Stuart Burgdoerfer - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Sharen Turney - Chief Executive Officer of Victoria's Secret Megabrand & Intimate Apparel and President of Victoria's Secret Megabrand & Intimate Apparel Diane Neal - Chief Executive Officer of Bath & Body Works and President of Bath & Body Works Martyn Redgrave - Chief Administrative Officer and Executive Vice President Amie Preston - Vice President Investor Relations

Stacy Pak - Barclays Capital Dana Telsey - Telsey Advisory Group Jeff Black - Citigroup Inc Michelle Tan - Goldman Sachs Group Inc. Paul Lejuez - Nomura Securities Co. Ltd. Brian Tunick - JP Morgan Chase & Co John Morris - BMO Capital Markets U.S. Howard Tubin - RBC Capital Markets, LLC Jennifer Davis - Lazard Capital Markets LLC Marni Shapiro - The Retail Tracker Roxanne Meyer - UBS Investment Bank Jennifer Black - Jennifer Black & Associates Neely Tamminga - Piper Jaffray Companies Kimberly Greenberger - Morgan Stanley Laura Champine - Cowen and Company, LLC Lorraine Hutchinson - BofA Merrill Lynch Janet Kloppenburg - JJK Research

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Limited Brands First Quarter Earnings Conference Call. [Operator Instructions] Thank you. Ms. Amie Preston, Chief Investor Relations Officer, you may begin your conference.

Thanks, Michelle. Good morning, everyone, and welcome to Limited Brands First Quarter Earnings Conference Call for the period ending Saturday, April 30, 2011. 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, including any non-GAAP or adjusted financial reconciliation tables, are available on our website, limitedbrands.com. Also available on our website is an investor presentation, which we will be referring to during this call. 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. Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO of Victoria's Secret; Diane Neal, CEO of Bath & Body Works; and Martyn Redgrave, EVP and Chief Administrative Officer, are all joining us today. After our prepared comments, we will be available to take your questions for as long as time permits. [Operator Instructions] Thanks, and now I'll turn the call over to Stuart.

Thanks, Amie, and good morning, everyone. We're pleased with our record first quarter performance. Our adjusted earnings per share increased 60% to $0.40 per share versus $0.25 last year. Our reported result was $0.50 per share versus $0.34 last year. Both this and last year's reported results include significant items as detailed in our press release. This year's reported first quarter results include the following: A pretax gain from the sale of Express shares of $86.4 million or $0.17 per share. A pretax non-cash expense of $50 million or $0.10 per share related to the multiyear funding of our charitable foundation. We plan to fund this commitment by contributing about 1/3 of our remaining investment in Express shares, which allows us to meet our commitment in a tax efficient manner. After this contribution, we will continue to own approximately 5 million shares of Express stock. Also excluded is an income tax benefit of $11 million or $0.03 per share related to the favorable resolution of certain income tax matters. The 2010 reported result includes a pretax gain of $48.7 million or $0.09 per share related to a cash distribution from Express. All results discussed on this call exclude these significant items in both years. Our first quarter earnings per share of $0.40 per share significantly exceeded our "beginning of the quarter" expectations of between $0.26 and $0.31 per share. This upside was driven by the 15% comp increase versus our initial forecast of about 2% to 4%. To take you through the first quarter results as detailed on Page 4 of the presentation. Net sales were $2.217 billion versus $1.932 billion last year and comps increased 15%. The gross margin rate increased 200 basis points to 38%, primarily driven by leverage on buying and occupancy expense. The merchandise margin rate…

