Good morning. My name is Shelbey, and I'll be your conference operator today. At this time, I would like to welcome everyone to the L Brands Second Quarter 2018 Earnings Conference Call. I will now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer for L Brands. Please go ahead.

Thank you. Good morning, everyone, and welcome to L Brands' Second Quarter Earnings Conference Call for the period ending Saturday, August 4, 2018. 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, additional commentary and earnings presentation are available on our website, www.lb.com. Stuart Burgdoerfer, EVP and CFO; Denise Landman, CEO of PINK; Jan Singer, CEO of Victoria's Secret Lingerie; Greg Unis, CEO of Victoria's Secret Beauty; Nick Coe, CEO, Bath & Body Works; and Martin Waters, CEO of International, are all joining us today. As you know, 2017 was a 53-week year. All of the sales dollars, margin and operating income results discussed in this commentary are on a reported basis for the quarter ending August 4, 2018, versus July 19, 2017. Comparable sales are on a comparable calendar period for the quarter ending August 4, 2018, versus August 5, 2017. Thanks. And now I'll turn it over to Stuart.

Thanks, Amie, and good morning, everyone. Our second quarter earnings per share of $0.36 exceeded our initial earnings guidance of $0.30 to $0.35 and benefited by about $0.02 from a favorable tax rate. Absent the impact of the lower-than-forecasted tax rate, we delivered an earnings per share result toward the higher end of our range, as strong performance at Bath & Body Works and Victoria's Secret Beauty offset weak results at PINK and Victoria's Secret Lingerie. We're not satisfied with this result and are very focused on improving performance at Victoria's Secret. As detailed in our commentary released yesterday afternoon, we are reducing our earnings forecast for the year to $2.45 per share to $2.70 per share from the previous $2.70 to $3, principally driven by a deceleration in PINK. Our guidance includes identified expense reductions as well as the previously announced investment in incremental wages and benefits for our hourly workforce of approximately $100 million. With that, I'll turn the discussion over to Denise.

Thank you, Stuart. Turning to PINK, comps decreased in the mid-single-digit range for the second quarter. We saw declines in some segments of the lingerie and loungewear business. Swim, which we are exiting, continues to negatively impact performance by 2 comp points in the quarter. Total merchandise margins were also unfavorable. Comps began moderating towards the end of Q2 with the introduction of the new floor set, enabling an explosive PINK Friday event. Although we have seen benefits from emerging businesses such as sport bras and apparel, outerwear and embellished product, the lounge fleece business has been particularly soft. The back-to-school floor set represents an important time frame for taking critical reads of all segments of the business, enabling us to leverage our speed and agility models to make rapid adjustments to our go-forward assortment. In closing, we shared a decision last night that I plan to retire at the end of the year. This is not an easy decision, but I believe it's the right thing for me and part of my personal journey to spend more time with my family. I feel incredibly fortunate to have been part of the PINK brand since its inception and L Brands for nearly 20 years. It's been a privilege to lead and be surrounded by such incredible talent, thinking and creativity. And it inspires me every day. I'm pleased to share that the organization's commitment to PINK remains strong, and that Amy Hauk, BBW President of Merchandising and Brand Development, will join PINK as CEO, October 1. Amy is an experienced merchant and well positioned to lead PINK. With BBW for nearly a decade, Amy has deep roots and a strong understanding of our enterprise. I have great respect for Amy, and I know you will be in good hands as will the PINK organization. Thank you, and I'll turn it over to Jan.

Thanks, Denise. As you read in the pre-circulated materials, we have more to do to deliver long-term growth and profitability. I remain confident as what's new in the assortment is what's working, and we are very focused on leveraging these learnings to accelerate our progress going forward. We see signs of progress in Illusion, one of our highest AUR constructed bras, and it's margin accretive. It's a bra with benefits balanced with fashion, and it continues to meet and beat plan. T-shirt bra also continues to see double-digit increases and building in sales on fewer frames and after 3 price increases. Total panty sales are up mid-single digits and positive for the third consecutive quarter. Speed, agility and fashion are fueling that book of business. And the key adjacent categories we've added back, like sleep, are seeing growth and are critical to creating new loyals as these categories flow more frequently and attach to bras. Again, while we've made progress in critical spaces, we still have more to do to close the gap created with changes taken in 2016, particularly the gap in key franchises and building back high-value, dual-channel customers. Thank you for joining us this morning. I'm handing it over now to Greg Unis.

