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' Third Quarter 2012 Earnings Call. [Operator Instructions] I will now turn the call over to Ms. Amie Preston, Chief Investor Relations officer for Limited Brands. Please go ahead.

Thanks, Michelle. Good morning, everyone, and welcome to our third quarter earnings conference call for the period ending Saturday, October 27, 2012. 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 third 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; Nick Coe, CEO, Bath & Body Works; and Martin Waters, President of International, 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] Also, just a reminder that all of the results discussed on this call are adjusted results and exclude the one-time items that are described in our press release. Thanks, and now I'll turn the call over to Stuart.

Thanks, Amie, and good morning, everyone. We reported adjusted third quarter earnings per share of $0.26 against last year's $0.25 per share or $0.22 per share, excluding the earnings related to the sold third-party sourcing business, which equates to an 18% increase in earnings per share. To take you through the third quarter results, as detailed on Page 4 of the presentation, comps increased 5% on top of 9% last year. Adjusting for the impact of the sourcing business sale, the gross margin rate increased by about 60 basis points, driven by an increase in the merchandise margin rate and buying and occupancy leverage. The SG&A expense rate improved by about 20 basis points. The merchandise margin rate was up in both the Victoria's Secret and Bath & Body Works segments. Our total company merchandise margin rate was negatively impacted by about 50 basis points from an increase in Mast sales to our international franchise businesses. Turning to the balance sheet on Page 8. Retail inventories per square foot at cost ended the quarter, up 2% versus last year. Our inventories are clean and well-positioned as we head into the fourth quarter. We repurchased 171,000 shares of stock in the third quarter for $8.4 million. At quarter end, we had 52.2 million remaining under our current $500 million repurchase program. As noted in our release, our board has authorized a new 250 million share repurchase program. Turning to Page 11 of the presentation for our forecast for 2012, we expect earnings per share between $1.62 and $1.77 in the fourth quarter against last year's adjusted result of $1.50. The extra week, the 53rd week this year, equates to about $0.08 per share. Our fourth quarter earnings forecast reflects a 2% to 4% comp increase. We expect the fourth quarter gross…

Thank you, Stuart, and good morning, everyone. Our third quarter results are detailed on Page 15 of your presentation material. Victoria's Secret earned record operating profit in the third quarter with segment operating income dollars up. We continue to focus on our key priorities, growing in our core categories, investing in select key growth opportunities and emphasizing speed and agility. In the stores channel, third quarter comps were up 6% on top of a 13% increase last year, driven by strength in PINK. Our bra and panties performance, although above last year, missed our expectations. However, we feel good about the assortment adjustments that we have made for holidays in response to recent customer buying trends. Therefore, we are optimistic for the upcoming quarter in these core categories. In the direct channel, third quarter sales were down 2%, as strength in bras, panties, sleepwear and PINK was offset by softness in apparel. Our third quarter merchandise margin rate increased in both channels versus last year. In the stores channel, the merchandise margin rate and merchandise margin dollars increased versus last year. In our direct channel, the merchandise margin rate increased, driven by increased full-price selling. The margin rate increase was not enough to offset the sales decline, so margin dollars declined. We have been preparing for holiday end already. We are looking forward to Black Friday and the balance of fourth quarter. Our assortments are fashion right with plenty of newness and will be coupled with the excellent in-store and online execution. Following the all-important Black Friday weekend, we are all very excited for the Victoria's Secret Fashion Show, which will air on December 4, with Justin Bieber, Rihanna and Bruno Mars performing as our musical entertainment. As I mentioned earlier, we will not lose focus on and are optimistic about our bra and panty business, nor would we lose focus on our robust gifting options, such as beauty and sleepwear. These categories are our primary investments heading into this all-important holiday time period. Additionally, we will continue to focus on providing our customers the best seamless experience across both channels through exceptional execution. Thanks, and now I'll turn the discussion over to Nick.

