Good morning. My name is Sarah, and I will be your conference operator today. At this time, I'd like to welcome everyone to the L Brands Second Quarter 2013 Earnings Call. [Operator Instructions] I will now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer for L Brands. Please go ahead.

Thank you, Sarah, and good morning, everyone, and welcome to Limited Brands' Second Quarter Earnings Conference Call for the period ending Saturday, August 3, 2013. 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 second quarter earnings release and related financial information 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. The call is being taped and can be replayed by dialing 1 (866) NEWSLTD. You can also listen to an audio replay from our website. Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO, 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'll be available to take your questions for as long as time permits. [Operator Instructions] All results discussed on this call are adjusted results and exclude the onetime 2012 item that is described in our press release. Thanks. And I'll turn the call over to Stuart.

Thanks, Amie, and good morning, everyone. Our second quarter comp increase of 2% was in line with our guidance, and we are pleased that we were able to deliver earnings upside through disciplined management and execution in the business, which resulted in better-than-expected results in expenses and merchandise margin. Second quarter earnings per share increased 22% to $0.61, $0.06 above the high end of our guidance. Total sales increased 5% to $2.516 billion, and comps increased 2% on top of an 8% increase last year. Our gross margin rate declined by 10 basis points, as a slight increase in the merchandise margin rate was offset by buying and occupancy de-leverage. As we've mentioned previously, buying and occupancy expense is increasing as we invest in real estate expansion for Victoria's Secret and international. These investments continue to deliver very strong returns. We focus on expense discipline across the enterprise, and SG&A expense dollars declined slightly and leveraged by 140 basis points. Operating income dollars increased by 16%, driven by improvements in all 3 segments, and the rate increased by 130 basis points. Turning to the balance sheet on Page 8. Retail inventories per square foot at cost ended the quarter up 6% versus last year, in line with our expectations. We're very comfortable with our inventory position. They are clean and in good shape. The increase at the end of the quarter versus our previous trend was primarily driven by the Body by Victoria bra launch, both new products and the previous products, which will be sold in the January semiannual sale. We expect inventories to continue to build through the third quarter to support significant planned launches in both Victoria's Secret and Bath & Body Works. We're also making targeted investments to support in-stock levels at Victoria's Secret. Inventory at…

Thank you, Stuart, and good morning, everyone. Our second quarter results are detailed on Page 14 of the presentation material. In the Victoria's Secret segment, our business results were in line with our expectation, as operating income increased $15 million or 6% from last year. Merchandise margin dollars and rate for the segment increased in the second quarter. We continue to manage our investment in real estate, technology and store labor that we are confident will enable future growth. In the stores channel, second quarter sales increased 6%, and comps were up 1%, on top of the 10% increase last year. Our growth in sales came from both Lingerie and PINK. While we continue to see less traffic in the quarter, we focused on providing our customers with the best experience. As a result, we had another quarter of record conversion and higher average dollar sales. Our bra launches met expectations during the quarter. Total bra sales, while up to last year, did not meet our expectations as new product introductions did not fully offset exit products from last year. As we move forward and anniversary these exits, we are confident that our current trends -- our current transaction -- traction in newness and fashion will lead us in the right direction. As mentioned earlier, both merchandise margin dollar and rate increased in the quarter, which is primarily the result of higher pricing in our semiannual sale, which is the result of entering sale with fewer units than last year. Additionally, we benefit from calendar-related shift in the second quarter. Buying and occupancy expenses increased due to our investments in real estate and de-leveraged slightly on sales. However, total expense leveraged versus last year as SG&A expenses held relatively flat to last year. The store channel saw a record operating…

