Welcome to the Limited Brands second quarter earnings conference call. (Operator Instructions) I will now turn the meeting over to your host today, Mr. Tom Katzenmeyer, Senior Vice President Investment, Media, and Communications Relations. Sir, you may begin. Tom Katzenmeyer: Thank you and good morning, everyone. Welcome to Limited Brands second quarter earnings conference call for the period ending Saturday, August 4, 2007. As always, a reminder, any forward-looking statements we may make today are subject to the Safe Harbor statement found in our SEC filings. Our second quarter earnings release and related financial information were made available on our website last night, LimitedBrands.com. Also, the call is being taped and can be replayed by dialing 1-800-337-6551 followed by the passcode 583. You can also listen to an audio replay from our website. With me today is Martyn Redgrave, EVP and Chief Administrative Officer; Stuart Burgdoefer, EVP and Chief Financial Officer; Sharen Turney, CEO, Victoria's Secret; Diane Neal, CEO, Bath & Body Works; and of course, Amie Preston, our Vice President of Investor Relations. I will remind you about this now and I'll remind you again later after our prepared comments. We are going to take as many questions as possible and try to stay with you as long as possible this morning but we're going to ask you to try to limit yourself to one question. With that I will turn the call over to Martyn Redgrave.

Thanks, Tom. Good morning, everyone. I would like to take a few minutes at the outset here to review the progress that we have made against our strategic agenda in the second quarter, and then I'll turn it over to Stuart who will discuss our financial results, including the impact of all of the actions that I will discuss in my introduction. As I think will you see, the second quarter has been a quarter of transformational change for Limited Brands. For some time we've been communicating our strategic agenda, focusing on growth in our intimate apparel as well as our personal care and beauty businesses. In the second quarter, we closed on the transactions to sell a 75% interest in Express to Golden Gate Capital. We also closed on a transaction to transfer a 75% interest in Limited Stores to Sun Capital Partners, which clearly demonstrates our commitment to this strategic agenda. On the first quarter earnings call, we discussed our intent to review our overall expense structure, with a view to realignment that is appropriate to the size and the nature of the new Limited Brands. We subsequently announced our intent to reduce expenses by $100 million. I'm pleased to report that we've made significant progress towards that goal. 75% of our targeted savings result from headcount reductions and substantially all of those reductions were implemented in July. In addition to the reductions, we've realigned our corporate support functions and about 200 people were transferred from the center, or corporate organization, into Victoria's Secret and Bath & Body Works. Now, we also talked about evaluating our capital structure on our first quarter call. Since that time, we have completed $1.25 billion in new debt financing. I'm also pleased to report that we have recently completed our $1 billion…

Thanks, Martyn, and good morning, everyone. The impact of all the transactions and events that Martyn mentioned is outlined in our press release. Let me take you through the key items. Our total reported earnings per share for the quarter was $0.67 per share. Of that amount, $0.36 per share relates to our divestiture of the apparel segment, including a gain of $0.46 per share related to the divestiture of Express, a loss of $0.20 per share related to the divestiture of Limited Stores, and a tax benefit of $0.10 per share related to an adjustment to state net operating loss valuation allowances. Other income includes a gain of $0.15 per share related to the Easton Town Center refinancing. We also recognized a restructuring charge of $0.07 per share related to the disposal of non-core assets and severance and other costs associated with our headcount reductions. The majority of this charge is included within our SG&A expense. Finally, we recognized a gain of $0.02 per share related to an interest rate hedge entered into in the first quarter in anticipation of the intended financing of the La Senza acquisition, and that item is included in other income. Earnings per share excluding all of these items was $0.20, at the low end of our original guidance for the quarter of $0.20 to $0.24 per share. Turning to the overall income statement for the quarter, comps increased 2% on the low side of our initial expectations, and total sales increased 7% to $2.624 billion. Gross margin decreased 350 basis points to 31.3%, driven by a decline in merchandise margin, particularly at Bath & Body Works. Diane will cover this in more detail. Total SG&A dollar spending, excluding La Senza, excluding the restructuring charge in 2007, and excluding apparel in both '07 and…

Please stand by, your conference will resume momentarily. Please stand by. Mr. Katzenmeyer, you may resume your conference. Tom Katzenmeyer: Thank you. Our apologies, everyone. We had a slight technical difficulty on our end here, obviously. I'll turn it back over to Stuart Burgdoefer who was in the middle of his presentation.