Thanks, Sharen and good morning, everyone. At Bath & Body Works, we're pleased with the results of the third quarter. We delivered sales and operating income growth versus last year's strong performance. Comps increased 5% against 9% last year, driven by the customers' response to newness in both form and in fragrance in all 3 categories: our Signature Collection product line, the soap and sanitizer business and our home fragrance assortment. Total sales for the quarter were $538 million, up 7% or $35 million versus last year. For the quarter, our operating income was $58 million, up $17 million or 42% from last year. Operating income, as a percentage of sales, was 11% in the quarter and up 260 basis points to last year. Gross margin rate in the quarter was up to last year, driven by B&O leverage and an increase in merch margin rate. The increase in merch margin rate was driven by more full-price selling and less clearance selling. SG&A expenses also leveraged versus last year. We finished the quarter with inventory levels up modestly to last year. We continue to grow inventories slower than sales year-over-year while maintaining our high in-stock positions. The BBW Direct channels have delivered strong sales and operating income growth versus last year. Looking ahead to the fourth quarter, we will continue to introduce newness and innovation in both form and in fragrance. This month, we transitioned from our Cashmere Glow theme and began our holiday theme with the launch of Forever Red. Forever Red is our most luxurious Signature Collection fragrance ever. Throughout the month, the shop will be focused on Forever Red, holiday traditions and great seasonal gifts. We're excited about the assortments, and we will continue to manage expenses and inventory conservatively. Our overall focus continues to be about getting faster and better at understanding and satisfying our customers' needs, while providing them with a world-class in-store experience. In addition to focusing on product and fragrance launches, we will continue to test and read the results of new product offerings and promotional strategies, while maintaining flexibility in our inventory to react quickly to our customers' preferences. With that, I'll turn the discussion over to Martin.

Thanks, Nick, and good morning, everyone. My comments this morning will focus on our international businesses. As you know, our opportunity for international growth is significant, given the leadership position and awareness of our brands and the success we've seen from our early efforts. We feel good about the strategic choices we made to be steady and purposeful, to pursue a test-and-learn philosophy that reflects the DNA of our company. We made good progress in the third quarter, and as detailed on Page 14 of your presentation, we continue to be on track to open over 200 international locations this year. At Victoria's Secret International, we continue to be pleased with performance of our full assortment stores. In Canada, we've successfully opened 6 of the 7 new stores planned for this year, and the last one opens later this month. In the U.K., we continue to be very pleased with our London flagship on Bond Street and with the London Stratford store, and we feel well prepared for the peak holiday season. Elsewhere in the world, our first Victoria's Secret full assortment franchise store opened 10 days ago in Kuwait City under our partnership with Alshaya. We are delighted with the early results and look forward to opening 2 more stores, both in Dubai, this coming weekend. Our Victoria's Secret Beauty & Accessories business continues to progress well, with 90 locations open at the end of the quarter, heading to about 120 by the end of the year. In Bath & Body Works International, we are now up to 70 stores in Canada, with one more store to open this year, and 33 stores under our franchise partnership with Alshaya. Eleven more stores will open before the end of the year for a total of 115. We continue to be very pleased with the performance of BBW outside of the U.S.A. Turning to La Senza. We're beginning to see some signs of progress within the business. Although comps decreased 2% in the quarter, our merchandise margin rate improved significantly. We continue to be encouraged by the repositioning work we're engaged in, creating a distinct and compelling customer proposition that is globally appealing and highly scalable around the world. Our franchise partners will have opened over 40 new stores by the end of this year. So that's an update on international. As I know you know, we are not dependent on international for growth. Our overarching priority is the strength of our brands in North America. And with that, I'll say thank you and turn the discussion back over to Amie.

Thanks, Martin. That concludes our prepared comments for this morning, and at this time, we'd be happy to take your questions. [Operator Instructions] And I'll turn it back over to Michelle.

[Operator Instructions] Your first question comes from Oliver Chen from Citigroup.

Regarding the execution in bra and panties and the opportunity there, could you speak to what's changing and what you’re liking in terms of features for holiday? And as a follow-up, from a bigger-picture perspective, could you share with us your overviews of how you're making efforts to balance your comp store sales versus profitability? And just remind us at what comp do you leverage occupancy.