Thank you, Sharen, and good morning, everyone. At Bath & Body Works, we remain committed and focused on the fundamentals we do well, and that led to record sales and operating income growth in the second quarter. Comps increased 3%, on top of 7% last year. Customers responded to newness in both form and fragrance in our 3 key categories, our Signature Collection product line, the soap and sanitizer business and our home fragrance assortments. Traffic level was down during the quarter, but we were able to improve upon our already high conversion rates while also driving higher average dollar sales. We were pleased with our decision to use July to combine newness and selected sharper price points in the highly promotional marketplace. Total sales for the quarter was $630 million, up 3% or up $21 million versus last year. For the quarter, our operating income was $102 million, up $14 million or 16% from last year. Operating income as a percentage of sales was 16% in the quarter and was up 180 basis points to last year. Gross margin rate in the quarter was about flat to last year, but SG&A expenses leveraged versus last year. The BBW Direct channel also delivered strong sales and operating income growth versus last year in the quarter. We finished the quarter with inventory levels down to last year. Looking ahead to the third quarter, we will continue to introduce newness and innovation in both form as well as fragrance. In August, the shop features our newest signature fragrances, Sweet and Sexy. We've also introduced full inspired view with our Fresh Picked collection, featuring newness in both form and fragrance across all 3 key categories. We are excited about the assortments, and we will continue to manage our expenses and our 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 our products 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. Thank you. And with that, I'll turn the discussion over to Martin.

Thanks, Nick, and good morning, everyone. My comments this morning will focus on an update of our international businesses. We continue to believe that our opportunity for international growth is significant, given the leadership position and awareness of our brands and the success we've seen to date. We made a lot of progress in the second quarter, with all of our international businesses showing improvement. Growth in our international business was the primary driver of the $52 million sales growth and $20 million profit improvement in the other segments during the quarter. Starting with Victoria's Secret International, we continue to be pleased with performance of our full assortment stores. We now have 27 stores in Canada, and we'll open another 7 stores during the balance of this year. In the U.K., we continue to be very pleased with our store on Bond Street and with the London Stratford store. We opened stores in Manchester and Sheffield earlier this month with great success, and we will open in Leeds later this month. Elsewhere in the world, the 3 Victoria's Secret full assortment franchise stores in the Middle East, after our partnership with Alshaya, continue to do very well. And we're committed to open another store in Dubai this year and several more stores in the Middle East region in 2014. Our Victoria's Secret beauty and accessories business continues to progress well, and we ended the quarter with 143 stores opened, and we're on track for about 200 by the end of 2013. Importantly, the 3 VSBA stores in Hong Kong continue to trade well. In Bath & Body Works International, we are now up to 77 stores in Canada and 45 stores under our franchise partnership with Alshaya in the Middle East and Eastern Europe. We continue to be very pleased…

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

[Operator Instructions] Your first question comes from Matthew McClintock of Barclays.

I was just wondering if we could focus a little bit on the market simplification efforts that you're doing in Victoria's Secret. It sounds like the investments that you're making in customer service are driving improved results there. And then I was wondering if you could actually talk a little bit about, I believe, the test for similar efforts in Bath & Body Works that I believe that you said you've been testing that for at least a year now and in, potentially, Chicago.

Matthew, this is Sharen. Thank you for the question. We are very pleased with what's happening with market intensification. We are in 6 markets today, and the performance in these markets continue to be above the company average. We are very optimistic about the increases we're getting in sales, the increases that we're getting in productivity and in our customer service score and in the conversions within that -- those markets.

Thanks, Sharen. Nick?

We have a similar story in terms of what's going on there. We're a little bit behind, taking some of the learnings from the Victoria's Secret business. But similar results, we're pleased with not only the customer reaction but also the quality of the sales that are going through and the improved productivity. So all in all, pretty good.

The next question comes from Barbara Wyckoff of CLSA.

I have a question for Sharen. Could you kind of recap the big bra launches last year and what your plans are to sort of offset those numbers?

Sure. Today, in our plans, we are going to have one incremental bra launch that we had this year versus last year. Also, the bra launches that we had last fall were more about relaunching versus new introduction. We have a much bigger balance of new introductions for this fall season. Still very confident about what we've seen in our early retest and within our testing, so I'm very optimistic about those bra launches.