Thank you, Stuart, and good morning, everyone. Victoria's Secret earned record operating profit in the first quarter. We are pleased with this result, and I will begin my comments this morning by discussing what we believe have been the key drivers of our success. I'll follow this with the review of first quarter financial results and will then briefly discuss how we are thinking about the second quarter. So let's begin with what we have been doing to deliver our results. We continue to stay very focused on our core categories, bras and panties, coupled with a culture that emphasizes getting faster and more agile every day. We remained purposeful in our balanced approach between managing the business with optimism and staying conservative on our inventory and expense plans, and we are carefully bringing all of our work together in a well-told brand story across channels. We are telling that story through innovative products, steady newness, the right fashion and excellent in-store and online execution. Our customer connection has been critical to our success. We work every day to stay close to her and deliver an emotional and positive experience with every interaction. An example of our connectivity and our brand strength is our Facebook presence. We are the top specialty retailer. In fact, in March, our Victoria's Secret and Pink pages were the 2 most liked pages of all retailers, something we're very proud of. Finally, at the very core of our success are the people who make it happen each and every day. We have a seasoned and dedicated leadership team across all of our key functions. Our leaders have been in place and working together now for a number of years, and I feel very good about our talent from design to merchandising, stores, operations, marketing and…

Thank you, Sharen, and good morning. As I'm sure most of you have already heard by now, since we made the announcement on Tuesday, that I've decided to return to San Francisco, which would require me to leave my role as CEO of Bath & Body Works. As you can all imagine, this has been a very difficult decision. I have an amazing team, we have great momentum in the business, and we've accomplished so much over the last 4 years. However, my personal life has been on the West Coast, and in an effort to create more balance, I decided to relocate. The good news is that I will be transitioning to advisory role to help on-board Nick Coe, who was formerly President at Lands' End, who will be joining us in early July. For those of you who haven't met Nick yet, let me assure that the brand will be in very capable hands. Nick has an incredible track record as a merchant and is as customer-centric as we are at Bath & Body Works. I am convinced that the brand will continue to deliver incredible results under his leadership. So let me discuss Bath & Body Works results for the first quarter. We were able to deliver significant sales and operating income growth versus last year. We continue to deliver improved results versus strong performance last year by maintaining focus on our 3 key categories, which are the Signature Collection product line, the anti-bac soap and sanitizer business and our home fragrance assortment. Performance improved on top of strong results last year in Signature Collection driven by the launches of new fragrances like Carried Away and Country Chic, as well as the relaunch of our already very successful fragrance, Japanese Cherry Blossom. The anti-bac business continued to…

Thanks, Diane, and good morning, everyone. On our last earnings call, I spent quite a bit of time updating you on our strategy to grow our international businesses. The summary of what I -- we covered on that call is that we recognize that we have tremendous international growth opportunities for all the brands as we expand outside the United States. We remain on track in the execution of our international strategy and continue to be very pleased with the performance of all of our new international stores. As you can see on Page 11 of the presentation, we, along with our partners, will open approximately 100 to 135 new stores this year. In the first quarter, our partners opened 7 new La Senza international locations and one Travel and Tourism store, which by the way, we're now calling the Victoria's Secret Beauty and Accessories stores, a change in name that clarifies, I think, the brand positioning of that concept. Just after the close of the quarter, we opened 2 more Victoria's Secret stores in Canada and the customer response to all of these new stores has been terrific. Before we take your questions, I'll close my comments by discussing La Senza's first quarter performance. Total sales increased 3% to $88.3 million in the first quarter. This was driven by foreign currency translation and a mid-single-digit increase in reported revenue in the international businesses, which was partially offset by a 4% comp decline in the Canadian stores. Our bra category delivered modest growth, led by the launch of our Body Kiss bra and the continued success of our Hello Sugar and Perfectly Me styles. The gross margin rate declined, driven by a significant decline in the merchandise margin rate. The decrease in the merchandise margin rate was driven by a mix shift to the international business, which has a lower margin rate, and also by a decline in the merchandise margin rate in the Canadian stores, and that was driven by foreign currency and increased promotional activity. The operating loss improved slightly on a dollar basis and significantly on a rate basis. We're encouraged by the growth in the bra business and continue to be focused on refining our assortment and establishing a strong brand that resonates with our target customers. However, it is clear that our La Senza business remains a work in progress. So in closing, I want to reiterate that we continue to be pleased with the company's overall performance, which was driven by an intense focus on the fundamentals, coupled with an orientation of getting faster and more agile and also staying close to our customers. We'll maintain this discipline and focused approach, and we clearly see opportunities to continue to get even better. Thanks, and I'll now turn it back over to Amie for questions.