Okay, Oliver, for the first part, the bra and panty question, obviously, we'll go to Sharen.

Oliver, thank you. First of all, I think in our bra and panty business that I'm excited about for holiday, is that we're very well balanced across all of our price points in terms of good, better, best. The fashion mix this year is really outstanding. When we think about going into -- we have an extra floor set this year because of the elongated time frame between Thanksgiving and the end of January, which we think will also lift the business. We have a great mix for the younger customer from the PINK bra collection, and doing very well in our layered bras, all the way up to our higher-end collection with Very Sexy. Dream Angels is extremely strong for us right now, as well as our Body by Victoria. So good balance in price points, good balance in fashion, good balance in newness and great new flow every week this year.

Great. Thanks, Sharen, and we'll go to Stuart for the second question, Oliver.

Oliver, in terms of balancing comps and profit, as you've heard us talk about before, the most important thing in driving our pathway to a 20% operating income rate is sales growth. And we all also understand the adage of you don't take rate home to the bank, meaning top line growth is very important. With that said, we believe that there is significant opportunity to improve the profit rate of the business, which we've talked about. So the net answer to your question is it's a balance, and if one ultimately has to choose, probably a little more weight on dollars than on rate. In terms of the leverage point, sales required to hold B&O rate or leverage B&O, it's between 3% and 4%. And as we invest more in stores, as we've outlined, as we're doing this year and we'll do even more of next year, that leverage point will go up a little bit, but we believe that those investments, as we outlined at the Investor Update Meeting, are excellent investments for the company, but it will put a little bit more pressure on the B&O rate.

Your next question comes from Kimberly Greenberger from Morgan Stanley.

Stuart, I'm wondering if you can talk about that 50-basis-point merchandise margin headwind on the increased sales to your international franchise partners, and if you could just help us understand either the year-to-date sales trend or how that -- how your gross margin, your merchandise margin mix shift is changing, and if you have a forecast for the full year 2012 hit merchandise margin, that would be helpful as well.

Sure. Kimberly, the effect of that is becoming more meaningful to the company, as we grow the portion of our business that relates to licensed and franchise businesses. So that's what gives rise to it, obviously. As we look out, at least, for the next quarter, the effect will be a little bit less than it was in the third quarter. Some of that, as you would appreciate, is timing and is also a function of the relative significance of the activity in relation to sales in a quarter. So often times, the effect of sourcing-related margin effect is greatest in the third quarter, as product is flowing in advance of sales. We would expect that the effect in Q4 will be probably about 20 basis points. Haven't calc-ed it for the year, but it will be 20, 30, 40 basis points as we move forward, and again, there'll be some variation by quarter as product flows and in relation to the sales for the quarter. So hopefully that addresses your question.

Yes, that’s helpful. And just to be clear, those are all incremental gross profit dollars associated with the sales to those third parties. It just changes your rate every quarter, right?

That's correct.

Your next question comes from John Morris from BMO Capital Market.

Sharen, talk a little bit more -- maybe address I think what you referred to in your remarks is bra and panty miss in Q3. Talk a little bit about where that came from and -- but also, if you can just give us a glimpse about how you're planning the important sleepwear category for fourth quarter because I know you're doing some interesting things there between glamor and casual. And Stuart, just very quickly, the inventory plan for Q4, up mid-single digits. Any considerations there? I mean, it's healthy. I don't know if there's timing differences. I think it's a little bit of a step-up. So if there's any color there, that would be great.

The bra and panty business in Q3 actually ran increases over last year. Where I think that -- where I was disappointed is we had misses in some colorations for the month of October. We were a little dark, a little too much lace over dark colorations. Because we have our speed models in place and because we have open-to-buy and we're fast, we were able to react to the correct colors through our testing agenda, therefore, course-correcting where we need to be before even Black Friday next week. So I feel very strong about where we're positioned in our bra and panty business. When I think about the sleepwear category, this year, we're actually balancing our glamor sleepwear with our casual sleepwear. Across the brand, our casual sleepwear this year, as you all know, we always test early to give us directions in prints. We have some wonderful boxed gift sets, whether it's from PINK, all the way through Victoria's Secret, and the early results are very exciting. This year, from a glamor perspective, as we have really made our glamorous sleepwear tie even closer to the fashion drops that we're doing in the bra and category through Victoria's Secret. So between us course-correcting and being able to use our speed models, keeping open to buy, staying close to the customer, we've been able to react to the bra and panty business, and off to a very strong start in the sleepwear and glamor category through this all-important holiday time frame.

