe if you have a success in the U.K.? Like, I don't know. It may not be Western Europe after U.K., I don't know, does the Euro get unglued? Does France become an ally or -- gee, allied with Russia politically because their socialism is so crazy, everybody move out of France, I don't know what else is going to happen, or Italy or Spain. So I think that our caution about what to do where until we had ourselves sorted out, kind of is fortunate because I think a lot of the world is getting sorted out right now and now is not a great time to be overextended with our capital in a lot of funky places. A follow-on to that, by the way, is that I'm not surprised that China is kind of wobbly at the moment. Trees don't go to the sky, not even in China. And the notion that if we're not there right away, the real estate opportunities will be barred from -- and everybody will have the goods -- all the good centers will be built in all the good locations and all our competitors will be there first. It's like -- come on, it's not how it is. If you have really good stuff, people want your brand and we just can't be overanxious because we -- again, I think being cautious and thoughtful and paying attention to our fundamentals is really, I don't know -- I'm really proud that we think that.

Amie Preston

You want to close?

Amie Preston


Leslie H. Wexner

You're going to -- want to close?

Leslie H. Wexner

The end? I don't know. I think the rap for me, somebody said here that they've been to these meetings, and the position of our business level and my own attitude is remarkably good. I think I'm a realist. And I think I know when I'm winning. I think I know when I'm not winning. And I think that we've built a very sound foundation. We've been developing and continue to develop great leadership in the business. Our people's thinking is really sound and a good balance of aggression and offense and defense, if you would. Our brands are -- I don't have to bid upset all the wonderful things about our brands. For me, the notion of getting better and simply having the opportunity to get better, well, one last thought, you can't come from Columbus and be an Ohio Stater without talking about Ohio State football. I always learn something from the coaches, and Urban Meyer said something after the first game and he said, "Well, what do you think, coach? You've won your first game." And he said, "Well, we've got a one-game winning streak and we have the opportunity to win 2." And last week, I was traveling in Europe, well, his comment, he said, "Well, you won 6 games. What does that give you?" And he said, "Well, we had the opportunity to win a 7th, and every week, we've got to get better." And I actually think simply having the opportunity to get better is a compelling thing. I hope all of you in your careers have that opportunity -- in your personal lives. And I think we're really fortunate. We're doing better. We have the opportunity to get better. And I think we're really teaming, stacking hands, and we really want to be the best in the world, that gold medal and having it, not just getting there but getting it on a sustained basis is really challenging and so we're fortunate and happy. So thank you.

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