Good morning. My name is Atania, and I will be your conference operator today. At this time, I would like to welcome everyone to the L Brands First Quarter 2019 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer of L Brands. You may begin.

Thank you. Good morning, everyone, and welcome to L Brands' First Quarter Earnings Conference Call for the period ending Saturday, May 4, 2019. 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 statements found in our SEC filings. Our first quarter earnings release, additional commentary and earnings presentation are available on our website, lb.com. Stuart Burgdoerfer, EVP and CFO, and I will handle the call today. Thanks. And now I'll turn it over to Stuart.

Thanks, Amie, and good morning, everyone. Our first quarter earnings per share of $0.14 were above our initial guidance of about breakeven, principally driven by a strong performance at Bath & Body Works and some favorability in income taxes. Performance at Victoria's Secret Lingerie, PINK, Victoria's Secret Beauty and International were largely in line with our forecast. Our performance continues to be mixed. Substantial growth in operating income at Bath & Body Works and an improvement in the other segment as a result of the sale of La Senza and the closure of Henri Bendel was offset by a decline at Victoria's Secret. Turning to our outlook for the remainder of 2019. At Bath & Body Works, an aligned experienced leadership team and strong customer response to our merchandise assortments are contributing to another solid year. We also remain highly focused on improving performance in the Victoria's Secret and PINK businesses. John Mehas and Amy Hauk, CEOs at Victoria's Secret Lingerie and PINK, respectively, are focused on getting closer to our customers and improving our merchandise assortments. We look forward to our assortments benefiting from their input beginning in the fall season, and our earnings guidance assumes gradual improvement in the Victoria's Secret segment performance as we move through the remainder of 2019. You will hear more from John and Amy as well as other business leaders at our Investor Day, which is scheduled for September 10. Thanks, and over to you, Amie.

Thanks, Stuart. 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] Your first question comes from the line of Paul Trussell with Deutsche Bank.

Can we just touch on Victoria's Secret in terms of kind of maybe where you saw some green shoots in the first quarter? And just give us a better sense of what you expect in the second quarter. And clearly, the guidance does still suggest some real improvement in the second half.

Sure, Paul. So in terms of where we see strong consumer response and what we're focused on is where we're delivering significant fashion and elevation in the assortment. And it's a big focus for us, and that's where we're seeing the strongest consumer response. The incredible bra launch did well. But as a general theme, it's where we have fashion that resonates with the consumer. And again, John is particularly focused on that and jumped right in. Frankly, he's been with our business now 13 weeks and hit the ground running in a very good and intense way in the business and is very busy at work to impact fall assortments. But again, for Lingerie, it's about delivering compelling fashion in the major categories of bras, panties and sleep and loungewear. In the PINK business, strong performance in intimates and a good volume result in sport bras, particularly and in -- again the intimate side of the business with very strong value for the consumer. And that business, PINK, is focused on really continuing to advance the assortment in bras and panties and is doing important work to reposition the apparel assortments as well, but has a real advantage in the bra and panties side of the business. And then for Victoria's Secret Beauty, the -- this business continues to do well. And where the business had good fashion in a better priced -- or higher-priced fragrance business, we've had strong consumer response. So as has been the case for us for a long, long time, and the same idea applies to Bath & Body Works and in our history, when we're delivering strong fashion, differentiated merchandise with emotional content, the consumer responds in a good way and we get healthy margins, we get unit volume, we get AUR opportunity and we get the results. So that's what the Victoria's leaders, John, Amy and Greg, are focused on. And frankly, the same for the team at Bath & Body Works. When we do it well, we get paid. And when we're off the market -- or off the mark or our assortments get too basic, that's when we tend to have trouble.

Your next question comes from the line of Ike Boruchow with Wells Fargo.

I guess, Stuart, just a high-level question for you. There was some news that kind of came out I think a week or 2 ago about potentially reevaluating the fashion show and being on TV. I guess when you think about VS right now, how much of the changes should be more strategic in terms of merchandising versus kind of more substantial changes, meaning changing the marketing approach, evolving the brand, maybe looking at the international business and owned versus partner businesses, franchise -- excuse me, flagship stores? I'm just trying to understand what could be -- your Analyst Day has been announced for September. What could we possibly look forward to hearing from you guys then?