Great. Thanks, Sharen. And we'll go to Stuart for your other question, John.

John, with respect to our forecast of inventory for the fourth quarter, it's a view of low-to-mid. I hope you know and appreciate that the management of this business is very, very focused on managing inventories and ensuring that they're well under control, which they are and will be through the fall season. We see that there will be a little bit of variation through the fourth quarter. We've got a little bit of change in some floor set timing, but I'm not at all concerned about the levels of our inventory or the quality of the inventory. And again, the view is up mid-single, and that is right in line with how we're thinking about total sales.

Your next question comes from Evren Kopelman from Wells Fargo.

I wanted to ask about fragrance. Clearly, it's becoming more of a focus for both brands. Any marketing changes to support that you can talk about? And also any thoughts on wider distribution of maybe the Victoria's Secret fragrances outside of your own stores?

Thanks, Evren. We'll start with Sharen and then go to Nick.

The fragrance business is very, very important to our Beauty business. It truly is the foundation of what Victoria's Secret does, and when we think about our fragrance business, there is a couple of different layers in terms of our high-end, our EDPs, all the way down to our mist business. When I think about the EDPs, this is where we're really focused this holiday season. We have a brand-new launch right now going on called Angel Gold, which goes -- which ties back to the Angel bra launch that is happening at this moment. We will come back with another fragrance launch closer into holiday. We usually have a gifting commercial that's tied into the fashion show, so you will see our Fine Fragrances, the new ones actually being on TV. That's not really a new thing, but they will get a little bit more airtime this year. When we think about the direct channel and the social channel, we're actually putting more emphasis this year on our beauty business, as we go into this all-important gifting time frame and really having it being a bigger piece of our gifting guide that we do. When I think about the wider distribution, right now, our strategy is to focus on our solely owned Victoria's Secret stores, as well as some of the international with the Victoria's Secret Beauty & Accessories. You may see a few Victoria's Secret Beauty & Accessories sometime open in the United States. But right now, it's really going to be -- our plan is not to go outside of Victoria's Secret.

Thanks, Sharen. Nick?

Evren, so I think, obviously, for us, it's critical that we’re fragrance first. So just about everything that we do, we take into consideration how do we do it through the lens of being, first and foremost, all about fragrance. And secondly, we're always looking to test and play and find ways to elevate that fragrance experience, and we continue to experiment with more prestigious fragrances like our Forever Red, which we just launched, and obviously, we continue to make sure that we’ve got a flow of newness coming on a regular basis because she, obviously, responds really, really well to that. So in terms of major marketing initiative changes, no marketing changes other than continuing to push fragrance first and trying to elevate the brand through more prestigious fragrances.

[Operator Instructions] Your next question comes from Erika Maschmeyer from Robert W. Baird.

Could you give us an update on PINK? It looks like you'll have the assortment in maybe 3 times as many stores as you had last holiday season. How much of the strength is incremental square footage versus maybe more organic or comparable growth? And then, also, could you just give us an update on Sandy, what you're seeing, I guess, just beyond the affected stores, and then consumer sentiment in the Northeast?

Thanks, Erika, so we'll start with Sharen for PINK.