Thank you, Jan. As you read in our prepared remarks, the beauty business saw strong second quarter performance in sales and margin, with comps in the high teens range coming from both stores [indiscernible]. Q2 marked our fifth consecutive quarter of [indiscernible] positive comps. Throughout the quarter, we saw strong growth from our declared priorities. Specifically, we drove growth through fashion, fueling double-digit growth in our men's collection category and also accessories, delivering on-trend newness to our customer. In fragrance, we were pleased with our continued momentum of our Bombshell franchise; and in July, the successful relaunch of Tease, our #2 fragrance and a top fragrance in the country. Throughout the spring, we drove growth in Bombshell, our #1 scent, while also successfully launching Bombshell Seduction and our limited edition scent, Bombshell Summer. At the end of July, we relaunched Tease with an updated look, which has delivered strong results for the month of August. Today, in stores and online, we launched Tease Rebel, an edgy new sister to our iconic Tease fragrance. The expansion of the Tease franchise supports our focus to make big bigger and to build out fragrance collections that our customer loves. In our new PINK beauty business, we remain very optimistic. Q2 results were strong, and we will continue to invest in the business. Look for PINK beauty to get even more exciting this season as we test new store formats, presentations and product. Overall, we are very excited and optimistic about what is in store for the remainder of Q3 and into the holiday season, when beauty becomes an even more important part of the overall business. We remain confident in our business model, our team and our continued growth throughout 2018. Thank you for joining this morning, and I will now hand it over to Nick Coe to share his thoughts.

Thanks, Greg, and good morning, everyone. First, let me say at Bath & Body Works, we are very pleased with our second quarter results. Sales grew by 12%, and operating income grew by 8% in the quarter. And that's on top of last year's second quarter record results. I'm pleased to see that the efforts we undertook in 2017 to reinvent and focus on the management of the product life cycle have led to greater product successes in 2018, creating growth and momentum in the business. True to my comments at the end of Q1, in Q2, we continued to experience pressure in buying and occupancy from our store remodels and SG&A from our wage investments. Those are not negatives. Those, coupled with product life cycle focus, are clearly brand-building initiatives that are positively moving our business forward and driving growth trajectory. Investments in our associates, our direct distribution capabilities and our real estate are creating healthy business in both channels and an overall younger fleet of stores. These initiatives will continue to drive expense pressure in the back half, but they are setting us up for continued success. In summary, we are pleased with the progress and the investments we've made, which are making us optimistic about the third quarter and our potential. Our business trends are positive, and we are focused on continuing to deliver great assortments to our customers. Thank you, and I'll now turn the conversation over to Martin.

Thanks, Nick. Good morning, everyone. As I look back on our international business' performance in the second quarter at a high level, I'd make 3 observations. First, the franchise businesses, BBW, VSFA and VSBA, are all doing well, with good sales and operating income growth. Secondly, we continue to invest in China, which we believe will [Audio Gap] market for us. We continue to experience strong growth in the direct-to-consumer business, and we opened 3 additional full assortment stores in the second quarter, including a flagship store in Hong Kong. And finally, the U.K. business continues to be challenged. We have more work to do there under a new leader who joined the business a month ago. In the balance of 2018, our priorities continue to be continuing to scale in China, improving our performance in the U.K., and continuing to build on the success of our partner-owned stores around the world. Thanks, and over to you, Amie.

Thanks, Martin. That concludes our prepared comments. At this time, we'd be happy to take any questions you might have. [Operator Instructions] Thanks, and I'll turn it back over to the operator.

[Operator Instructions] Our first question comes from Mark Altschwager of Baird.

I'm curious about the divergence between VS Beauty trends and the VS Lingerie. And you discussed increased promotional activity to drive traffic, but with high teens comps in beauty, I would suggest that maybe traffic isn't that big of a problem in the stores. So just any color on what's driving that. And then as we head into the holiday season, where beauty does over index, any thoughts on how you leverage the better product acceptance there to drive transactions across the broader assortment?

Thanks, Mark. We'll start with Greg.

Yes. We've been talking about what's working. And in beauty, it's really been stemming from our strategy on testing and learning. We have a tremendous speed model behind us in our supply chain, so we're able to chase into the things that are working. And ultimately, it's really come from tremendous focus and really focused on fewer bigger ideas. Ultimately, it's with the customer and the brand at the center. In terms of integration of beauty and lingerie, what we're finding is that the customer is increasingly buying a combined basket, which for us as a brand, is really a strong strategic point. And so we like how the 2 categories work together. And for those people who've been in our stores, you'll see that beauty and lingerie are more and more integrated together as a total shopping experience.

Thanks, Greg. Jan, do you have any thoughts?

Sure. I'll just build on that a little bit. I would say that the assortment in lingerie is very broad. Beauty is, for the right reasons and should be as a category, very focused and has been reset beautifully, and it's getting great traction. I think that we're all really pleased with the progress. In lingerie, we're resetting franchise by franchise. We're seeing great progress on the things that we are resetting. And what Greg is saying is that the bundling together is happening. We promote together. We create awareness together. We are 1 brand with 2 different businesses. We feel really good about that. The differentiation is us building back our high-value customers who buy bras in particular franchises, and that's the work of the work right now.