Thanks, Martyn. At this time, we're happy to take any questions you might have. [Operator Instructions] Michelle, I'll turn it back over to you.

Your first question comes from the line of Kimberly Greenberger, Morgan Stanley.

I wanted to ask Stuart about the SG&A leverage point. I know that historically you've said, typically, when you beat your same-store sales-growth plan, you -- somewhere between 30% and 50% of those incremental dollars flow-through to the operating income line. I think this is the second quarter in a row where the flow-through rate has been slightly lower than that, so I'm just wondering if you can step back from the noise of the last couple of quarters and talk about how you think the flow-through rate should come in the future quarters.

Sure, Kimberly. Thanks for the question. I mean, it's a balancing act, as you all appreciate. I mean, I don't know how many of you have heard the expression, "You don't take rate home to the bank; you take dollars home to the bank." So there's a lot of things that we think about. The first is, just to reiterate quickly, operating profit dollars in the quarter were up 40%. The margin rate -- operating margin rate improved by 250 basis points to 12%. And, Kimberly, as we look at expenses, while our -- the geography in our P&L kind of highlights SG&A, there's a lot of home office and other important expenses within gross margin in the buying and occupancy line, and those expenses in aggregate grew about 10%, which was about 500 basis points slower than sales. So we are making investments to drive growth, sales growth and longer-term growth. We think on an overall basis, those investments are paying off. But to your point, the leverage might not be as great as one might pencil out on paper, but the investments we're making are absolutely contributing meaningfully to the top line growth and the dollar profitability of the business. With all that said, we continue to look at everything very closely. Within the brands, within the overall corporation, we continue to look at stuff. We can always get better at how we do it but we think, overall, we're managing it pretty well.

Your next question comes from the line of Marni Shapiro, The Retail Tracker.

' Diane, you'll be very missed, and so I'm going to throw my question out to you. You've done a great job stepping up the fashion at BBW, in particular things like PocketBac. So could you talk about the philosophy behind here? And do you plan to expand this throughout the store? And, I guess, is Nick on board and fully vested in what you're trying to do here?

Marni, first of all, thank you for saying that. And Nick is not fully on board until July. He will be on-boarding with me until that point. But as far as fashion, we continue to work not only in the PocketBac category; we've done it across all of our categories by the amount of fragrance newness that we have across soaps and Signature and home fragrance. It's about double and we'll continue with that cadence. And we continue to look at our business at, "How much basic fragrances do we need on a year-round basis?" And we continue to weed out where we don't need them, and continue to pump up the amount of seasonal things that we have coming in as well as fashion. So I mean, it's -- our business now is a fashion business across all the categories and -- which is actually pretty exciting because that helps us add to the top line better than having a basic commodity business. So I anticipate that continuing. And Nick's got a lot of fashion in his background, so I think he'll continue when he starts.

Your next question comes from the line of Janet Kloppenburg from JJK Research.

Stuart, I was hoping you could talk a little bit more about the SG&A spending. I think it has to do with increasing the payroll on the stores to boost customer service, and I'm wondering if the rate of spend will continue at similar levels throughout the year or if there'll be a modification in the back half. And if you could help us understand the success level of that project. And also for Diane, I wanted to say thank you very much for your wonderful leadership, and I was just wondering how long your advisory role, you would hold that with the company.

Thanks, Janet. We'll go to Stuart first.

So Janet, on the first thing, on kind of SG&A expenses and what we're doing and how we're thinking about it and how it may play through for the whole year, the first thing that we're committed to, and it's a shared view across the business, is that we're going to grow expenses slower than sales. So I want to reiterate that and ensure that, that's clear for everybody that's following us. We will grow expenses slower than sales. And then what I would in some form repeat, but I think it's the key message is -- with that said, we're going to invest in a lot of things whether it's working to serve customers better through a better experience in our stores or better visual display in our stores, more effective visual display or more compelling marketing. We're going to invest in those types of things, all of which are in SG&A, where we believe that we're getting paid for that work, that customers notice and that it drives growth in sales, and that's what we're doing. We'll continue to do that as any reasonable business would. And what you can expect for the balance of the year is more of that but, again, with the commitment that expenses will grow slower than sales. So we're not going to go to a lot more detail about the specific aspects of those investments, for reasons I hope you can understand, in terms of we think some of those things can create some competitive advantage in the one hand...