Now, just to be clear, PINK was in all of our stores last year. We have actually opened up 12 freestanding PINK stores, and in our view, we'll probably have an additional 40 stores, but that's not until 2013. In some of our new real estate stores, as 34th Street, we actually have expanded the PINK real estate. I would say right now that probably 80% of the PINK growth really has been more on the organic side rather than just the real estate. The real estate will happen over the next few years, although we did open up 12 freestanding stores. But when we opened up the 12 freestanding stores, it wasn't 100% incremental in square footage because they -- when we pulled it out of the Victoria's Secret stores, they gave up that real estate and expanded it. So again, a lot of the growth is coming for -- from an organic perspective. When I think about Sandy, first and foremost, our hearts go out to our customers and as well as our associates. And right now, we're very happy that a lot of them have gotten their homes back, and it's really -- our focus is really, going forward, in terms of Black Friday and into the all-important Christmas season. That's where the majority of the business is done.

Erika, did you have a follow up?

Yes, I guess, just on the PINK assortment, but year-over-year, you have it in, I guess, the full assortment in more stores? Is that a fair clarification?

Yes, I would say that in terms of some expanded real estate stores and in the 12 freestanding stores that we opened up this year, so I would say that, overall, in probably 80 more additional stores, we have the full assortment versus last year.

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

Can you touch a little bit on BBW, the strength in BBW that you've seen opportunity to go forward for continued operating margin improvement, especially given the theme of elevation there? How should the pricing brand emerge at BBW? And just lastly on the Victoria's Secret, as you think about post-Christmas, how is the semiannual sale, post-holiday? How's post-holiday plan this year versus last year?

Dana, so in terms of growth and focus, we still believe there's a lot of productivity left and a lot of opportunity to really drive our 3 big businesses: the signature business, the soap business and, obviously, the home fragrance business. And that's evident through the results we've had this year in all 3 of those categories. I think what's really going to propel us in terms of speed is really going to be speed. Our ability to be really, really focused on full-price selling, leveraging speed to allow us to do that, so staying as close to the customers as we possibly can. And then in terms of cost, we'll continue to -- if our focus is about us much full-priced selling as possible, we'll continue to focus on reinvesting back into the product in order to make sure that we elevate that experience and elevate that product. So it's going to be less about the cost and more about making sure we're selling full price, and that's what's really helped us in the third quarter of this year, where our margin rate has improved, somewhat contributed from full-price selling versus less clearance.

Thanks, Nick. And we'll go to Sharen for the question about post-holiday plans at Victoria's Secret versus last year.

Our post-holiday plans -- because you have the extra week this year in January, and we are also adding a new floor set in the January time frame, so we're optimistic about the opportunity that we have post holiday this year.

Your next question comes from Jeff Stein from Northcoast Research.

Two quickies, first of all for Stuart. Stuart, as we look at the segment breakdown that the other income line had so many moving parts in it and with franchising and license income becoming a bigger piece as we move ahead, how should we think about that line item? Is it going to start coming down on a year-on-year basis? And maybe you can give us some help if you can on kind of your annual royalty run rate.

Well, there's a lot in that, and we want to be helpful, obviously, Jeff, and we’ll start with good morning. The -- some broad-stroke comments. The first would be that, as we described in our release, we got a distribution related to Easton that's in the other income and expense line, and we're adjusting that out, so that was a unique item in the quarter, a good thing, a gain, cash distribution. So that -- those kinds of things are infrequent and tough to model and should be good when they happen.

Stuart, sorry. Let me clarify, Jeff. I think you're talking about that other segment, right?

He was, yes.

Okay.

Yes, and then the next thing I would point to is we got a little bit of equity income related to TSAM [ph], which is our ongoing interest in the sold sourcing business. But the broadest point to make is that, as the international business gets better -- or bigger, I should say, bigger and better, the amount of loss in the other segment will diminish. So that is the broadest point. As we think about Jeff giving guidance for 2013 in February, we'll continue to do modeling work on that. We'll try to be as helpful as we can. As you know, we don't provide a lot of specific guidance by segment, but the theme is as international becomes more significant, the loss will reduce in the other segment and, over time, should be become a source of income, obviously.

And Stuart, on the third quarter, the -- did you take most of the markdowns on the fashion misses at Victoria's Secret? Or are some of those going to carry over into Q4?