The next question comes from Kimberly Greenberger, Morgan Stanley.

My question is for Sharen on Victoria's Secret. Sharen, I'm wondering if you can talk to us about the way you're thinking about inventory management, more broadly speaking. And as you've seen challenges here in the first half of the year replacing some of the volume and exited bra styles, does that suggest, perhaps, a different inventory management strategy going forward?

As always, Kimberly, we are really maniacally focused on our inventory and really trying to take a very conservative approach. One of the things that we're looking forward to in this fall season is how do we make sure that we are invested within the bra launches that have tested well and do we have enough inventory and can we be in stock, and I think the check mark to that is yes. I believe this year as well, we are making investments in certain key items, that we know that we have left business on the table, we have -- still have lots of open to buy. We will continue to use our speed and raw material position to help us to do that. I do not believe that the offset of the bra launches really affects the way that we control our inventory. I think that was just about exiting way too much for what we had in the pipeline.

Your next question comes from Jennifer Black, Jennifer Black & Associates.

I think this question is for you, Sharen. I was curious to know if you have early reads from the catalog that just dropped the fall trend edit. And about the website, the catalog, everything looks amazing. And then also it looks like you rebranded the footwear, and we are wondering if you had changed manufacturers.

Well, today is the big day to actually get a read in terms of all of the new catalog, as well as the new website for that particular pair of catalog goes up. No, we have rebranded, we have redesigned the shoe business, but we have not changed manufacturers. We put more emphasis on quality, and so we feel good about that. But today is a big day to really -- because this officially launches today.

Great. It looks fantastic.

Thank you. Keeping our fingers crossed.

Your next question comes from Janet Kloppenburg of JPMorgan (sic) [JJK Research].

I wanted to ask Sharen about the focus that's been given to PINK and the greater value message, I think, that's going out of the customer there. I wondered if you could talk about it and the strategy there, and I'm wondering if that at all could inhibit margins for that brand going forward. And also, I wanted to -- I wondered if you could comment on the performance of sport. I think it looks great, and I'm wondering if you'd consider accelerating the rollout of that product category.

Thank you, Janet. Let me take the first one. PINK is really focused on a good price point in terms of our bra business. We think it's very important. It's part of our strategy as graduating that bra customer into Victoria's Secret lingerie. We continue to increase prices in our bra. And in fact, the Date Bra and now the Wear Everywhere Bra are doing very well. There's comparable pricing in the panty business. We do have a good, better, best reach strategy in the apparel business, so I think it's very well balanced. And so I think we are constantly looking at the opportunities that we have there. And there are no inhibitors in terms of the margins by our pricing strategy. We are seeing some success in sport, especially within the bra category. We are rolling the sport bra to 300 additional stores that we started basically in July and into August.

The next question comes from Brian Tunick, JPMorgan.

So I guess first one for Nick. Maybe outside of the big 3 categories, have you done any research or identified maybe a fourth or fifth big category that you think can drive the BBW business in the future? And then maybe Sharen can talk about the Beauty business. It's been a hot topic. Whether you want to discuss the margin impact for the first half or the product flows for the second half, but maybe just give us an idea of where you think we are in the spectrum from the Beauty business being incremental to Vicky's [ph].

Brian, we're always looking at and testing different ideas outside of those 3 core categories. But I think the real interesting thing for us is looking at all 3 of them, we see an awful lot of productivity gains to be gotten within them, especially when I look at the home business and some of the things that we've added in there, whether that's decorative accessories or just the continued growth of new fragrances, et cetera, that we launched within there. So I think as we continue to look for ways to elevate the brand, look for ways to reinvent the brand, I think we'll be doing it very, very focused in those 3 categories because, once again, I feel like there's awful lot of productivity gains to be gotten and still left in the 3 key ones.