Great. Thanks, guys.

Your next question comes from Oliver Chen of Cowen and Company.

Our question is about helping us contrast the opportunities of bras at the VS business relative to the lingerie opportunity at PINK. Just curious about timing, customer reception and what we should expect in understanding the nature of those 2 issues would help us illuminate what's possible going forward.

So Oliver, I want to make sure we understand your question. Are you asking about performance of bras at lingerie versus PINK?

Yes. I was just curious about the bra opportunity at VS and how you would contrast that against the PINK lingerie opportunity and sort of helping us contrast those and -- because that would help us understand it better and also get a sense of timing and supply versus demand and understanding the nature of the opportunity.

I would say in PINK, this is Denise speaking, that we are coming from 2 very different places. PINK has a relatively underdeveloped bra business, which we've work hard over the past several years to leverage and expand upon, and have found recent successes with our incursion into the sport bra category, which we continue to be excited about. That drives our penetrations to levels that are certainly higher than they've been historically. But the PINK business is not completely centered around the lingerie business as the VS Lingerie business is. So we start from very different vantage points. I do think, secondarily, the assortment architecture seeks to differentiate itself and message itself in ways that are very centric to the core population of customers that we're both speaking to, and we acknowledge that we're speaking to 2 different sets of customers. So product differentiation, how the business has evolved, our starting point versus lingerie's, I think, are fairly central to your question. And I hope that I've answered it accurately.

Yes. I guess on the PINK side, how quickly can you fix it? And what do you think we should focus on as timing? And what happens here, just more simply and directly on PINK?

I don't know that fix is the right word. We've been developing both core bra business through what you might be aware of as the lens of Wear Everywhere and have made inroads, as I just mentioned, into the sport bra business as an essential adjacency. There has been residual bralette volume in our baseline that we're working our way through. I don't consider that baseline reference point to be an impediment to the brand's ability to grow strongly into the category in the future.

Jan, do you have anything to add on?

I think Denise said it well. I mean, the percentage of our business in bras is different. Our approach is different. Our customer -- it all really comes down to customer at the center. And if you really are building product with the insight of who she is, we come from this in very different place. Pricing is different. So I think Denise covered it, unless Oliver has more questions.

Okay. Great. Thanks. Thanks, Oliver.

Your next question comes from Paul Trussell of Deutsche Bank.

Just wanted to get some additional color on the August commentary about PINK, in particular where there was a little bit of a slowdown. And if you can also just help us understand the thought process around low single-digit comps in 3Q, just given the more difficult compare, and whether or not there is an expected turn in the 2-year of the VS comps versus just continued strength at BBW.

Thanks. We'll go to Stuart for that, Paul.

So Paul, with respect to August for L Brands in total and the major pieces of L Brands, August is running pretty consistent with the Q2 and recent results. So the pattern is continuing or is consistent in August to date versus recent results. With respect to our assumptions in the third quarter and the fourth quarter, both with respect to comps and margin dollar year-on-year results, again, implicit in our guidance are assumptions that would suggest that results are pretty consistent with recent results. Obviously, the team is working hard to do better than that. But as an overall modeling comment, we're assuming a balance-of-year result that's generally consistent with recent actual results, both sales and margin dollars.

And then just to follow up on that. Maybe a bit more big picture, and for Denise, first of all, congrats and best wishes on your retirement. But I'm really curious in your view, just given your tenure there, in the state of the industry and how you view competition and the meaningful impact of digital. And also, just what is the -- what is it that the young millennial customer is responding to from a merchandise and marketing standpoint? And to what extent is PINK and Victoria's Secret on top of those trends?

So this is Denise. I'll answer the question as best I can. It's an extensive conversation. I do not think, nor do I think anyone in this room believes that PINK has lost its ability to connect astutely with customers and drive excitement in our core constituency. We had, as I mentioned earlier, a very explosive PINK Friday moment, which is celebratory to all things PINK. And that moment, in my mind, and for the folks that work around me and the brand, has edified the exuberance that consumers feel for our product when we create these celebratory moments. The issue of how well or effectively we're competing in the market, I think, from the mix point of view, we're competing fairly effectively. I think there is, as I mentioned, a fleece business that, due to what we believe is very much a mindset, a consumer mindset of buy now, wear now, which is delaying her inclination, if you would, to buy into more seasonally appropriate product, has reflected in our fleece performance in recent times. But there are many, many healthy and emerging sectors of the business, which are, in some cases, on top of the market and then, in some cases, ahead of the market that we believe we can continue to mine for true benefit from. And that's, I think, as succinct an answer I can give you to a very expansive question.