I think it's really paying off, Stuart. I just wanted to know if it was...

We think it is, too. We appreciate your acknowledgment of that, and we're happy with the growth of the business, the experiences customers are having and the profit growth of the business. So thanks for the comment.

You're quite welcome. Diane?

Yes, Janet. First of all, thank you for your kind words. And also as far as an advisory role, last night have been -- are in conversations and I'm willing to help out as long Nick or Les [Leslie Wexner] need me to.

Will you help through the holiday season?

If that's what the need is, I'm willing to come back on a partial basis to try to help out.

Okay. And has the marketing and merchandising program for the holiday season been developed? Or will it be before you exit the company?

We basically have our merchandising and putting the marketing piece together as we speak for holidays, so it'll pretty much be in place. But, as you know, managing the business day-to-day is pretty significant in our business.

Your next question comes from the line of Dana Telsey from Telsey Advisory Group.

With Bath & Body Works and with Victoria's Secret, can you give us a little update on any cost pressures that you're seeing? I know, obviously, it's much less than a lot of the apparel retailers. Any updates there? And then just also on inventory levels, which appear very lean, how do you think about inventories for the balance of the year?

Thanks, Dana. We're actually going to go to Stuart for both of those questions.

Dana, on costs, our views in summary haven't changed much from what we communicated in February when we did our call and that is, to reiterate some of that, 40% of our product is personal care and beauty. The biggest opportunity that we see at the end of the day is to get fashion right; to manage inventories tightly and with discipline with an appropriate balance of optimism and conservatism; to continue to work down markdowns, to reduce markdowns where we can, which are much more substantial opportunity, frankly, than the pressure of cost. But with that said, as we've communicated before and it's still our view and we reiterated it again in our prepared comments, there is some cost pressure in the business. It'll be more weighted to the back half of the year, and we're going to work hard to offset as much of it as we can. But not -- in summary, to answer your question, not a lot of change in view from how we saw it a few months ago. With respect to inventories, similar in mindset to expenses, which is, as you know, it is a critical area for us. All of us, all the leaders of the business are -- pay very close attention to it, balancing, creating an appropriate experience for customers, along with managing the risk of inventory and working hard to get better at greeting and reacting and chasing. We made good progress on that, but there's more that we can and will do. As I commented on, we think inventory in terms of where it'll end, the second quarter will be flat to up slightly. So it remains a continued area of focus for us and we're managing it very carefully.

Your next question comes from the line of Jennifer Davis, Lazard Capital Markets.

A comment, a clarification and a question, if I may. First, Diane, congratulations to you. You've done an amazing job over the past couple of years. You really turned BBW into a fashion brand, so best of luck to you. And by the way, the in-store marketing at BBW looks amazing right now. Clarification. You guys had guided May comps up low-single-digits and hadn't provided any updates. So since you didn't provide an update, should we assume that, that's where comps are trending now? And then, Stuart, any update on your 15% operating margin goal? I think that was based on 16% to 17% segment margins at Bath & Body Works and VS, and I'm actually modeling that this year. So any comments there?

Okay, Jennifer, I'll take your first comment on May comps. So we didn't update guidance, obviously, about May on in this call, but you shouldn't read that -- anything into that one way or another. And then, Stuart, for the 15% margin.

Well, with respect to the 15% operating margin, our first focus is to achieve that goal that we've set out more than 2 years ago, and we're working very hard collectively to do that. We've made good progress, as you know, separately as we start to approach that goal or it gets closer in our sights. We do think about the full or true potential of our business, and we're starting to get more formal in our thinking, starting to get more formal in our thinking, including looking at other international and well-known retailers like Inditex and H&M and others about what the full potential of Limited Brands is. And we think that it certainly can exceed 15%, but our focus is first to get to the 15%. As you point out, depending upon what one assumes, you could -- we could get to that goal in different time frames. We're working hard to get there as quickly as we can, but doing so in a way that also ensures the long-term growth and health of the business. So we're making good progress. There's more that we can do beyond it, but it's kind of like one step at a time.