Brian, it's Sharen. In terms of the Beauty question, we still like Beauty. It's just such a natural adjacency to both the Victoria's Secret business, as well as the PINK business. And as we've gone into the fall season, really focusing on going after the Fine Fragrance business with the first Victoria launch, if you haven't seen it you should, and really has been very pleased with the response that we have gotten. As we continue to build in terms of the all-important holiday timeframe, you will see more launches this year versus last year really in -- more of an emphasis on gifting as we're going to the holiday season. And then we also came off of last year repackaging our PINK Beauty business and have seen good results from that effort as well.

Your next question comes from Ike Boruchow of Sterne Agee.

I guess, Stuart, my question is on the expense line. There were several initiatives that you took during Q1 that seemed to have flowed into Q2, and expenses were managed very well. Just kind of curious how that's going to flow through the next 9 to 12 months and how we should be thinking about SG&A going forward.

Thanks, Ike, for the question. We have intensified our focus on expenses. We talked about that at the beginning of the year, saw some benefit in this quarter, as we've reported, and we're going to continue to be focused on it. And with that said, we're go to do so in a balance way. The success for Limited Brands is not to be the world's best cost-cutter. It's to have good top line growth in brands with emotional comps and great service experiences for customers in stores and online. But with that said, we are managing expenses with discipline. I would expect that we'll continue to do -- have some leverage in the back half of the year. That's what's implicit in our guidance. And we'll continue to work it. But again, we'll do so in a balanced way. And it's broad based, so we're seeing that benefit across the major parts of the business and, particularly, in the home office area. So it's an important part of what we're doing. But again, the most important thing we're doing is working hard to drive top line growth and good merchandise margin rate results.

Your next question comes from Paul Lejuez of Wells Fargo.

A question for Nick. BBW margins have been heading steadily higher. Just wondering what are the opportunities from here to continue to drive margins higher. Is it just productivity gains or are there opportunities on the gross margin line as well?

Thanks, Paul. Let's see. I think, if I could just kind of answer that slightly differently. One of the goals that we're really looking at is to continue to figure out how to really evolve the brand and figure out ways to get the right price and read the right customer expectations. So that being said, we continue to invest into the products. So a lot of the product launches that we've done have taken on incremental cost increases, but we've been in a position that we've been able to charge the appropriate price. So for me, it's going to be less about continued gross margin gains and more about are we able to continue to reinvent the brand, continue to elevate the brand, and then work closely with the customers to make sure that we're not letting retail prices get too far ahead of us, which is probably looking more at a sustained gross margin rate.

Our next question comes from John Kernan of Cowen and Associates.

The other segment had a really nice improvement year-over-year in the first half in terms of operating income. Can we expect similar improvements in the back half? Will some of the investments in La Senza systems offset that or will the continued growth in the international business help to offset some of those investments in La Senza?

John, it's Stuart. I appreciate the question. The benefit in the second half and particularly in the third quarter relative to the other segment will not be as great as it was in the first half. And it's for the reason you mentioned, which was in our prepared remarks, about the systems project and related investments at La Senza. It also, frankly, relates to some of what we are anniversary-ing in the first half of the year. As an example, the pre-opening costs and rents related to Victoria's Secret U.K., we are anniversary-ing it now as we enter the fall. The store was opened last fall, and obviously, they are open this fall. So very good results in the first half. I shouldn't expect that level of contribution in the third quarter and the second half. With all that said, obviously, very optimistic long-term about our international business, but in terms of quarterly impact, not as significant.

The next question comes from John Morris of BMO Capital Markets.

A question for Sharen and Nick, if I may, on the -- just rolling ahead and looking at holiday. You guys are very good at talking about where you see the opportunity in terms of product category versus last year. Where do you see that opportunity, if you can take a minute and just talk a little bit about that.

When I -- let me just approach it in terms of kind of what will change. I think what we learned at Victoria's Secret from last year and really hope to not to make the same mistake is we understand the need to drive traffic in both channels, especially in the first week of December. So fashion, beauty and gifting all play a big role in that. And I feel great about what we have to offer. We'll stay focused on the fundamentals and ensuring excellent execution.