Thanks, Tom. I believe where we got interrupted was in my description of the SG&A rate, so I will start again with that. The SG&A rate will also be impact by the apparel divestiture and the increase in mass sales as well as by the benefit of our headcount reductions. The net effect of these three factors will improve our SG&A rate by about 250 basis points for the fall and on an annual basis. Interest expense will increase due to the $1.25 billion in incremental debt issued in the second quarter. We expect interest expense to approximate $50 million per quarter. Other income will be impacted by the recognition of our 25% ownership interest in Express and Limited Stores. This line item, as well as minority interest and interest income, is difficult to forecast, but we are currently estimating $40 million to $50 million in income for the fall for these three line items in total. Finally, our weighted average share count is reduced due to the completion of our $1 billion share repurchase program. We ended the second quarter with 370 million shares outstanding and we completed the repurchase program in the third quarter with the repurchase of 7.7 million shares. Now turning to the specifics on third quarter and fourth quarter guidance, we are comfortable with the current First Call consensus earnings estimates of $0.04 for the third quarter and $1.18 for the fourth quarter. The third quarter estimate is predicated on flat comp store sales versus a 16% increase last year, and a sales decline in the low single-digits. Although we lose $529 million in apparel sales, this is partially offset by an increase in mass sales of approximately $190 million related to the recognition of mass sales to Express and Limited Stores. We estimate that…

Thank you, Stuart. Good morning. Total Victoria's Secret segment sales, including La Senza, increased 16% in the second quarter to $1.43 billion. Comp store sales increased 4%, 15% on a two-year basis. Total segment operating income declined $27 million to $178 million, a decline of 13%. Of the operating income dollar decline, slightly more than 40% related to the anticipated expenses associated with our new distribution center and upgraded technology. These investments support the future growth of our direct business. Another 30% related to incremental expenses associated with our planned real-estate initiative. As we ramp up the number of expansion projects, we begin to accelerate depreciation on our store assets at the time we make a decision to remodel the store. This results in the recognition of a significant expense prior to the realization of the benefits associated with the expanded store. This negative impact will continue through the remainder of 2007. The remainder of the operating income decrease was driven by quarterly business performance. Turning to the individual business results within the segment, last quarter I indicated that we had anticipated a challenging second quarter. The second quarter was indeed challenging and Victoria's Secret stores performance was disappointing. Comp sales did not meet our planned sales growth. We picked up 4% in comps at a 15% two-year life. Our gross margin rate decreased driven primarily by a decrease in merchandise margin which is down significantly to last year and plan. Our buying and occupancy rates increase driven by our real estate investments, and the SG&A rate increased to last year, primarily driven by an increase in store selling expense. During the quarter, our core bra and panty business was relatively flat to last year, missing expectations. Contributing to this was an aggressive growth plan and negative small traffic. Compounding…

Your first question comes from Kimberly Greenberger - Citigroup. Kimberly Greenberger - Citigroup: My question is on inventory. I was hoping you could tell us how the non-apparel inventories compared this year to last year at the end of second quarter? I would assume that excludes the write-down of the inventory for the BBW. Then just a follow-up to that. At the Bath & Body Works brand, do you think you have appropriately impaired inventory at this point or is there some risk that we're still running heavy inventories and might see another charge in the third and/or fourth quarter this year? Thanks.

On Victoria's and BBW in terms of where we ended the spring season on a per-foot basis we were down about 5% in terms of the prior year comparison. With respect to ongoing risk, with respect to the raw material and component inventories, we took a very hard look at that this quarter. There is always risk with anything, but we took a very hard look at it and think we made the right judgments based on what we know at this time.

Your next question comes from Dana Cohen - Banc of America Securities.