We ended the quarter very clean on inventory. We're not on the retail method of accounting anymore. We're on the cost method of accounting, but our inventories are very clean, and we're entering the fourth quarter in very good shape. We obviously properly value inventory in terms of reserving, but those reserves aren't nearly as significant as they would be if we run the retail method of accounting.

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

First, a clarification for Sharen. Just wondering if you think that the good, better, best kind of pricing at Victoria's Secret got a little too high in the third quarter, if maybe you had a little too much of that best price point and if that was potentially part of the cause of the lower-than-expected sales? But my question is really on Victoria's Secret Direct. I think that margins were up at stores, down at Direct, right? And merchandise margins were up at both, so I guess, is the issue primarily just leverage or lack of leverage at VS Direct? And just wondering about your general thoughts on that on Direct, and I believe it's been weaker than you expected, so any changes to the strategy there?

Thanks, Jennifer. I think the good, better, best strategy was not the main factor in October. I really do believe that we got too dark too early, too much lace in almost -- across all the collections. And so I think that the launch that we had for Very Sexy was just a little slower than what we had wanted it to be. And as I said, because of our speed models, we were able to react into it. But I will tell you, it's something that we constantly watch in terms of good, better, best, and making sure that we're not only getting our AUR growth, but also, as well as a balanced growth in units. And we are pushing the best price point. But at the same time, we're growing the good, and we're growing the better. When I think about the Direct business, although the margins were up, because of the miss in the apparel sales category, we didn't offset that to actually from -- the rate was up. We didn't actually offset the dollars. I think that as we go through the transition, the apparel business has always been an important part of the direct business. But as we continue to push and align those assortments, more so with the PINK lounge business, as well as the lounge business that we are developing within the supermodel essentials with the sport opportunity we have. So I think it was just in the matter of a transition. So from a strategy change, it's not about really a strategy change. It's just getting better and better about what we do. Our direct business is very powerful. Our direct business is very profitable, and we're right now kind of taking a step back to take a giant step forward.

Your next question comes from Howard Tubin from RBC Capital Markets.

Can you guys take us through maybe your thoughts or your promotional cadence or your planned promotions at each of the brands for the next couple of months for the holidays, maybe relative to last year?

Thanks, Howard. Want to start with Nick?

Sure, Howard. Our plans at this juncture are that we would be less promotional than last year. But obviously, behind those plans, we have the ability through our speed model and through our agility to really read and react to the business, so we’ve allowed our inventories to be in place that would allow us to do that. We're set up in a way that would have us read and react, and if need be, we'll have to be more promotional maybe. But at this juncture, our plan is to be less and really focus on full-price selling and just really track with the customer as we go through the holiday.

At Victoria's Secret, we have a few less planned promotions. The only thing that we have that we do have an extra gift with purchase that we're doing in the month of December, but the rest of it is pretty much flat to last year, obviously with contingency plans.

Your next question comes from Roxanne Meyer from UBS.

You're up against several holidays now that have been pretty spectacular, and I'm just curious for each brand. In what category do you see the most inflection and improvement versus last year or the past couple of years and just your learnings over the past couple of years? And also, specifically, at Victoria's, I'm wondering, as the beauty category continues to evolve and improve, it seems like there's a lot of opportunities there. Aside from fragrance, are there any other categories that you can call out for holiday that you're looking forward some improvement in?

Thanks, Roxanne. We'll start with Sharen.

When I think about the all-important holiday time frame, obviously, just the feeling of gifting and feasting is very important, and the gifting that we have, not only in the beauty category -- and this year, we've expanded our gift sets by about 20%, and actually landing even fresher gift sets closer to holiday, where last year, we landed them pre-Thanksgiving and ran the same ones all the way through Christmas. So there is a different strategy in play. It's really about Fine Fragrance and about gifting in beauty this year. Obviously, within the fragrance category, you have the Fine Fragrance, as well as our fantasies, which is more body care and mist, and that's still a very important piece of the business. And this year, we've got some great new scents landing and great new gifting packaging that we're very excited about. The second category that's very important to us is that the PINK is also a great gifting category. One of the highest gifting pieces of PINK is our licensing apparel piece that we do with the collegiates, and so those are always a high-gifting item. And this year, how we have actually created the gift boxing, the gifting that comes in boxes with the t-shirts and the tanks is really a great opportunity for us. And then there's -- people don't realize, but still, in bras and panties, it is a huge gifting, and we have this year more matching sets, more spectacular product that goes together. So we're very excited about those opportunities. It also starts with the in-store execution and online execution. This year, we started earlier in terms of hiring our sales staff so that we could train them and have more time with them as we went into the holiday time frame.

