Good morning. My name is [Barbara] and I will be your conference operator today. At this time I'd like to welcome everyone to the Limited Brands first quarter earnings call. (Operator Instructions) I'd now like to turn the call over to Amy Preston, Vice President, Investor Relations. Ms. Preston, you may begin your conference.

Thanks, Barbara. Good morning, everyone, and welcome to the Limited Brands first quarter earnings conference call for the period ending Saturday, May 2, 2009. As a matter of formality I need to remind you that any forward-looking statements we may make today are subject to our safe harbor statement found in our SEC filings. Our first quarter earnings release and related financial information are available on our website, LimitedBrands.com. This call is being taped and can be replayed by dialing 1-866-News-LTD. You can also listen to an audio replay from our website. Martyn Redgrave, EVP and Chief Administrative Officer, Stuart Burgdoerfer, EVP and Chief Financial Officer, Sharen Turney, CEO, Victoria's Secret, and Dian Neil, CEO, Bath & Body Works, are all joining us today. After our prepared comments we will be available to take your questions for as long as time permits. So that we can speak with as many callers as possible, please limit yourself to one question. Thanks and now I'll turn the call over to Martyn.

Thanks, Amy, and good morning, everyone. As you know, on our last call in February we acknowledged that this is a time when there really is an extraordinary uncertainty and lack of visibility in the economy and in our businesses. The environment continues to be very challenging, although we are sensing that it is stabilizing. The overall first quarter comp result and promotional levels within our businesses were more or less in line with our initial expectations and we were able to deliver earnings upside versus our guidance, which Stuart will describe more fully in just a few minutes. As we look ahead to the second quarter we are continuing to manage the retail fundamentals of the business very conservatively and we are not anticipating a change in overall trends in the environment or our business. Therefore, we remain laser focused on inventories, all expenses and capital spending and expect to deliver strong free cash flow results and to maintain a strong balance sheet. Stuart will take you through the details of our second quarter and full year guidance in a minute, but essentially we are projecting a second quarter comp and operating income dollar year-over-year percentage decline that is similar to our first quarter results. Overall, we continue to believe that we are in the right businesses; our brands lead their categories and offer high emotional content at accessible prices. As Sharen and Dian will further describe in a few minutes, we are aggressively focused on bringing compelling merchandise assortments, marketing and store experiences to our customers in order to maximize sales and margins, and we are continuing to be opportunistic in this difficult environment. We continue to be on track with our technology initiatives and Victoria's Secret Direct's distribution center, and we plan to implement the last phase…

Thanks, Martyn, and good morning, everyone. So turning to our first quarter performance, we reported earnings of $0.01 per share versus $0.11 last year, which excludes significant items of $0.18 per share in 2008 as described in our press release. All results discussed on this call exclude these 2008 significant items. As Martyn mentioned, our first quarter results significantly exceeded our guidance for a loss of $0.07 to $0.12. We would generally attribute this upside to three factors. First, our negative 7 comp result was at the higher end of our expectations, driven by better-than-expected results at Bath & Body Works. Second, we realized some better-than-expected results related to physical inventories at both Victoria's Secret and Bath & Body Works. And finally, our focus on expenses yielded expense reductions in excess of our initial forecast. To take you through the first quarter results in more detail, net sales were $1.725 billion versus $1.925 billion last year, and comps were down 7%. The gross margin rate decreased 150 basis points to 31.8%, driven by significant buying and occupancy expense deleverage that was partially offset by an improvement in the merchandise margin rate. Although the merchandise margin rate declined in all of our brands due to increased promotional activity, the overall rate benefited from the decline in lower margin rate Mast sales. Sales in the Other segment, which consists principally of Mast, declined 27%. SG&A dollars declined by $57.5 million or 11% and the SG&A rate decreased by 10 basis points, principally driven by our expense reduction efforts and to a lesser extent a decline in marketing. Total operating income decreased $35.2 million or 35% to $65.2 million. By segment, the Victoria's Secret segment decreased by $61.9 million to $87.2 million, Bath & Body Works increased by $9.5 million to $4 million,…