Great. Thanks, Denise.

Your next question comes from Kimberly Greenberger of Morgan Stanley.

Great. My question is for Stuart. Stuart, I wanted to ask about inventory, which has been growing faster than sales here for the last 3 or 4 quarters. And I know that looked at on a 2-year basis, inventory is more flattish. But on a 2-year basis, sales are down, not flattish. So if we looked at both sales and inventory on a 2-year basis, we'd still find inventory running kind of well ahead of sales. And I'm wondering if there's been a philosophical change just in the way that you manage inventory. Or if there are other some strategies that are entering the inventory conversation that maybe we're not aware of on the outside that are causing you to want to make some of those investments? If you could just sort of add some insight there, that would be really helpful.

Thanks, Kimberly. Appreciate that. It's a big subject, important subject. Four or five points I'd want to make. The first is, in terms of where we expect to end the fall season, we're expecting to end the fall season up low single digit and maybe a little lower than that. So flat to up low single digit, that's where we expect to end the fall season, first point. Second point would be our view of growing inventory at the rate of sales or slower than sales to improve turn. Our philosophy, our belief around that has not changed. Obviously, with growth in international business and a lot of change in a dynamic situation, I'll describe it, at lingerie and at PINK, Victoria's Secret Lingerie and at PINK, the situation, given the degree of movement in it, has been a little bit more challenging to manage. We are a very focused, as you know, to clear seasonal inventories twice a year aggressively through our semiannual sales. And we've done that consistently. So in addition to the quantitative aspect of inventory, qualitatively, our commitment to ending seasons clean has not wavered at all. We are making important investment in the sleep and loungewear business for Victoria's this fall. We think, as pre-circulated in remarks and Jan might comment on further on this call, we think it's an important category of growth for us. And we are making investment there, which creates a little bit of investment in inventory in advance of sales. But fundamentally, Kimberly, our view hasn't changed as to how we manage inventory. Again, a little bit more challenging, given the variation in outcomes for lingerie and PINK in recent quarters and seasons, but the view doesn't change in terms of how we look at it. And we are making some important investments internationally in the digital channel and in the sleep and lounge business that I described for lingerie. Thanks.

Thanks, Kimberly.

Your next question comes from Paul Lejuez of Citi.

Stuart, Victoria's Secret has sales productivity over $900 a foot, including e-comm sales. I'm just curious, what do you see as the right EBIT margin for a business with that sort of productivity? And it seems like relative to peak, the VS business is off about 1,000 basis points from peak margin. How much of that is due to lower merch margin, deleverage on occupancy or maybe SG&A deleverage? If you can maybe break that down for us.

There's a lot in that, Paul. Appreciate the question. We believe, as we've talked about pretty consistently, and we've demonstrated when we're performing at our best, and there are a lot of reasons for the decline in performance over the last few years. But a business like Victoria's Secret, stores and digital, high-quality brand, pricing power, nature of competition, et cetera, we believe that, that business, when running optimally, should be a high-teens operating income rate business. And we have that view based on our own history and as we look at businesses like this when they're performing at their best over time. It's easy to say that. It's hard to accomplish that. In terms of where the business is running now versus that ideal level, there is meaningful improvement opportunity, both in merchandise margin rates and in expense leverage. You appreciate that the expense structure, a lot of that relates to stores and square footage and payroll and wage rates and lots of things. But again, we've got -- the biggest opportunity for us is to drive sales growth at reasonable and healthy margin rates to get back to what should be the ideal operating income rate in that base business or EBIT rate in that business. It's not going to happen overnight. It'll take a few years to accomplish. But as you know, and for different reasons, when we pulled out of the top performance of '08 and '09, driven by macro events, we've steadily and consistently improved the operating income rate, both at Victoria's and Bath & Body Works, over that period of time. And this management team is focused on achieving the same result over the next several years for Victoria's Secret. And the most important thing to do is to drive volume at healthy margin rates. We'll manage expenses with discipline. We'll certainly continue to look at real estate, as we've talked about at length. The cash flow and profit characteristics of our real estate today are very healthy. But as is obvious, the sales productivity and underlying unit economics at Victoria's aren't as strong as they would've been a couple of years ago, but they remain very healthy. But a big part of the cost structure of the business relates to stores, and we'll continue to look at that as we move forward. But the biggest opportunity is around volume, and that's what this team's focused on. Thanks.

Thanks, Paul.

Your next question comes from Brian Tunick of RBC Capital Markets.