Looking at these pieces and maybe it's not for this call, but is there any way to get a little more granularity on taking the loss of apparel and the mix of mass as a component to gross margin and SG&A just because it's hard to see how these pieces are coming together lumping them all together in both gross margin and SG&A. Then secondarily to BBW, sort of following up on the last question, with only half of the gross margin erosion from the charge, what gives you the confidence that it reverses in the back half? Diane Neal: As I've mentioned, we've made significant changes in our pre-Christmas business that went up last year, so we feel we've got enough newness and excitement going into this Christmas season, which as you know is a big part of our total fall season so I think we have gone against the risk that we think that we had last year and I think we've made significant changes to affect that.

Dana, was your question about the impact of these elements with respect to the second quarter actual or the future projections?

The future projections. As I'm sure you can imagine there's a lot of moving pieces here. So any way we could understand how each of them contributes, gives us a better sense of what the underlying business is? As an example the $100 million of SG&A savings is 100 basis points. But you're talking 400. So can you give us any more granularity on these moving pieces?

The recognition of the mass third-party sales is also an important contributor to the improvement in the SG&A rate. We're probably going to be reluctant, Dana, to go into a lot of detail, because these are estimates, as you can imagine, but we've outlined the major driving factors, the restructuring piece is pretty straightforward to do as you remarked on in your question, then the other significant piece in the SG&A movement relates to the recognition of the mass sales, and again we tried to provide both on an annual basis and a quarterly basis the amount of those sales.

Dana this is Amie. Just to add to that, we did try to be helpful with letting you know what the exact impact of the mass sales is, and so by knowing that amount you can try to isolate what the impact, just from mass is, and that impact more than offset the impact from the apparel disposition.

Your next question comes from Jeff Black - Lehman Brothers.

Just want some clarity on the inventory again. How much apparel was included in the 2Q inventory number last year, and is there any apparel this year? I would assume not. When you say you're down 5% at Victoria's Secret and Bath & Body Works, can you break that out? Is Victoria's Secret down X and Bath & Body down Y? Or is one of them up? It sounds like Bath & Body would be up significantly. Tom Katzenmeyer: Apparel is not in either. We've made the numbers comparable so the statistics that I provided to you relate to Victoria's Secret and Bath & Body together. Just directionally, BBW is down, and really a more important driver of the decline. VS has moderated consistent with the total, but BBW is down more so than VS.

Your next question comes from Jennifer Black - Jennifer Black & Associates. Jennifer Black - Jennifer Black & Associates: Sharen, I wondered if you could talk about the percent of newness you're bringing in each month into Victoria's Secret, and how you're flowing the goods and how does that compare to last year?

Sure. We will have more newness this year versus last year. As you know, this year we have basically six floor sets. We will have one less bra launch this year versus last year because one of our strategies is to focus on a few things and do them well and really master the fundamentals that would go into this season. We also have new, fresh deliveries. We've changed our cadence at the holiday timeframe, that instead of just landing another drop of holiday in December, we're actually dropping spring in December. We also have a huge new floor set that's dropping before holiday. So when you look at it, there is faster turns, more fashion drops, and when we talk about fashion, as you saw from the spring season, our fashion sell-throughs were very strong. When we talk about fashion, sometimes fashion is just basic bras in fashion colors. But we do believe in this economic environment it is so important for us to land more fashion than just basics as we had in the past.

Your next question comes from Brian Tunick – JP Morgan.

I guess our question was really on the Victoria's Secret marketing spend plans in the second half. I think you've said before that that's an opportunity to have lower SG&A. So just want to hear a little more about how much you think you will be spending and any change in circulation.

Our marketing spend for the Fall season and in the third quarter is down to last year. It is down close to over $10 million to last year.

Your next question comes from Todd Slater - Lazard Capital Markets. Todd Slater - Lazard Capital Markets: Victoria's Secret operating margin in the fourth quarter, with all these moving parts, but in the last many years, Victoria's Secret has been able to generate about a 25% operating margin in the fourth quarter, and you've got the DC and the real estate depreciation acceleration, all that as a drag, obviously, but you also have the big cost savings as an offset. I'm just wondering if the margins are permanently impaired down here at this 21%, 22% rate, what type of margin rate would you expect this year against last year's 100 basis point decline, on let's say a low single-digit comp? Tom Katzenmeyer: As you know we don't guide to operating margin by segment but I think Sharen can maybe speak about it generally for you.