Thank you, Stuart, and good morning, everyone. In the first quarter sales for our total segment, including La Senza, decreased 10% to $1.125 billion. Comp sales were down 10%. The total segment operating income decreased $61.9 million or 410 basis points to $87.2 million. Turning to performance by channel, Victoria's Secret store comps declined by 9% and total sales decreased 4% to $726.8 million. In terms of category performance, Pink continues to show the strongest performance, with significant growth in bras and panties. In addition, beauty also had a good quarter, with several new product launches, exceeding our expectation including Naturally by Victoria's Secret and [inaudible]. We were pleased with our bra launches during the quarter. Despite the positive response to new products, we did not drive dollar growth in bras although total bra unit sales were up slightly year-over-year. As anticipated, the environment was very challenging and we responded with targeted promotions to drive traffic and maximize merchandise margin dollars. As a result, the merchandise margin rate in the quarter was down to last year. Buying and occupancy expense delevered on the negative 9% comp. Despite a negative comp result, the SG&A expense rate was flat, as a result of disciplined expense management. Operating income dollars and rate were both down significantly to last year. Now let's review performance at Direct. Sales for our web and catalog business were $317.4 million, down 17% to last year. The decline versus last year is more permanent in our clothing category. We have increased promotion to improve the trend of the business and as a result our demand trend improved over each month of the quarter. Consequently, there was a decline in the merchandise margin rate. Despite a meaningful reduction in expense dollars, the buying and occupancy and SG&A rates delevered on…

Thank you, Sharen, and good morning. At Bath & Body Works we are encouraged by the results in the first quarter but recognize that we continue to operate in a difficult retail environment. Some of the successes of the first quarter that I want to highlight include our re-staged Signature Collection, which was featured in floor sets throughout the quarter, which delivered strong results. Additionally, we successfully introduced a new fragrance for this collection, Butterfly Flower, which met our expectations. Our home fragrance sales were up significantly to last year, driven by strong candle and diffuser performance. The antibacterial business posted gains over last year, aided by sales of our pocket bac hand sanitizer. Hand sanitizer sales improved with the outbreak of the H1N1 flu and our product is differentiated by our broad assortment of fragrances. And finally, our financial results benefited from continued focus on expense and inventory management. The successes, however, were tempered with the economic realities of the first quarter. First, we continue to operate in a heavily promotional retail environment, and additionally, we witnessed soft traffic in our stores and saw that our customers spent less per transaction than last year. So with that context, I'd like to take you through our financial results. Bath & Body Works first quarter sale comps were above expectations at a negative 3%. Total sales for the quarter were $403 million, up 1% or $3 million to last year. The 4% spread between comp performance and total growth was driven by new stores sales and growth in our ecommerce business. For the quarter our operating income was $4 million, up $10 million to the first quarter of last year. The last time Bath & Body Works generated a profit in the first quarter was in 2006. The results were driven…

Thanks, Dian. That concludes our prepared comments. At this time we'd be happy to take any questions you might have. And, again, as a reminder, in the interest of time and consideration to others, please limit yourself to one question. Barbara, I'll turn it back over to you.

Thank you. (Operator Instructions) Your first question comes from Kimberly Greenberger - Citigroup.

Martyn, you said something in your prepared remarks about sensing the economy is stabilizing. I'm wondering if you could share with us what are the things that you're looking at. And if it's something that you're seeing on a brand-by-brand basis, maybe Dian and Sharen could talk as well.

Sure, Kimberly. Again, we're all, I think, reading and watching all of the developments in the economy and all seeing pretty much the same kind of metrics and indicators. I think some of the things we're looking at is the relative stabilization - in other words, the decline is lessening in intensity - in the housing market, the relative recovery in the consumer confidence index, and the relative stabilization of the financial markets. And I say it all in a relative sense because it's relative to the pace of decline that we've been experiencing over the past six months. And so the signs that things are stabilizing in that sense are there. In terms of our comp store sales growth and other things, you've got the numbers. So is that stabilizing or not? Hard to say. As we've signaled in terms of our planning, though, looking forward we're continuing to look at things very conservatively, positioning all elements of the business in a very conservative posture, and continuing to look for other leverage in the other parts of our business through cost savings, inventory, capital, etc., to maintain a very strong position as we navigate our way through the economy and the retail environment that we're competing in.