I guess I wanted to hear a little more about your comfort on your Q4 guidance. Maybe if Stuart could maybe talk about how you're thinking about gross margin rate in Q4 versus Q3. And maybe Jan, you could talk about what are some of the biggest initiatives, whether it's changes in marketing, product, store environment that you think will help stabilize the business embedded in your fourth quarter guidance.

So Brian, obviously, we spent a lot of time looking at the third quarter and the fourth quarter range of outcomes. Obviously, management believes that we've put out an appropriate range for the business. I wouldn't describe our views around margin dollars or margin rates as, in any stretch, heroic or unrealistic for either the third or the fourth quarter. I realize you're asking about the fourth quarter, but we believe they're realistic. There are a couple of inputs in the rate that I would remind you of. One is that the sourcing part of the business has gone out and done some work with our vendor partners to get some benefit that will benefit the fourth quarter. And apart from that, the margin rate assumptions are relatively consistent with recent results on a year-on-year basis and a multiyear basis. So we feel that we put out a model that should be achievable for sure if we execute well.

So fourth quarter is what you asked about, Brian, right? So we have a few critical bra launches, as we always do in fourth quarter, around specifically T-shirt and Dream. Of course, the panty business is the usual -- really, the heavy hitter for us. But what is important is that, Stuart mentioned earlier, the sleep and lounge category adding adjacent categories like sleep, lounge and even sports fashion has been a really important investment and growth driver, something that we've been working on all year. The casual side of the sleep business has had double-digit comps attaching to bras up to as high as 40% of the time. It's bringing in a new customer over 20% of the time week on week. And we have an existing customer who's coming back more frequently. We feel really good about the adjacent categories and what they do to the core of the business. It's a really big part of us building back our high-value customer file as well.

And if I could just...

Go ahead, Brian.

I was just curious, marketing and the messaging, it seems to be a hot topic out there. Just curious if Jan and the rest of the organization, how they're looking at the marketing message today at Victoria's Secret versus the last couple of years. And how you're making changes to that?

So, yes, thanks for the question. The brand, as I've said, we're not exactly where I think we need to be. However, we've debated this rigorously as a leadership team and a management group. And it's been decided that we had to focus on, and we are, transactional traffic driving marketing that transitions into the results that we're all looking for.

Your next question comes from Ike Boruchow of Wells Fargo.

So Stuart, I want to kind of dig into the answer you gave to Paul's question. Obviously, you think VS is a much higher-margin business than what you're seeing today. So I guess at a higher level, VS is seeing ongoing declines in profitability and margins. I kind of just wanted to ask about how you view the cost structure of the brand. And how you think about balancing investment spend versus protecting profitability? And I guess what I really mean by that is, when the brand was hot, you guys had a lot of investment behind the brand to capture the volume. But with the top line pressure now, do you rethink some of your larger global investments, things like the Fifth Avenue flagship, Bond Street, potentially partnering back in China, even the fashion show. I'm just kind of curious, what will you kind of look at to kind of keep those margins higher than where they are today from a balancing investment?

Yes. Thanks for the question, Ike. It is a big subject, as you appreciate. I mean, what this business is about, both at Victoria's Secret and, frankly, at Bath & Body Works and what Les has done over more than 50 years running the business, is to make investments, whether it's in the store design, in the merchandise, in the experience with customers, that create emotional content. And from that emotional content, you generate pricing power, that the product's got to be great and the emotional content of that merchandise, along with the environment in which it's sold, the marketing of it, et cetera, has got to be special, unique, different that creates that "got to have it" emotion for customers. So that's a fundamental philosophy of how we think about our business. Obviously, evaluating whether you're getting paid for the range of investments that you described, and those were just examples, is the work of the work. And what I would want you to know is that we have had historically, and given recent results, are having more intense debate about evaluating whether we're getting paid for that range of investments, but -- or the wide range of the types of investments that you're asking about. Obviously, there's a lot of business judgment involved in evaluating that. We test things where we can. We make some decisions based on vision and intuition, as you would expect. Oftentimes, the greatest value is created in things that aren't obvious in terms of a return on investment. But a big question. We look at it intensely, regularly, periodically. Obviously, with some of the shift in the business, I understand why you're asking the question, and you can be sure that myself, other leaders in the business, Les, are also looking at all those investments and just challenging, are we really getting paid for them or not. And generally speaking, this business is relatively short cycle, again, versus other industries, so we are able to adjust. So things like the stores that we're now opening in China are smaller than the initial stores that we opened, as an example. Or you could take the Bath & Body Works remodel program, where we tried several different iterations before we came upon a store design that really drove incremental sales and profit. So big subject, often multiyear in nature. Requires iteration, testing, learning, adjusting. And I think we haven't always gotten all those things exactly right, but I would want to assure you and those listening to the call, that those things get rigorous evaluation as part of running the business. Thanks.