Thank you, Sharen. And Nick?

Yes, thank you. A couple of things. One for us is just going to be -- just based on our performance last holiday, which was strong, the big learning for us was how deep our planning went in terms of ensuring that we have various options available to us to maximize it. We're also going to look at -- knowing that it's a condensed period, we're also going to look at the real peak opportunities and how do we really maximize those peak opportunities while we know the traffic is absolutely going to be there versus one of the softer periods. We'll obviously continue to test different promotional ideas to make sure that we've got ideas on our back pocket as we go into holiday in case we need to call them. We spend a lot of time looking at gifting and trying to figure out how to continue the improvements in that business. And then at the end of the day, it'll be a lot of holiday for us will be about the right newness flowing at the right time and, again, maximizing our flexibility in terms of how we flow that newness so that we can be as close to the customer as possible.

The next question comes from Omar Saad of ISI Group.

Wanted to see if you guys could maybe comment on your customer base, Sharen, in the Victoria's Secret franchise, older versus younger. We're hearing a lot of noise in that kind of "teen" or younger consumer space. Are you seeing something, whether it's along the lines of PINK or your younger customer in the Victoria's Secret side of business? Is there something going on with that customer maybe? Any insight you can provide there will be super helpful.

Great, Omar. I think that when you look at Victoria's Secret and PINK, our target is the 18 collegiate customers and upwards. And I think -- so we're not so much focused on that teen customer. That's not who we target to. Because of the strengths of the PINK brand being aspirational for the teen customers, she obviously trades up into PINK. But our real focus has been in the collegiate 18 year old and up for the Victoria's Secret and PINK brands.

So you're seeing no disparity between your younger consumers and then -- and older consumers, if you will, under 18, maybe over 18?

No, we are not.

The next question comes from Laura Champine of Canaccord Genuity.

This is sort of a big picture question. I understand the issues with expenses for La Senza and the calendar changes, but it sounds like there's a lot for Victoria's Secret, in particular, to be excited about, and you've got great momentum coming out of Q2. Why not increase guidance for the back half today?

Laura, it's Stuart. We work hard internally. As we think about the business and run the business, we found it very important to plan our business conservatively, inventory expenses, et cetera, mindset, and then read, react and chase where there's business to be done. And that mindset, that approach, that thought process, has served us very well, and we'll continue to run the business that way. It's how we've run it the last 4 or 5 years, it's served us very well, and that's how we think about and run the business.

The next question comes from Jeff Black of Avondale Partners.

I guess a question for Sharen. On the direct business, can you remind us when the transition will be fully made to the Supermodel Essentials versus the apparel? And then as we look ahead, also remind us what the profitability characteristics are going to be when you look at a business that has Supermodel Essentials against what was formerly a lot of apparel in the mix.

All right. Jeff, as we reposition the apparel business, it's going to be bigger than just that lounge piece of Supermodel Essentials. So I just want to make sure that we were understanding that. I think that the transition, hopefully, as we come out through 2014, that we will be 90% through that transition. The marking characteristics are very strong in the high double-digit increases, so -- double-digit margins. So I think that we are learning a lot this fall, will teach us a lot. As I said, we're just launching some of the new catalogs as we speak. So we're being cautiously optimistic as we go forward.

Your next question comes from Oliver Chen of Citigroup.

This is Nancy Hilliker filling in for Oliver Chen. We're wondering if you have any update in terms of supply chain initiatives, if we -- if there's any more room for improvement there and potential upside for margins in the second half or into next year.

This is Stuart. I'll speak generally about it, and Sharen and Nick may want to comment further on it. In terms of supply chain, we think about it more in terms of our sourcing and how we flow goods and read and react to it. We've been talking about the initiatives around speed in our business for the last several years, and that continues to be one of the most critical things that we focus on as it relates to how we work with our suppliers and flow goods. And we've made a lot of progress in that area, and we're continuing to do work there. We're doing more work in the beauty product as it relates to personal care and beauty. Again, Sharen, Nick, may want to comment on it further. But we made good progress on speed and furthering our relationships with key sourcing partners, but there's more to do that, again, Sharen and Nick may want to comment on.