Your next question comes from Michelle Clark - Morgan Stanley.

My question relates to gross margin. If you can give us a sense of what the gross margin rate would have been ex the favorability of physical inventory at both VS and BBW, and secondly what the gross margin rate would have been ex the decline in lower margin Mast sales.

In terms of isolating those effects or adjusting for those effects, merchandise margins would have been down - I'll talk about the two businesses together - between 150 and 200 basis points for the quarter.

Your next question comes from John Morris - BMO Capital Markets, LLC.

My question I think really is for both Sharen and Dian. If we can look ahead out towards holiday with respect to your approach toward marketing this year - marketing as defined both in terms of external to the customer as well as your promotional positioning - compared to last year, what are your thoughts, what's your philosophy, the difference in approach this year versus last year with that marketing strategy, particularly taking into account the observation that you all have been pulling back on external marketing spending and needing to be a little bit more promotional. So what are your thoughts for Q4 and holiday?

We don't do any external marketing, as you probably know, at Bath & Body Works. And how we are planning our promotional strategy for Q4, it's basically the same as last year in total. I think we've got some more targeted, we think, traffic-driving ideas, which obviously I wouldn't share. But I think overall we're planning basically flat to LY. But I can also say our marketing in store and windows is significantly different than last year and much more animated than you've seen at Bath & Body Works in quite awhile.

We are very selective and purposed when looking at our marketing. And although our marketing dollars will be down roughly around 6% in the fall season, we have targeted very strong bra launches. We have actually taken the marketing dollars where we've gotten little return. We are continuing to test our promotions before we implement them and [will then]. We will continue adding the emotional content for the brand. We are using more surprise and delight; an example of that would be as we gave away Godiva at Valentine's Day. So you will see more of that coming from us, as well as within our Pink category. You will see us in terms of our marketing playing in Pink, where the customer is, such as online marketing as well as Facebook. We still do have robust television plans to support our launches. So I think that we are very set up to be successful in the fall season.

Your next question comes from Lorraine Hutchinson - BAS-ML.

I was hoping to get a little bit more color on the Victoria's Secret margin decline and any specific strategies that you have at the Victoria's Secret business to try to stabilize that operating margin going forward.

Lorraine, maybe I can provide some overview and then Sharen could deal with the merchandise margin specifically. As you know, the key driver to improve the operating margin for Limited Brands in total and Bath & Body and VS is really two or three things. One, to improve merchandise margins over time and, again, Sharen can address that more specifically. The other is to get back to a pattern of low to mid single comp growth, which will provide leverage of expenses. And the third key thing will be the ongoing management of our expense structure to continue to take costs out of the business. That is the general plan to get to what we believe is an appropriate target of 15% operating margin over time. That will be a multi-year effort, as you would understand. But the biggest driver of decline in the margin in the business and the biggest opportunity going forward is in merchandise margin, and probably Sharen can elaborate on it.

Yes. As we go forward, our financial plan for the year is very conservative and we are working to remain flexible in our inventory position as well as our ability to [change]. So rigorous inventory management as we also are testing more before we roll big programs. This will enable us to have cleaner and also leverage our markdowns. And we believe that by having this conservatism that this will serve us well in whatever shift occurs in the economy.

Your next question comes from Jeff Black - Barclays Capital.

Sharen, just to continue on that line of thinking, is it safe to say you were more promotional than you set out to be, though, in the quarter, and in what categories did that happen? And when you talk about the opening price point, is it that that customer or underwear just won't buy at full price? And if that's the case have you tested the opening price points and how much of the assortment is that going to hit?

Okay, there's probably two questions in there; the first question was were we more promotional than we had anticipated. As we came out of the fall season we were heavy in inventory although it was very healthy inventory, and we did add a promotion to make sure that we could balance that inventory in the March timeframe. As we think about expanding our offering in opening price points, we believe it will garner us a new customer. And what we are focused on is really segmenting the business and meeting the product and price needs of all the segments in the Victoria's Secret customer. And Pink will have a more aggressive approach in the bra category, the core category. We dominate within that market share and we believe there is a strategic opportunity where Pink fits and where our core business fits. We are not seeing - all of our bra launches have been very successful and we have not seen price resistance within those bra categories. Having said that, we still believe there is an opportunity to gain market share by addressing this good, better, best strategy.