Great. Thanks, Sharen, and Nick?

Roxanne, so I mean, we obviously really hind-sighted quite deeply the last holiday in order to set ourselves up for what we hope is a successful holiday this year. So really looking at traffic patterns, understanding the flow of product that we put in, what kind of product acceptance did we get. So coming out of that, we feel very good about our 3 core businesses, which we would always want to make sure we're emphasizing as we go into holiday. And then separately on gifting, similar to Sharen, we're looking at gifting, certainly, an improved assortment, and really flowing closer to the full-price selling period as you get into the latter parts of December versus being there in November. We've also looked at flow, and so our opportunity to -- with the longer month and hind-sighting last year's, knowing that we survived an awful lot on the product acceptance of our newness, and the fact that she comes to us looking for newness, so we have an additional flow as we go into holiday at that time of the year. And then, obviously, continuing to make the store look and smell and feel like it's really a holiday destination and really connect with her at an emotional level because she really does come to us for that Christmas spirit, and the store will and does look very, very Christmas-like.

Your next question comes from Christian Buss from Crédit Suisse.

Yes, I was wondering if you could talk a bit about how you think longer-term about the ability to take price and how to manage the balance between taking price and making sure you ensure a value offering for the consumer.

Thanks, Christian. We'll start with Sharen.

When you think about the pricing in terms of our good, better, best strategy is that we really have to think about what is the credible promise of value for our customer, is that we want to make sure that we're covering all the price points, and it's really about what is the quality and fashion on a consistent basis that we can offer this customer, and that's really what we're focused on. It's about consistent fit, consistent fashion, consistent newness, how we actually flow goods, how we spin -- how we actually train our people within the store to interact with her, more so than how far can we push the prices up.

Great. Thanks, Sharen, and Nick?

Sure, Christian. Well, I think what's really important for us to explain is we do test constantly in terms of as we're bringing things to market and thinking about bringing the things to market. How do we put them out there in a way that doesn't expose us to being either too high, and then, obviously, we're structured in a way that allows us to really read and react to those. So if we're trying to put something out that we feel is a better product that deserves a higher price, can we read and react into that so that we don't land with something across the fleet that's either too low or too high? Secondly, we take a very holistic point of view as we do that, so we're really thinking about not only the product, but the packaging, the quality of the fragrance, and then how do we price it and how do we merchandise it and how do we market it. I think a really good example of how we've done that has been with Forever Red, where that is our most exclusive, our best fragrance, our most luxurious fragrance. It is at a higher price point, but we did give it a complete face lift in terms of packaging with some of the best ingredients we've ever put in there, and obviously, we tested that before we put it out to make sure that we weren't going into a territory that was going to be unavailable to her. So that's pretty much how we approach it.

Your next question comes from Brian Tunick from JPMorgan.

I guess 3 quick ones for Stuart, if possible. I guess, first one is if you can give us any color on product costs here in Q4 and into the first half on either PINK or on the apparel businesses at the direct business? Second question, on the 53rd week, can you maybe give us the update on where you think sales and earnings benefit? And the third thing is on the expense side. In the first half of this year, you had some one-time expenses, just sort of wondering how you think about expenses as we move into the first half of next year, if we should be backing out those one-time or if there'll be more expenses on projects coming next year.

Thanks, Brian. So first question was product costs, Stuart.