Nancy, I would just review it right to what Stuart said. We have great partnerships we always are looking to get better and better, and we have not unlocked all of our potential. I think that we have baked in upside -- we've already baked in what we -- in our margins, I think there's even more upside in margins as we go forward. I think we've already baked that in for the '12 season.

Nancy, it's Nick. I think we pretty much got speed and, therefore, read and react in our ability to stay close to the customer pre-embedded into the business now to almost as a standard. And I would agree with Sharen, it's pretty baked in.

The next question comes from Lorraine Hutchinson of Bank of America Merrill Lynch.

It looks like you took the CapEx guidance up by about $50 million, so I was just curious what that related to, and then you also maintained your free cash flow guidance, so what the offset was there.

Sure. Thanks, Lorraine. The increase in CapEx versus the prior forecast relates to real estate and specifically, Victoria's Secret real estate. One aspect of it is some additional CapEx that will be on '13 books but relates to 2014 projects. The effect of that is greater this year than it normally is, but fundamentally, it's about real estate in Victoria's Secret. And again, we remain very bullish about those projects and the sales results we're getting and the profit results we're getting and the returns that we've generated for shareholders. So just some movement there. With respect to the free cash flow forecast, as you would imagine, there's a wide range of inputs there in terms of all the components of that and, again, remain comfortable with the broad range that we've given. As you appreciate, a lot of our cash is generated in the fourth quarter. And so there's a lot of moving parts there. But again, the business has very strong free cash flow properties, and there's a reasonable range of outcome there, but it will be a strong year for cash flow.

The next question comes from Jennifer Davis of Lazard Capital.

A couple of clarifications on earlier questions. First, Sharen, on the bra launches, are there -- on the new introductions, are there any new technologies coming out? And Nick, on the market intensification efforts, are you only in Chicago right now? And then just a general question on Henri Bendel. I know it's a very small piece, just wondering for an update there.

Yes, there are new technology launches in the fall season for Victoria's Secret.

Yes, we are still in Chicago. But please remember, we're a year or so behind Victoria's Secret and taking on the initiative, so we're continuing to see a nice productivity there and continuing to invest in that marketplace.

And Bendel -- it's Stuart. We're obviously optimistic about that category. We added a number of stores to the business over the last few years. We've got a team there that is working hard to drive growth in sales and margin and so on, we're making progress, and we think it's a great category. And we're seeing progress in the business this spring and optimistic that, that business will deliver further sales growth and margin improvement in the fall.

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

Bath & Body Works had terrific improvements in the operating margin. And certainly, some of the new product initiatives seem to be working very well. What is the potential for the long-term operating margin at BBW? And how do you see pricing and product newness evolving there?

Well, thanks for the compliments. In terms of long term, what do we see? Our goal will be to -- we're seeing very, very nice traction in terms of our ability to charge the right price for the customer, where we've elevated the brand, she's got into more prestigious products, more trade-up products. It's really allowing us to maintain that margin position. So again, as I mentioned earlier, we'll continue to look at improving the products. That's, in some cases, taking costs up. I think the bigger opportunity for us is to really say what's the sales growth opportunity more than the margin rate or margin growth opportunity as the brand moves forward.

Your next question comes from Marni Shapiro of Retail Tracker.

Stuart, I actually have a bigger picture question here. Victoria's Secret, obviously, is a huge brand, a big brand in direct business. You have a solid business there, away from some ups and downs in apparel. At what point should we be thinking about, or -- either an investment or will you guys start to seriously think about omni channel or even a situation where returns aren't getting mailed back to the DC? And I'm curious if you guys have the systems in the DC to support this kind of shift or is this something that would have to be a multiyear investment in technology and your distribution system?