Thanks, Ike.

Your next question comes Chethan Mallela of Barclays.

On BBW, the business has been strong for some time, but the comp acceleration over the past couple of quarters has still been notable. And I think the double-digit comp growth in 2Q was the first time it was at that level in a couple of years. So could you just kind of frame what's primarily responsible for the improved trend? How much is idiosyncratic versus just kind of a better industry backdrop in general? And how you're thinking about the growth rate for that business over the midterm?

Sure. We'll go to Nick.

Thanks. So I think the first part of the question is, we feel very good about the categories that we're in, being in beauty and being in home. And they are dynamic categories, as you can see in the industry. So that's a positive thing for us. Secondly, as I mentioned in our opening comments, the amount of work that we took on during the latter part of 2016 and the majority of '17 where we were really investing in the product and trying to reposition a lot of the products that we had, and that has manifested itself in, I would say, a healthy comp. Whilst -- as we continue to roll products out and programs out post 2017, we can see the trajection of it has continued to grow. So we saw from the latter part of October 2017 into Q4, Q1, Q2, we've seen that continually grow. So as we look forward, I think it's more about us continuing to stay as close as we can to the customer; continue to refine the assortments to reflect what's going on in the market and what we're learning; and hopefully, maintenance of the current comp performance that we've got.

Thanks, Nick.

The next question comes from Michael Binetti of Crédit Suisse.

Jan, I think you mentioned a strong focus on building back the customer file quite a bit in the last few quarters. But you've also commented today, I think, briefly on rebuilding a gap with the dual-channel customer. I was wondering if you could discuss a little bit how to marry those 2 comments. And what you were referring to that you mentioned the dual-channel customer specifically. And maybe just bigger picture, remind us of some of the metrics around that customer and how valuable they are for the franchise relative to your total customer book.

The short -- thanks for the question, Michael. The short answer is it's the same commentary, the building back the customer file refers to the high-value dual-channel customer.

Okay. So Nick, if I could sneak one in. Is -- with the remodels, could you remind us of the KPIs you look at to measure the rollout of the White Barn doors maybe. And how those are progressing relative to your plan, with any numerical example you might be able to offer to help,just kind of reorient us from some of the goals you mentioned before?

Sure. And I think part of our performance -- part of our solid performance has been also driven by continued good performance in the existing real estate activity that we took on and the new real estate activity. So the real KPI that we look at is what kind of growth are we seeing in the first, second and now into the third year. And we continue to see a very nice lift in that first year and then a continued performance in year 2 and year 3. What I really want to reiterate is the agility that we have. And so we continue to read very, very diligently the results of those investments we're making in the stores. And if that ever slows down, we have terrific agility in terms of being able to slow that pace or stop that pace. Now as we go into a number of years of doing this -- and by the end of the year, we'll be well north of 600, we continue to see a return on investment that we like. And so we'll continue to invest. But the moment that we feel like that, that's not happening, we do have the agility to pause that. So continually evaluating that performance is a high priority of ours.

Okay. Stuart, can I sneak one in? You guys have remained very committed to a very, very high dividend yield despite, I think, the operating results coming in below some of your hopes for a bit here. I know you've worked hard to moderate CapEx down a few times here along the way. But could you help us with how you think about holding steady the approach to the capital deployment in contrast to the variances you've seen in the operating plans?

Important subject, obviously, important source of return for shareholders. Obviously, the payout ratio is abnormally high. The yield is very high. We look at it regularly. Management does. We have the appropriate conversations with our board. Obviously, a lot of our earnings and our cash come in the fourth quarter. We have conversations about this regularly. But importantly, as we have more insight into holiday results, we're comfortable with the dividend today, have the free cash flow to support it. But it's obviously something that should be looked at periodically, and we do. We're comfortable with it. We expect to -- one way to deal with the payout ratio is obviously to increase earnings. That's what we're focused on. Earnings increases would drive obviously an increase in the share price and get dividend yields and relationships like that in a more normal range. But with that said, our operating performance has lagged our expectations over the last several years. So we look at it periodically in a rigorous way. That will continue. We're comfortable with it based on what we know at this point, and we'll continue to look at it. Thank you.

Thanks, Stuart. [Operator Instructions]

Your next question comes from Roxanne Meyer of MKM Partners.

My question is about the right number of Victoria's Secret, PINK and BBW stores, just giving us perhaps an update as to how you see the portfolio evolving, taking into account, on one hand, expanded categories and also -- but also, you've seen some rapid growth in DTC. So how does that change, if at all, your view on what the right number of stores and even the size of the store should be?