Yes, and Sharen may want to add to this. I mean, our product cost, Brian, as you're aware, and I think as most are aware, we had some product cost increases a year ago that we're lapping, and those costs have, particularly in the PINK business, come down, and that's one source, not the only source, but one source of merchandise margin rate improvement. We realized some of that in the third quarter, and we expect to realize more of it in the fourth quarter. In other parts of our business, we're also having some favorability from cotton and related inputs in Q3 and a little bit more in Q4 as well. As we've talked about before, and as I know you know, but it's important by way of reminder, the company is not overly focused on product cost. What we're focused on is having differentiated merchandise that creates emotion, focused on speed, read and react, to drive as much full-price selling as possible, but there is some favorability that we’re realizing in Q3, a bit more in Q4, that's contributing to not the only driver of, but contributing to merchandise margin rate improvement. With respect to the 53rd week, we estimate, and it is an estimate because there are some assumptions that need to be made in it, is that it would account for about $140 million in sales and about $0.08 per share of operating income. With respect to one-time expenses in 2012 and how those normalize out and so on, Brian, as we put together our guidance for '13 to the extent that there are significant items that would affect the modeling and guidance for '13, we'll call those out in February when we provide guidance. As I think it through, and again, we'll be more specific on the next call, I can't think of anything significant that would really affect guidance on a full year basis. But again, we'll provide more of an update in February on that.

The next question comes from Paul Lejuez from Nomura.

You've talked about a path to 20% EBIT margins, and I think the opportunity there is driven mostly by Victoria's Secret. Just wondering if there's anything you anticipate next year or even over the next couple of years that might disrupt that progress, whether it be international expansion or investing in the stores. And then just a quick one, are we at a point now when we get into this fourth quarter that we've lapped the Mast comparison? Or are there still a couple of days where we you had Mast in the fourth quarter last year?

Thanks, Paul. So for 20% VS, Sharen, you want to take that one?

Sure. Paul, basically the thing that we are constantly balancing is our investment in stores, as we think about setting ourselves up for the growth in the future and how fast do we want to go and constantly looking at being cautious and optimistic, trying to delay those decisions as long as we can, but that would be the only thing, is that investment in stores and so forth. From my perspective, we're getting great returns today on our real estate, and as we're trying to be more optimistic, we're taking a little bit more aggressive view for 2013. And so we're excited about that, but we still have flexibility because we're not 100% committed in terms of those real estate deals at this time.

And Stuart, on Mast?

Paul, on Q4, the affect is very immaterial. It's not material at all to earnings. So I'd say there's a couple of days, and it's not material to either sales or profit.

Your next question comes from John Kernan from Cowen.

I wanted to talk about La Senza and what the margin performance of that brand has looked like the past few quarters and what the long-term outlook for margin recovery in that La Senza business is, and then I got one quick follow-up.

Thanks, John. Martin?

Sure. So I think in the transition of La Senza from old La Senza to new La Senza, we had merchandise to clear, and that affected certainly previous years’ earnings. What we're seeing in the current season is that as we've gotten much closer to the customer, we get it right the first time. We have higher full-priced sell throughs. We have higher conversion rates at the store level, and the higher level of engagement with the customer leads to better full-price sell through and better merchandise margin rates. I would expect that, over time, that we should expect to see merchandise margin rates in La Senza increase further as we get closer to this customer. We continue to say that we feel optimistic about this brand, and we feel good for the future that it holds.

Thanks, Martin. And John, you said you had one follow-up?

Yes, just on the Bath & Body Works segment. Obviously, the year-over-year operating margin performance, the prior -- this quarter and the prior quarter was really impressive. As you come out with new and better product, the pricing comes up. Can we expect similar-type year-over-year margin improvement in that Bath & Body Works segment in the fourth quarter and into next year?

No, because, again, we’ve got to put it in perspective of the size of the third quarter, so those percentages look big because they're off small numbers. Having said that, our focus will continue to be on making sure that we're pushing full-priced selling as first and foremost, which is really what's helped drive the margin rate because we've had less clearance. But the answer should be no, not to that kind of degree, especially going to fourth quarter, just given the size of the fourth quarter.

Thanks, John. That concludes our call this morning. We want to wish everybody a happy Thanksgiving, and thank you for your interest in Limited Brands.

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