There's a couple of things we were looking at our operating margin. First of all, as we talked about our investment in terms of our real estate strategy, we talked about in the real estate strategy, accelerated depreciation. We've also talked about some shifts in mix of business, that we do believe that we will continue to be in not just this season but in the future, back up to the high double-digit increases.

High double-digit absolute level of margins. You said increases. Just want to clarify. We've talked a lot about this in terms of getting where the business would go in the long term, and what we've consistently said for both of our businesses, VS and BBW, is that we're targeting 18% to 20% operating income on a consistently stated basis for both businesses. Todd Slater - Lazard Capital Markets: Can the merchandise margins, then, improve in the fourth quarter against last year's big decline in Victoria's Secret?

Yes, they can.

Your next question comes from Lorraine Maikis - Merrill Lynch. Lorraine Maikis - Merrill Lynch : It sounded like a part of last year's miss at Victoria's Secret was that you didn't have enough fashion. So as you move the mix toward fashion for the back half how do you manage the markdown risk associated with more colorful assortment?

Last year we picked up 16% on the top line last year. I think that although we had very aggressive plans going into the spring season, once you look at the rate of the business we did have a pretty healthy top line business last year. One of the things that got us into trouble as we looked into the spring season is continuing to think that we could grow the business at that rate. We've got our inventories in control, we have much more agility. We've actually have read and react capabilities within the fashion component, as well as how we're managing the flow. So I feel confident that we will see an improvement within the margin rate.

Your next question comes from Neely Tamminga - Piper Jaffray. Neely Tamminga - Piper Jaffray: Just a question here on La Senza and the timing of implementing some of your efforts over in those 750 doors in total between the franchise and the owned. I think you've been testing some Victoria's Secret Beauty product over there. How many doors, how well is it doing? I think there's demand for Bath & Body Works as well as the Victoria's Secret product, and some of those doors. Can you just speak a little bit more about your international efforts and the timing of that?

Just going a little bit backwards on that, the Victoria's Secret beauty product test in Canada has gone very well. It's taken a significant percentage of the shop. Our La Senza management team has been very pleased with those results. As a result, we are planning to expand that into the balance of the chain; the company-owned operations in Canada, not the rest of international stores for La Senza and we're expecting very positive results from that expansion. In terms of our overall portfolio for La Senza, which would be the international franchise stores and the company-owned stores in Canada, as we've signaled before, they are continuing to expand in both geographies, company-owned stores in Canada as well as internationally. We will approach 400 stores on the international franchise base in 37 countries. What we're looking at from a Limited Brands perspective is continuing to partner with La Senza to take full advantage of all the knowledge and capabilities that they have, and then to support their development, support their expansion, but also in taking advantage of the knowledge and the capabilities that they have and with the new management team that Mark Giresi is heading, start to really aggressively look at how we can introduce Victoria's Secret and BBW outside the United States. We haven't made specific decisions on when, where, or how we will do that, but we are aggressively looking at that and we've now assigned people full time to work on it. Tom Katzenmeyer: Thank you, Martyn. I know it's about 10:00. I know there are other companies reporting this morning but we would like to continue to take a few more questions because there's a lot of people in line to ask. So let's go to the next question.

Your next question comes from Lauren Levitan - Cowen & Co. Lauren Levitan - Cowen & Co.: Thank you. Good morning. I was hoping Diane could talk a little more about the SKU reduction test, how that's playing out, and what would it take to be able to extend that across a wider group of stores if you saw that that were successful and something that you would want to have in place by holiday? Thanks very much. Diane Neal: The SKU reduction test actually starts implementing in a couple of weeks, and our goal is to run that through the entire holiday season so that we have more than just a short time period what that test will look like. After the holiday season we will evaluate that test and make decisions going forward. Lauren Levitan - Cowen & Co.: Can you elaborate on how deep you're going in the SKU reduction? Diane Neal: It's about 40% SKU reduction. Lauren Levitan - Cowen & Co.: Is it whole groups that are going away or is it within existing brands? Diane Neal: There are some brands that are completely going away but they're brands that need to go away anyway, as we are currently doing in the rest of our stores, but then we are taking a really sharp look at our key brands in reducing SKUs within those as well.