Your next question comes from the line of Lorraine Hutchinson, Bank of America Merrill Lynch.

The other operating loss of $27 million was a bit steeper than we had expected. I know you have international in there, so -- which seems like it's going very well. So can you just talk? Were there any unusual items? Or what should we expect for that division going forward?

Lorraine, it's Stuart. We did -- in the prepared comment, I mentioned that the key driver of change year-to-year was related to some legal matters. We're not going to expand on those as is our practice on an earnings call. But part of the Q1 result relates to some legal matters that impacted the Q1 result.

Can you quantify that, Stuart?

No. I'm not going to go into more details then.

Your next question comes from the line of Brian Tunick with JPMorgan. Brian Tunick - JP Morgan Chase & Co: Question is really on the international side. Just curious, maybe you guys could talk a little about how much Les now is spending his time on growing international. And then between the franchise, wholesale or your company-owned stores in London that you'll be opening, how do you think about sort of those paces of growth over the next few years? And outside of London, have you thought about maybe the next few cities that you guys would be looking at?

Okay. Thanks, Brian. We're going to go to Martyn.

I think the key thing to say about Les' commitment is he's very committed to the core brands in the United States and also our expansion outside the United States. I mean, he will talk about the amount of time he spends on it, relatively speaking. But the fact is, he's committed to all the parts of the business and working very hard alongside of the rest of the management team to make all of it work. In terms of our international expansion plans, the things that we -- and we've kind of discussed this in a great detail or more detail on the year-end earnings call, we remain on track with all the expansion plans that we've previously described. The London flagship store for next year, as you called out, is the next step beyond North America for Victoria's Secret. The expansion of Bath & Body Works outside the United States through our partners in the Middle East and Turkey is part of our plans for this year. And beyond that, geographically -- well, sort of in addition to that, the expansion of this Victoria's Secret Beauty and Accessories concept formerly known as T&T remains a priority for global expansion. And in addition to that, the La Senza international business, which we're very committed to, working very hard on because we believe that brand is well positioned for expansion globally. All of those remain on track and on plan. Geographically beyond that, we're continuing to be curious about other parts of the world, Asia, South America and elsewhere, and we've not yet decided on where we would go next.

Your next question comes from the line of Jennifer Black with Jennifer Black and Associates. Jennifer Black - Jennifer Black & Associates: Dianne, you will be missed and congratulations to everyone. So I have a question for you. Over the last year, you've run a number of tests for a BBW loyalty program, most recently the Luv BBW Club with a mobile app, and I wondered what your findings are. Do you believe these test programs have been effective? And does a credit card make sense for your customer?

Well, we're continuing to -- first of all, thank you, Jennifer. We're continuing to read some of the other tests that we have out there. We have mixed results depending on the type of tests that we have and Les has actually challenged us on a whole other level to make this a little different. And I don't want to share too much of it, but it's to take a whole new level of how we look at the stores and kind of how the loyalty-type club programs are. So you'll probably be seeing a lot more tests going forward into the fall season and into next year. But as far as the credit card, our AURs are so low that I don't know still that if it makes sense for us to have a credit card in our business. Jennifer Black - Jennifer Black & Associates: Yes. That's what I thought.

Your next question comes from the line of Neely Tamminga with Piper Jaffray.

Really quick questions for Martyn or Stuart in terms of La Senza. I think, recalling back in the days when you guys bought the business and kind of what the EBIT margin structure was there, and obviously so many things have changed since then. Just wanting to know what the roadmap is in terms of EBIT contribution, how much it might be weighing on the overall entity. That'd be helpful.

Okay. We'll go to Martyn for that, Neely.