Marni, I'm going to take that question for Stuart. This is Sharen. We have had what we have called omni channel, really, in our sights and have been working on it and investing in it for the last 2 years. We are so encouraged. Well, we call it, give her what she wants. So now we have the systems in the stores to take the direct channel return. We also have the systems in the DC to take those returns. It is working very well for us. The customers have been very excited about the customer service that we have been able to provide. What it's been allowing us to do now are people that haven't bought from direct before because if you're out of stock in something in the store, you can buy from direct, and we'll have it there the next day. And now what we're seeing is moving more customers slightly to being dual-channel customers, which we now have dual-channel customers spend more with us. But it's really about the customer service model that Victoria's Secret is after is making sure that we're servicing every single customer.

Are you able to take advantage of it from an inventory perspective, if somebody comes into a store or goes online, to ship it from -- if somebody returns something to a store that is not a store item, rather than ship it back to the DC, can you then reship it out to a customer who ordered it online? Or are you still shipping inventory back to the DC and then repurposing it and then sending it out?

We're shipping it back to the DC.

My question is, at what point will you start to think seriously about moving off of that model because there's a lot of cost savings and inventory implications that comes along with that. And so I'm curious, at what point -- do you have the systems to move off of that model to the next step? And are you thinking about doing that anytime soon or is this a big investment and a big multiyear project on top of what you've already done?

Yes, we probably -- if we wanted to ship from the stores today that one particular item, we could. It's a little bit more complicated than that, Marni, in terms of most of the orders and people that are coming in from the DC are really looking at multi-category. We do have the capability, it's just not something that we're turning on at this point, but we're always curious to learn about it.

One other thing I would add quickly -- it's Stuart -- is the number one thing that our store associates are focused on is selling to customers that are there. And to the extent that we start doing some things that other retailers are doing, you to start turning your stores into little mini DCs. And at the end of the day, we're focused on selling in our stores.

The next question comes from Richard Jaffe of Stifel, Nicolaus.

Just a question on merchandise margins. In both divisions, seeing that, albeit very modest pressure on margins, I'm wondering if there's an opportunity on the flip side, with the introduction of beauty, with better sourcing, with mix changes, you see merchandise margin improvement in the balance of this year and into 2014.

Richard, it's Stuart. The guidance that we've given is in the third quarter down slightly, and we've been down slightly. The business is always working to get it to the right merchandise margin rate. And we think the guidance is about right. And to your point, there are a lot of pluses and minuses, and believe me, we're, first and foremost, focused on dollars. We've all heard the expression, you don't take rate home to the bank, and things like more work on full-price selling and speed and so on. But we think the guidance for the remainder of the year is about right, and you can be sure that the business is going to be focused on getting the maximum number of dollars that they can get, and part of driving that can be opportunity to earn rate. But we think the guidance is about right.

Just a follow-up question about the Victoria's Secret direct business and its shift away from apparel, I'm wondering at what point do we see a new equilibrium established.

I think we're starting to see it but as I said earlier, we're really looking at 2014.

And what would that balance be?

The balance should be, as we enter into the 2014, the core businesses of the shared businesses will be about 75%, and the remaining will be in the apparel category.

The last question comes from Susan Anderson of FBR.

I was wondering if maybe you can give us an update on the swim business and how that performed this summer, and then also if you can provide some color on the sports business and trends you're seeing there.

Sure, Susan. This is Sharen. We were very pleased with our swim business. So we will have about a $450 million swim business this year. We still see growth opportunity. We're still not in 1,000 stores. It is still a big category for direct and has much more opportunity, and it's a natural adjacency to our apparel business. The sport category still has a lot of upside potential. I think the one thing there in the sport category is just making sure that we can get the real estate in the right -- in the right real estate as we go forward, and that is something that we're working through year after year because the first priority is to make sure we have the right space for the Victoria's Secret lingerie and PINK and then sports.

Thanks, Sharen, and thanks, Nick [ph]. And thanks, everyone, for joining us today and for your interest in Limited Brands.

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