Your next question comes from Margaret Mager - Goldman Sachs. Margaret Mager - Goldman Sachs: I just wanted to ask about Victoria's Secret and the bra launches. What do you think has been wrong with the bra launches? They haven't been meeting expectations for quite sometime and why do you think they will as you look to the second half and Holiday? Is now the right time to be adding so much square footage to Victoria's Secret when the business is not performing up to your expectations, and can you make adjustments to slow that down in 2008? Thanks.

Sure. The bra launches in the spring season, we had changed our strategy in terms of really doing a collection of bras, speaking a lot to technology. What we really have found is that the customer really wants to understand what the bra does, not necessarily play up the technology in terms of communicating to her. We actually made our first adjustment to that with our first full coverage push-up bra for this August, and that bra launch has actually exceeded expectations. So I think that we've learned a lot in the manner in which we talk to the customer and also instead of talking about collections of bras, really focusing on one bra. The other question you asked in terms of real estate. In terms of our real estate, we actually have committed through the early part of '08 in real estate. It's something that we look at on an ongoing basis, and we do have some flexibility within our strategy. Margaret Mager - Goldman Sachs: So what would be the triggers to slow it down?

Right now within our real estate strategy, we are really actually making expectations, especially in our remodeled expanded real estate. So I think that the only thing that would slow that down is that that if we saw that our percent of going into new stores versus expanded locations, looking at making sure that we have the prime real estate and making sure that we're in the A and B malls, that if we started to see that deteriorating we may make different decisions about those lower tier malls.

Your next question comes from Jeff Stein - KeyBanc Capital Markets. Jeff Stein - KeyBanc Capital Markets: Wondering if you could talk a little bit about your strategy with mass now that it's going to be a more visible piece of the business? Are you going to try to drive that business more strategically or just use it as a feeder for Express and Limited Stores, and can you tell us what the EBIT margin is for mast industries?

I think the first thing to understand again, about mass, is its principal purpose in our portfolio is to act as the captive sourcing and production arm for our Victoria's Secret intimate apparel businesses, and it will continue to be that for us; very strategic and very important to us. Obviously it continues to serve Limited Stores in Express in accordance with agreements that we've reached with Golden Gate and Sun Capital, and that now becomes third-party business to mass which shifts the P&L around in terms of outside sales versus inside sales and Stuart, I think, has tried to give you a pretty good guidance on how that shift would occur. It also continues to serve third party customers beyond Express and Limited. We expect that they will continue to do both of those things, Express, Limited, as well as third-party customers and do it very well, and to the extent that they have opportunities to expand that third-party sales business, they will take advantage of those opportunities. But to re-emphasize their principal purpose continues to be to be the strategic sourcing and production arm of our businesses. Jeff Stein - KeyBanc Capital Markets: Martyn, how about reported EBIT on an annualized basis?

We have not broken that out, and we have not reported it as a separate segment, continue to not plan to do that. It has the kind of margins that would be similar to a sourcing and production type of company, if you look at the principal competitor out there.

Jeff, just to clarify that that would be on their total sales base, not just what is recognized in our financial statements as external sales. Jeff Stein - KeyBanc Capital Markets: Expense savings. Of the $100 million, as we move into calendar 2008, how much of that would you expect to reinvest into the business?

We expect to flow the $100 million to the bottom line. We will be evaluating investment in the business generally but we don't have an explicit plan to reinvest a portion of those savings. In connection with the change in the portfolio, and just an evaluation of overhead we think the right thing to do is to take that cost out of our business structurally.

Your next question comes from Mark Montagna - CL King. Mark Montagna - CL King: Just a question about your ERP investments. How much have you invested over the past couple of years, how much do you expect to invest over the next couple of years, and at what year do you think this is going to end with the investments?