Roxanne, it's Stuart. I'll try to take that and others may want to jump in. But as we've talked about pretty consistently in our communications, the first point I'd really want to register is that we actively manage the subject you're asking about. And we are opening and closing stores every year. In the information we put out publicly, there is a forecast of store activity this year, and it's being actively managed. We shared a slide at the investor meeting a year ago that showed our activity over a 10-year period where we opened, by memory, more than 700 stores and we closed more than 500 stores. So it's being very actively managed. As you know, our sales productivities are high. Not as high at Victoria's as they were a few years ago. They're continuing to grow and be high at Bath & Body Works. You know that our cash flow and profit profile in our stores is very strong. And with that said, we're not unaware of what's happening with mall-based retailing in an overall sense. But with that said, those retailers that have strong brand, strong offering, strong execution are doing very well in malls. And again, within our own business, Bath & Body would be an example of that. Victoria's Secret Beauty would be an example of that. So it is very actively managed. We'll see how it plays out over time, and we'll continue to manage it actively year by year. Looking at the current version of our schedule, Victoria's Secret is going to close about 20 stores in North America this year and it's going to open about 3. So there's some net reduction. But it's actively managed, and it will be a function of performance. It's performance based. That's how we evaluate the initial investments, and that's how we evaluate decisions as to whether to close doors or not. We obviously understand sales transfer and cannibalization and all those dynamics, and consider those things as we actively manage the real estate portfolio. So big, important subject. Got a very strong team that is responsible for it within the enterprise, and we have a lot of experience working with it. Thanks.

Thanks, Stuart.

Your next question comes from Jamie Merriman of Bernstein.

Jan, I think this question's for you. You talked pretty positively about some of the products that you've relaunched, like the Sexy Illusions bra, like the T-shirt bra. Can you just update us and give us a sense of timing for some of the initiatives for maybe second half of this year into next year? I think Body by Victoria is one. And then as you move beyond that, are there other big legacy businesses that will still need relaunch?

Thanks, Jamie. Well, we continuously update each part of the portfolio. So BBV, as recently as this month, has been relaunched with color and fashion. We're continuing on the innovation of that bra. That's a very important franchise, and we're very thoughtful and mindful about how we manage it. But going into the fall, as I mentioned, it's balancing that portfolio with, again, the acceleration and the success we're seeing in panties, which we're super excited about. It's a business that we flow new goods superfast, sometimes weekly. And we continue to see, again, new customer acquisition as well as existing engagement and moving up the funnel of the deal. The adjacent categories I mentioned in sleep and lounge and sport fashion, if you will, and sport performance, are really important to build back again that the -- not just the file, but the business in a long-term, sustainable way. So that's just on the dockets.

Thanks, Jan.

Your next question comes from Marni Shapiro of Retail Tracker.

Could you talk a little bit or dig a little bit into the lounge business at PINK and Victoria's Secret? It seems that over the last several seasons, there's been a little push and pull between the 2 brands. Are you seeing the customer gravitate to whichever looks better? So maybe one season, it's Victoria's Secret; the next season, it's PINK. Or do you think these are separate issues at Victoria's Secret and PINK?

Yes. So Marni, it's Jan. I will say that we're not in the "lounge business" per se the way PINK is. We're in the sleep business for sure, which is different fabrications, different silhouettes, different content and different fashion. Our "lounge" effort is a much smaller part of the business. We are not in fleece in the way that PINK is in fleece. And Denise, I'm sure, will speak to that. So I don't see them as trading off each other. We have a very different handwriting, again, a different target consumer, a different end purpose and different pricing structure. Don't know, Denise, if you want to add to that.

No, I would agree that, not unlike the commentary specific to bras, they're hopefully and discernibly differentiated. I think the thing I would reemphasize specific to the fleece segment of our lounge business, which is currently under some pressure, is in our minds, attributed to this buy now, wear now phenomenon that has fairly rapidly affecting the buying habits of our age cohort. And so we're adjusting into seasonality based on these consumer insights and feedback that we get from the consumers that we're in constant contact with. But I would say, overall, the lounge business continues to be a relevant category to the college-age consumer and a category of interest. It's just silhouette reference points, fabric reference points have to be seasonally accurate and in the appropriate quantities to drive the velocity that the business requires.

Thanks, Marni.

Your next question comes from Susan Anderson of B. Riley FBR.

I guess as a follow-up on the profit margins of the VS business, there's been a lot of new competitors pop up in the space. So I guess, has -- do you guys think the bar has been reset in terms of where these margins should be? And then also, we've had a mix shift in the bralettes and sports bras, which are still part of the mix, which are lower ticket and potentially lower margin. So does that also reset the business?