La Senza, as I mentioned in my brief remarks, is -- continues to be in the process of transformation. I just want to remind everybody they are only 9 months into this process of transformation in the sense of we relocated the management team. We've got a new leadership team in place. We've now repositioned the brand in terms of its brand positioning to be more of a fun, flirty and sexy brand positioning. We repositioned the assortment to focus on bras and panties. All of that is a work in progress and only 9 months old. So knowing the track record we have for building brands, I would suggest we need to be patient and stay the course. The other thing I'd say about Canada is if you've tracked any of the competitive results in Canada, it's interesting. The Canadian retail market is actually quite challenging right now. And while traffic is significantly negative, and so in addition to the transformational challenges that the management team is working their way through the Canadian retail market, it has presented more headwinds than we're seeing in the United States.

Neely, this is Stuart. Just a quick follow up. La Senza at this point is not contributing meaningfully to the profit of the company, so it's dilutive on margin rate. Where it should be, which would be in our view for any of our store-based businesses with brand equity and so on, is it should be a 15%-plus operating margin business. So with the background that Martyn provided financially, there's a big opportunity to improve this business.

Your next question comes from the line of Stacy Pak with Barclays Capital.

I guess I have 2 sort of fundamental questions. And one is just on Victoria's Secret, you have this incredibly powerful brand, and it feels like you're tiptoeing internationally with it. You're leading with franchising. You're doing the Travel and Tourism. Why are you not opening Victoria's Secret stores internationally more aggressively? And when are you going to? And I guess, the other question is, "What are you doing about Lulu and about Soma?" And if you don't want to answer those 2, then just answer the category questions. Are you going to leave those businesses alone? I know you're doing some stuff at Easton on the VSX. Maybe you can address that, as well as sort of the older mindset in lingerie.

Thanks, Stacy. We're actually going to go to Sharen first for the second part of your question, and then we'll go for Martyn for international.

We believe that the opportunity within the sport yoga world is a real one. And as you know, we have been testing and playing with that concept for a while. And as now we have our business really on a growth pattern, I think that you will be seeing us getting much more aggressive about that concept as we go forward. In terms of the Soma question, is that we have a targeted customer in terms of the size band that we want to serve. And we, at this point, will not deviate from that as we go forward.

Thanks, Sharen. And Martyn?

Stacy, it's a challenging question because I know people can be frustrated about the pace. The best way for me to answer that is with the things that we've said very consistently over the past 2 years. Number one, we're focused on our core brands in the United States. We have great core brands in United States with great growth opportunities. Our international expansion, therefore, is paced at a rate that will not distract us from that first report -- primary mission. With the VS brand, we believe is a very complicated brand to deliver to the rest of the world because of the complex nature of the brand, the multi-sub-brand categories, the big box positioning, et cetera. The La Senza brand, the BBW brands are easier and less complicated, and that's the reason we've been focused on those brands principally in the early days. We're very encouraged by the results that we're seeing in Canada, not just the customer sales and profitability results but also the operating results, in other words demonstrating that we are able to operate a big box Victoria's Secret store outside the United States. Our next step in that dance will be the London store, and that will help us to demonstrate our ability, operationally, to do that across the ocean and do that well. And then beyond that, I think that will open the doors to further expansion of the Victoria's Secret brand. But as Les has said many times, we're going to be careful and cautious about the pace and make sure that we don't distract ourselves from the core mission of our U.S. business.

Your next question comes from the line of Paul Lejuez with Nomura Securities.

What month are you guys targeting for the London flagship opening? And I guess, also what are your plans in the rest of the U.K.? Will you wait till that store opens? Or are you already looking at other sites? And then, Stuart, just wondering what's behind the higher CapEx numbers.

Thanks, Paul. We'll go to Martyn for the first question.

Yes, Paul, we -- the new Bond Street store that we're planning to open in mid-2012 is a very complex store from a construction and other points of view. And so we're targeting to have that open in mid-2012, but we haven't kind of zeroed in on the exact opening date yet. Beyond that, yes, we are looking at additional real estate opportunities in the U.K. And with the assumption that this first store will be wildly successful, I would expect that we will expand beyond that first store.