Your next question comes from Stacy Pak - SP Research.

I guess sort of the same type of question for both Sharen and Dian. Sharen, it looks to me with the sort of expansion of the opening price point that the VS business is going to continue to suffer some comp pressure unless you can get the traffic up to offset. But I'm wondering how we should be thinking about the average price going forward and how much traffic needs to be up to offset that pressure. And Dian, if you could address Signature, it looks to me like you're not really realizing the ticketed price and that margins are probably down because of the promotion so I'm wondering how you feel about being able to address that ticketed price on Signature going forward? And if you could address traffic in BBW, that'd be great.

As far as Signature and the ticketed price, we have everyday buy ins and have had for the history of this brand, and last year we were buy three, get one free on an everyday basis. We tested some additional buy in strategies because as we got into the fall season of last year realized that that ticket as an average sale was probably too high, and so we tested some additional promotional strategies this spring, which has actually been helping to drive business. But the overall margin for Signature's slightly down, but it's really because of clearing additional or the old packaged product in February as well as the fact that even though our distribution of CRM is pretty flat to last year, we're getting a higher response rate this year, which is adding to our promotional margin decline. And the other piece is about traffic. Traffic is down at Bath & Body Works and we continue to try to find ways, whether it be through promotional strategies, window marketing and in store to really drive traffic.

In terms of the AUR, you're not going to see a significant decline in our overall AUR. As we build this strategy, we're building not only the opening price point, but also the upper tier price point. We're getting paid for the fashion. When we have the right fashion, we're getting paid. So I don't think you're going to see a big significant difference within our AUR strategy. And as Dian had talked about, traffic has been down. And we know that when we launch a bra we drive traffic. We know when we have targeted strategic activities and promotions, we drive traffic. So these are the things that we will continue to balance as we go through second quarter as well as into fall.

Your next question comes from Randy Konik - Jefferies.

I guess a question for Stuart. Stuart, just regarding the cash flow, can you talk a little bit about how we should be thinking about go forward working capital given where the inventory's been starting to shake out in the last few quarters on a year-over-year basis? And then if you think about reiterating your free cash flow guidance for the year, can you help us understand how you'll be thinking about free cash flow, not just this year, over the next couple of years. Do you think this is more of a sustainable level of free cash flow going forward?

I'll take the second of your two questions first because at the end of the day in many ways it's the more substantial thing that we're managing towards. So on free cash flow for 2009, we remain very comfortable with the guidance that we put out in the beginning of the year, which free cash flow of $350 to $450 million. And then even beyond '09, our view and the history of the business with the exception of a couple of years is such that this business should generate $400 million plus of free cash flow every year, and we as a management team are very intent on accomplishing that. With respect to inventory and working capital assumptions in 2009, Randy, there aren't what I would call aggressive assumptions or overly optimistic assumptions embedded in my view of the $350 to $450 million of free cash flow. With that said, with respect to inventory we're going to be managing receipts and levels down in fall into the negative mid single range for fall.

Your next question comes from Jeffrey Stein - Soleil-Stein Research LLC.

Guys, you've built up a pretty wide level of variability into the second quarter outlook and I'm wondering how much of that reflects perhaps some cushion with regard to the supply chain systems conversion.

I wouldn't say that there's a lot of cushion explicitly for that. We have some expense contingency that frankly is more in the fall period, in Q3. What the range reflects is the uncertain environment that we're all familiar with, so starting with the sales and comp assumptions through to obviously, and a lot of interest to you and to us, what level of promotion will be required to maximize margin dollars and flow inventory appropriately. That's really the driver of the range that we have.

Your next question comes from Dana Telsey - Telsey Advisory Group.