Susan -- Jan jump on. Where I start, and many of you have heard us talk about it in this way, a company that we admire a lot is Inditex. And particularly, theirs are our business, but they run a strong portfolio, and they run for sustained periods of time at high-teen margin rates. Their cost structure is different, which relates back to an earlier question. But in terms of intensity of competition, I can't think of a more competitive set of segments in retailing than the ones in which they operate. And through very strong execution on their part over very long periods of time, they run at a high-teens operating income rate. And so if I think about that set of circumstances in comparison to the environment in which Victoria's Secret and PINK operate in, I think when we're executing our business extremely well, including again back to some of the questions about making sure that we're trading off investments appropriately, there's no reason why there might be, to some degree, an increased level of competition vis-à-vis the segment, for example, that's ours competing in. And I think we're in a much better set of categories with a much stronger relative competitive position. And so again, we're of a view that when we're really running this well, and we realize we've got a lot of opportunity to get there and it's our job to get us there, that we have the potential to get back into that high teens rate, which we've been at before, even with a little bit more competition in the industry. So that'd be my take. Jan, you may have something.

Well, I mean, I think the thing about the expansiveness of this brand and the assortment that we offer online, [ late-design ] push-up bras. So there's choices in the portfolio. It's important to be in balance. An example that you're mentioning about the price architecture due to the landscape result, let's say, T-shirt for a second, which originally was an opening-price-point bra, we've taken 4 price-ups on that bra, and we continue to see unbelievable builds week on week, so it's an interesting phenomenon. It's a casual bra. It definitely speaks to the landscape you're talking to. Yet every time we keep putting out, I will call, fashion content on that bra, she continues to pay us more for it. We're selling out of the most important styles in it. And even when we look at BBV and what we're starting to do with it and adding fashion again to that bra franchise, we're seeing a younger consumer pay us for that work. So it is an interesting time, and things are moving, but we are on top of it.

We're going to try to get 2 more questions in here.

Your next question comes from Simeon Siegel of Nomura Instinet.

Stuart or Nick, what percent of the new BBW stores are side-by-side versus shop in shop? And I guess, where relevant, how much of the remodels -- how much have those remodels added to comp? And then just any help on where the PINK margins operate currently.

Simeon, the majority are actually shop in shop. And as a go-forward point of view on that, we -- that tends to be where we would want to get -- continue the investments into it. So we're actually happy with both, both side-by-side and shop in shop. I think operationally and the ability to manage the store, it's probably more efficient and probably more customer-friendly from a shop-in-shop perspective. And that tends to be where we will continue the investment at the moment. But as I said earlier on, we're pretty fluid in terms of how we read those and how we manage them, but that's pretty much the answer.

And I think that has not been a meaningful contributor to comp, right? It's less than a point, I think.

Yes.

Simeon, on PINK margins, they are -- they remain very healthy but are down versus their peak but remain very healthy. We don't get into fine detail about margin rates by -- at that level of detail. But in an overall comment, they're very healthy margin rates. They're down somewhat versus their peak but remain healthy. Thanks.

Thank you, Simeon.

Your final question comes from Janet Kloppenburg of JJK Research.

Congratulations to Denise, whose brand leadership has been remarkable and has taught us a lot. And also, welcome, Amy, who I think will do a great job at PINK. Couple quick questions for Denise. We've often talked about the logo business at PINK. Can you talk about that in light of the fact that logo is working universally? And maybe if there's some updates necessary for the PINK logo. And just for Jan, in the businesses of shrink, can you talk about margin direction there, maybe in panties and the new bra introductions and sleepwear?

If by local, you're referring to our collegiate business, am I clear? Did I...

No, I'm talking about all the PINK logo products.

Oh, logo, sorry. The logo segment of our business literally defines it. And what we're experiencing lately, which as well, I take as a sign of brand validation, is increasing engagement with more expansive brand iconography. So you would be familiar with the PINK dog as another discernible brand reference point selling very well. So the attachment rate to LOVE PINK, PINK logo, logo manipulated in a myriad of creative ways and the inclusion of more expensive iconography has not met with consumer rejection. Far from it.

And Jan?

Janet, just one more time with your question. I'm sorry. I don't think I heard the whole thing.

I know you have a lot of new products that are working very well. I'm just interested in whether you're seeing margin gains in those categories. For instance, in the panty category, which you turned rather quickly, are you able to see the rebound in margins back to historical levels? And on the new bra introductions, are you seeing margins comparable to, let's say, legacy Body by Victoria or Very Sexy?

Yes. So on the businesses that I talked about, we are talking about not just top line sales but also margin -- healthy margin in line with sales. I can't speak to historical levels because some of these items didn't exist back in the day. But panties certainly is tracking to where we've been, and we're excited about that. Same with the T-shirt bra, and Illusions is a new book of business.

Appreciate it, Janet. Thank you, and thank you all for joining us this morning and for your continuing interest in L Brands.

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