Thanks, Martyn. Stuart?

Paul, on the CapEx, 2 things. One is the number of new store openings has come up a little bit from the beginning of the year, just opportunistic. And secondly, we're on a spectrum, doing a few more things with respect to technology. Nothing major, but a few more things with respect to technology than we thought about at the beginning of the year. But again, it's still $420 million to $425 million. It's just up modestly.

Your next question comes from the line of Howard Tubin with RBC Capital Markets.

Maybe just a question on the promotional cadence going forward at both of the big brands. Is there further opportunity to kind of be less promotional? Or are you kind of at a point where you'll be consistent with where you were last year?

Okay. Thanks, Howard. We'll go to Diane first.

The way we run our promotional business for probably the last 18 months is we plan it flat, and then we pull back in season where we need to. And we still see significant opportunity for us to pull back on our promotional strategy. Victoria's Secret, as a total brand, both in the store channel and the direct channel, have really been on a pathway for the last 3 years to really pull back through sale promotional time frames. I think there's still some opportunity. As you know, we really have just now, 2 big events a year, which is within our semi-annual sale. I think there's opportunity more on the direct side and a little bit on the store side.

Your next question comes from the line of Michelle Tan with Goldman Sachs.

I think in your prepared comments, you mentioned that you saw some further opportunities for improvement as you look at this year. I was wondering if you could give us any more specifics on what some of those opportunities might be as you look forward to fall and holiday.

Michelle, are you referring to top line or other assets?

It was -- I think Sharen made the comment when you were talking about kind of all the progress you've made in terms of customer relationship, product, all of those things. I guess, I'm curious, kind of helping -- there was a mention of some further opportunities and I'm curious what you're most focused on, I think, specifically at Victoria's Secret.

Sure. It's Sharen. I think that when we think about Victoria's Secret and as we're continuing to be agile -- we are in the fashion business and continue to flow the newness -- how we are testing and reading and reacting to those, there's still opportunity as how fast we can get back into the big winners. When I think about how we are really focused on where the product meets the customer, that there is always opportunity for improvement, and especially when you're looking at a 1,000-store chain and also the direct channel. So we do have an initiative this year, is that, "Really, how do we even get closer to the customer when we think about the efficiencies in the business?" So I think that if we, as a brand, and continue to have a vision for growth, we do believe that there's always opportunities to get better and better, and just think about how we do things differently and, especially, as we think about what's happening in the social media world and just how we utilize our advertising dollars. So it's really a longer conversation, but I think that we have got a lot of great ideas, new initiatives but still focused on our core category to even make Victoria's Secret a better company.

Your next question comes from the line of Laura Champine with the Cowen Company (sic) [Cowen and Company].

I guess this is piling on to Stacy's comments, but looking to your international slide and seeing that La Senza's going to have over 500 franchise stores by the end of the year internationally, I can't help but wish those were Victoria's Secret stores. Is converting those stores a possibility? Are those box sizes even what you would want? Is that something that you guys have thought about?

I think we'll go to Martyn.

I guess I'll say that we very much appreciate the support for the Victoria's Secret brand outside the United States. The simple answer to your question is no. They are really not, box-size-wise, compatible with the VS brand, which is multiple-sub-brand, multi-room-based and will be more flagship oriented as we take it to the rest of the world. And again, I do want to reiterate that we have tremendous confidence in the La Senza brand internationally. It is well distributed. It performs well in 40 -- over 40 countries today, and we do see that as an opportunity as well.

Your next question comes from the line of Jeff Black with Citigroup.

Stuart, back on the inventory, which seems to us to be getting very lean indeed. How much of this is due to taking out clearance from direct? I guess, the question is, "Do you think you have enough inventory to drive a comp?" And what is -- what things you're doing on conversion give you confidence that we can see a nice strong comp on these low levels? And then finally on the back half, what kind of comp do we think we need to get the leverage on B&O to offset the rising costs?

Okay. Jeff, Sharen's actually going to take the inventory question.