We haven't talked explicitly about the amount. We've given you guidance in the past in terms of percentage of total capital spending that we've been dedicating to technology, builds, and implementations. In terms of the year-over-year impact, we're continuing to spend at about the same level as we have in 2006, so for 2007 it's approximately the same. For 2008, we believe that it will continue to be about same. The emphasis is shifting, so our first emphasis in 2005, '06, and '07 has been on supply chain systems. It will shift a little bit more to our Victoria's Secret Direct and direct channel systems in 2007/08. And then as we look out to 2009, it will start to decline both dramatically in '08 and '09 in terms of the cash spending going against technology, but because we've capitalized a lot of that spend, the depreciation starts kicking in, and so the P&L impact of the technology spend will really not start to decline until 2009 and '10. Mark Montagna - CL King: When you have talked about BBW going outside of the U.S., is that in reference to just Canada, or are you talking about potentially putting that into other international areas?

Again, we don't have any immediate announceable plans, but we're considering BBW as a brand and retail operator for all parts of the world.

Your next question comes from Paul Lejuez - Credit Suisse. Paul Lejuez - Credit Suisse: Just to piggyback off the last question, the same question for the Victoria's Secret remodel program. Will it be more of a drag as we look into 2008 relative to 2007? I believe you said that your lower operating income assumptions were based on current trends. Was there anything specific that you can share with us about August to date?

With respect to the impact on earnings of the real estate initiative at Victoria's Secret, as we've mentioned in the last quarter call, it is dilutive to earnings in 2007 and will be accretive to earnings in 2008 so that's the view on that.

In terms of August, we had guided to a low single comp store sales growth. We're tracking well against that. As we all know, the environment that we're all operating in right now is filled with uncertainty, but we continue to track well against our expectations.

Your next question comes from Richard Jaffe - Stifel Nicolaus. Richard Jaffe - Stifel Nicolaus: Just a quick question on the Victoria's Secret expansion. Sharen, you spoke about expanded stores performing on plan. If you could give us some sense of what your long-term expectation for an expanded store is, that is to say do you expect to recoup the sales per square foot level when you add 50% more square footage, or to exceed that to create some internal synergies? Or is your outlook more conservative and just to improve 25%? If you could help us understand your expectations there that would be great.

Initially we have about a 15% reduction in sales per foot, as we outlined in the October analyst materials last fall. And our results are running consistent with that, slightly better than that. We would get to the same level of productivity, meaning the pre-expansion productivity in about three years, if you just make a simple assumption that we're comfortable with of about a 5% growth per store, per year, we would be in the same place in about three years in terms of sales per foot. Richard Jaffe - Stifel Nicolaus: Longer term, do you see some synergies or the economies of scale to be realized to help you exceed that level of productivity?

Well, we obviously believe that the dominant presence of those larger stores well positions the brand for very good growth over time.

Your final question comes from Marni Shapiro - The Retail Tracker. Marni Shapiro - The Retail Tracker: Can you just give a little color on La Senza about the weakness there? Was it similar to what you're seeing at Victoria's Secret, or was it more related to La Senza Girl and the apparel side of it? Have there been any thoughts about moving a PINK-like type line up there a little bit more aggressively given the success of PINK in the United States?

I would characterize La Senza's lingerie performance as very, very similar to Victoria's Secret. The expectations for comp store sales growth, heavier inventories, and being more promotional to rebalance the inventories at the end of the season which did impact their margins is very similar to what you've heard from Sharen about Victoria's Secret stores in the United States. I wouldn't say that the other businesses are a material variation in their performance. In terms of PINK, yes, of course, it's an interesting idea, but our focus in the first six months of partnership with La Senza has been to allow them to be independent, to run their business effectively and for us to get to know each other better. So we are in dialog with them about all kinds of ideas, and we will stay tuned to see what we decide to do there. We're not in position to announce anything specific. Tom Katzenmeyer: Thanks, everyone. That concludes our second quarter call this morning, and we appreciate your continuing interest in Limited Brands.