Can you talk about the opening price point product at Victoria's Secret? How do you think about the IMU of that product versus the rest of the assortment? How much of the assortment will it account for? And then just lastly on Mast, impact this quarter and expectations going forward?

In terms of the opening price point and in terms of some of the bras that we think about, our two for $40 strategy, and go forward, you will not see any difference in the IMU than what you see in the business. So we are able to engineer this from a costing perspective as well as partner with our vendor base. I would say that through this strategy a little more than 80% will be at the normal IMUs that Victoria's Secret achieve; there's probably 20% that may be a little lower than that.

Great. And [inaudible] on Mast?

The Mast effect is really, particularly in the first quarter, is really an effect on rate as we've called out, so it is benefiting the overall company merchandise margin rate due to the greater-than-company decline in those sales, in the first quarter about 27% down. With that said, the Mast business did not have or the Mast activities did not have a significant impact on operating income in the quarter in terms of year-on-year dollar change. And that was really due, while sales were down, they were able to drive a better profit rate, obviously, with the new business to make up for that decline through expense management and just other better margin in their business. And that performance in Q1 I would expect to continue through the balance of the year.

Your next question comes from Laura Champine - Cowen and Company.

Just looking at your recent historical comp performance and your guidance for the rest of this year, it concerns me that maybe you're losing market share, so could you share with us how you measure market share and think about your declines relative to the rest of your comparable company?

As we measure market share, there's a couple of things that we utilize. We have internal data that we utilize as well as MPG. As we came out of 2008, our market share had actually increased in 2008, especially within the bra category. Also in my earlier remarks when I talked about that although dollars were down in bras our units were up in bras in the first quarter, and really speaking to counterparts and also in the market, we are thinking that we did better within the bra category than our competition. Most of the competition that we were able to get information about actually saw bigger declines in their intimate apparel business than in some other category. This market share is something that we totally watch, and I still believe that as we get better about segmenting our business and making sure that we have clear segments like Pink and filling the void that we believe we have between Pink and core, we will continue to see market share growth at Victoria's Secret.

In most of our categories we still are the leader as far as market share. The one category that we probably have been not the leader is in candles, and we're gaining share this season just based on what we've done with our candle assortment and strategy. But what we look at really for the body care business, most of it is really en masse is our biggest competitor, and we still feel that we offer such a differentiated experience through our in store emotional connection as well as our fragrance assortment that it really isn't as much of a convertible issue.

Your next question comes from Paul Lejuez - Credit Suisse.

Can you remind us what percent of your BBW and Victoria's stores are mall versus off mall and if you're seeing a difference in the performance one versus the other? I'm also wondering where are the majority of the closings in each of those brands.

Currently we our mall is about two-thirds to one-third off mall. Closings are about equal for mall and off mall.

Victoria's Secret, 80% is mall, 20% off mall. We are not seeing any really big swing between the performance mall versus off mall. And our closings are probably more mall than off mall.

Your next question comes from Todd Slater - Lazard Capital.

Real quick, are you guys still thinking about a La Senza opportunity in the U.S.? And does BBW's success in its first foreign foray give you any greater confidence or inclination to pursue other international opportunities more aggressively? And for Sharen, any plans to gain more share with the modern 25-year-old target customer?

I think the way I'd characterize our current view of the world outside the United States is clearly Canada is our primary focus. As I described in my prepared remarks, we're very focused on La Senza Canada right now with new leadership, new focus, [inaudible] attention to the brand, the assortment, the positioning of that business and its performance from our point of view is the number one priority for us. BBW Canada is very encouraging to us and it's a big operational focus for us to expand there and continue to enjoy the success we're enjoying. The introduction of Pink and Victoria's Secret in Canada - I didn't mention Victoria's Secret because those are stores that were scheduled for the spring of '10 - is another major organizational focus for us and we're trying to make sure that as we do these things we do not distract our U.S. brands or demand of them too much attention to this effort. So it's a swat team environment to try to get these brands up and running outside of the United States. In terms of bringing La Senza to the United States, that remains a curiosity to us and something that we're thinking about and looking at, but again, I'd go back to my priorities and that order of sequence. We'll get to La Senza United States lower on the prior list. The other thing I would mention quickly is we're also launching a new concept in travel retail stores under the Victoria's Secret brand in the next couple of months, something I did not mention. Six pilot stores in different airport locations around the world that will also, I think, give us some clues about Victoria's Secret outside the United States.