So, Jeff, if you think about it from a Victoria's Secret perspective, we had to go on a diet. We actually got a little bloated in our inventory, and as we really changed our model in terms of being more agile and being faster to market with our ideas and our reading-and-reacting skills, and I think that we've really been able to come a long way and still have opportunity for improvement. And so when I think about the inventory is that you also have to look at the flow of goods. And as we think about how we're flowing our products into the stores, it's a much better, efficient, more agile model.

Great. Thanks, Sharen. And leverage on B&O, Stuart?

Jeff, the leverage or the sales, does require the leverage -- the buying and occupancy expense categories that again are within gross margin is roughly 3% on a full year basis.

Your next question comes from the line of John Morris with BMO Capital.

Martyn, a little bit more color on La Senza. I want to ask the question maybe this way in 2 parts. I know you've talked a little bit about it already, but dive a little bit deeper on where you like the progress that you're seeing. What do you approve of? Where would you particularly want the division to focus more? Where do you want more progress? And is there a difference in the performance between what you're seeing in Canada versus outside of Canada internationally, besides the weather factor here in Canada lately? In other words, are we seeing strong performance in La Senza international versus in Canada? Or is it consistent?

Thanks, John. Martyn?

John, so hopefully you would recognize my comment about the Canadian retail market, right?

Correct, yes. But I'm saying kind of beyond that...

Just recognizing that you have more focus on the Canadian retail market than maybe some others. Where we like the progress is the transformation of the brand in terms of becoming core focused on bras and panties, less focused on sleepwear but continuing to have an important part of the assortment around sexy sleepwear. And that transformation, which we also believe is positioning the brand to be younger, fun, flirty, et cetera, is also changing the customer mix. There's a lot of change going on there, and I think I can represent that Les is very pleased with the progress that we're making in that kind of a transformation, similar to other transformations that I've seen Les take the other of our brands through over the past 2 decades. The repositioning of the brand imagery, if you've seen the stores in Toronto, John, is working, and we're pleased with that brand positioning. But that's new and it's not fully distributed throughout Canada yet. So that needs to be fully distributed and proven to be a good brand positioning in terms of store design and imagery and et cetera. So all works in progress, and we're pleased with the progress we're making. It's not yet producing the financial results, as Stuart said, that we would want and we will be targeting to produce. In terms of the international business, that is also going through the same kind of transformation, and a number of our international franchisees are adopting the new standards, the new store design and positioning and seeing great success from that. And relatively speaking, I would say the international franchise business has been performing better than the Canadian business because it's a less competitive market that they're in, in many of the cases. So we're pleased with that progress and working closely with a number of our key international franchisees to convert that into this new model -- this new brand model.

Thanks, Martyn. Thanks, John.

And your last question comes from the line of Roxanne Meyer with UBS.

Great. I just was looking for a little bit more color on Pink. Where do you see the biggest opportunities in terms of category expansion? And how do you see the growth opportunities in terms of "store within a store" over the next several years?

Thanks, Roxanne. We'll go to Sharen.

We're very excited and pleased about the growth that we have seen in our Pink business. We also believe that there's still an enormous amount of opportunity. As you know, we've really not been focused on the bra category. It was really based upon our lounge business and panty business. We think there's a big opportunity within that category in getting great traction and success as we go forward. And we also believe that there's another opportunity within the accessory category. Still, continuing to have even more opportunity in the lounge. So we do believe that this is a powerful brand and a well-told story. As we think about our go-forward strategy, as we can appropriately right-size Pink within the Victoria's Secret box, we prefer that as a side-by-side. Where we cannot, we will be then expanding and opening up freestanding Pink stores. And that is to say, we have about 9 freestanding Pink stores, and we probably still see some more in the future where we just can't get enough real estate for the side-by-side concept. So I think there's opportunity and growth in the bra category and continue with the apparel category. We have -- a unique differentiator for us is in our collegiate licensing apparel program that is so targeted to that market. And then either within the story is our first and the second one would be freestanding opportunity.

Great. That concludes our call for today. Thanks, everybody, for joining us and for your continuing interest in Limited Brands.

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