The question was are we targeting more of the modern 25-year-old customer and, Todd, yes, we are focused on the 22 to 25-year-olds. And I believe that this is an opportunity for us. We will have our first introductory offer coming in this summer. I think that in targeting this customer there is a different body type - they're narrower - which gives us an opportunity. And we've done a lot of work around understanding that, and so we will be testing this within about 250 stores this summer with the ability to get to all stores by holiday.

Your next question comes from Marnie Shapiro - The Retail Tracker.

You guys have been pretty quiet about Direct in the Q&A, so I want to throw a couple of questions there. If you could just update us on site traffic trends and click through and things like that, and where you've seen the real hot spots as to where people are buying. And then if you can also talk a little bit about your thoughts for fall and holiday because obviously last year was very tough for this area. And it seems from many other retailers the Direct channel has been very strong, so as you plan for the back half against last year, how are you thinking about it?

Direct has not performed to my expectation and here's what we're doing about it. First of all, we are appropriately balancing and leveraging the catalog and the Internet and we are re-focused on the fundamentals of the Direct business operation, including the discipline around our catalog circulation. We will re-commit to having the right product at the right time. For an example, we have had softness in apparel, and I believe there are internal and external factors that contribute to that. Externally, as you know, we face significantly more competition in the clothing business and our competition is being dramatically promotional. And internally we've had misses in several categories in our assortments and color choices. So we are addressing the assortment and color misses for the summer and the fall months, and we are addressing the overall opportunity. I believe we will see this trend change. When we think about the traffic, our traffic has been up on the website. We have not seen - where we have seen weakness is in conversion, and I believe that that goes back to some of the assortment issues and misses that we have. We did have a conservative fall season last year in terms of performance. We are going into fall conservative, but with the ability to take advantage of any uptick that we see within this business.

Your next question comes from Brian Tunick - J.P. Morgan.

I guess maybe Sharen, first, you could talk about the positive mix shift, I guess, if Victoria's Secret Beauty is improving here, maybe give us an idea of maybe the delta in the gross margin between beauty and the core lingerie business. And then maybe, Stuart, on the average unit costing side you talked about, which division do you think has the most opportunity in the second half?

Our strategy as we entered the spring season in beauty was to ramp up the newness, and we actually had about 60% of the assortment were new. And then also within our core assortments like Secret Garden, we added newness in terms of fragrances. Our hit rate this spring season on the newness has been the best it's been in years, so we had a very successful launch with Noir, which was a fragrance that we came out with around Valentine's Day. We had a very successful launch with Naturally, which sits above the Secret Garden. We had a good seasonal fragrance launch with the Heavenly Collection. So we're very optimistic about beauty.

Brian, there is going to be just - I think I recall you were curious about the mixed benefit on beauty beauty is growing or having a better sales outcome than the business in total. To your point, that will provide some mix benefit. We're going to be careful about how specific we get on category margin rates, but your intuition is correct that the beauty margin rate is higher than the total. And then, Brian, with respect to cost of goods reductions and kind of how that breaks by segment or division - and it's not coincidence it just happens to be the outcome because we have worked this in detail, as we've discussed - the benefit is actually pretty similar across intimate apparel, clothing and personal care and beauty categories. There is some difference but I wouldn't describe that difference as material. So each segment of business will benefit meaningfully in the back half of the year as we've talked about, and the magnitude of those benefits in terms of percent reduction is similar.

Your final question comes from Howard Tubin - RBC Capital Markets.

Sharen, in terms of the new opening price point business, is this going to come in the form of new sub brands or will it be line extensions to existing brands in the stores?

It will come in many different places. Number one, there will be more of a focus for Pink. It will come in terms of a new sub brand that is launching this summer, as well as it will be in line extensions within some of our other [separates].

Thanks, everybody, for joining us this morning, and thank you for your continuing interest in Limited Brands.

This does conclude today's conference call. You may now disconnect.