Yes. So thanks, Ike, for the question and your research on the business. We've said pretty consistently now for probably around like 6 or 9 months, certainly 6 months, that everything is on the table with respect to the evaluation of the Victoria's Secret business, and that wasn't just a throw away phrase. That was [Audio Gap] we are taking a fresh hard look at all aspects of the business. And that's not a onetime exercise. It will be an ongoing exercise and starts from the place that the ultimate profit result, economic results of the business is not consistent with our expectations or the potential of the business. And thus, you get into a mindset -- we're in a mindset of truly looking at everything. And again, not a onetime exercise. As Amy and John particularly have come into the business, but Greg has done the same thing, it really does start. And it's not limited to, but it starts with fundamentally the merchandise that you're selling. And as I mentioned in a quick comment on the first question on this call, Amy is very intensely focused on understanding that target customer and reworking the assortments at PINK. And John, again now 13 weeks in, has truly hit the ground running and is bringing to our situation a lot of great experience that he had in his prior retail life. And so we're very focused, obviously, on the merchandise. And as registered in our pre-circulated comments, that impact is showing up in the most clear way beginning in the fall season, and it will get more significant as we move through the fall season. But that is tangible and real. From that, we're taking our look at lots of other stuff. We closed more stores or announced plans to…

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

I was wondering if you can maybe give some more color on the gross margin as we go throughout the year. I know you're expecting growth in merch down for the year. But I guess are you expecting any improvement at all as we go into the back half and some of the new products flows in and then just the drivers?

Thanks for the question. The simplest way to answer your question is we are expecting improvement in merchandise margin. You'll remember, as we report, gross margin includes buying and occupancy cost, but we would expect -- I trust you're asking about the Victoria's business. But for Lingerie, PINK, and Beauty, we would expect an improvement in merchandise margin rate and dollar result as we move through the year sequentially. That was our view going into the year. It remains our view, and it's a function of the work that John, Amy and Greg continue to do on the merchandise assortment. So that is our expectation, that we'll see sequential improvement as we move through the quarter.

Your next question comes from the line of Mark Altschwager with Robert W. Baird.

If I could just follow up there, Stuart, on the margin front. So there was a comment in the prepared remarks about the VS Q1 operating margin still benefiting from last year's credit and sourcing actions. So -- and then you're going to begin to lap that I think going through the remainder of the year. So a number of crosscurrents here. You mentioned you would expect merchandise margin to improve throughout the year. But as we lap some of those other benefits, and then it sounds like maybe we're baking in some incremental tariff headwinds, just how should we think about the EBIT margin rate progression through the year for Victoria's Secret relative to that 300 basis point decline in Q1? And then kind of as a follow-up, clearly some greater divergence this year with the investment plans at Victoria's Secret versus BBW. I was hoping you could just help us understand the run rate of buying and occupancy growth at each of these concepts so we can have a better understanding of the leverage points today.

Yes. So thanks, Mark. On the progression of margin rates and EBIT rates as we move through the year, while there are puts and takes, including some benefit that we got from our proprietary credit card and some sourcing-related benefits that we got last year and into the first quarter of this year, despite those puts and takes, we would expect a progression and improvement sequentially in margin rates and the operating income result in the Victoria's business as we move through the year. Again, even despite the callouts that we had in the prepared remarks and including the pressure from the list 3 tariff moved from 10% to 25%. With respect to buying and occupancy dollar increases or percent growth and sales growth needed to drive leverage, in the Bath & Body business, driven by the ongoing and we think a very healthy and appropriate investment in store remodels and some pressure related to continued mix shift towards direct, again, Bath & Body is having the great outcome of growing sales in stores and online, but online is growing at a faster rate. And the P&L architecture, that penetration growth for direct in BBW in addition to the pressure related to real estate, results in a sales growth to leverage B&O in the high single or low double range, depending upon time period, again, driven by the 2 factors I just mentioned, the direct business as an aside is a very healthy profit business for BBW and VS for that matter. But that growth rate outstripping the total growth rate drives some geography change in that P&L. And then for Victoria's, driven by the lack of growth in square footage and our pullback on investment, the breakpoint or the leverage point for sales at VS is flat or even a little less than flat in 2019. Thanks.

Your question comes from the line of Jamie Merriman with Bernstein.

First question is just on digital with Victoria's Secret. I think you've talked in the past about -- and in the release today about the stepped up investment. And I think there's still a relaunch coming this year. Can you just confirm that and talk about what that will encompass and when it's coming? That would be great.

Yes. So we went live in the first quarter with a new technology platform for victoriassecret.com. And that was a result of more than a year's work and a substantial IT project to replatform that website. So that is a new base platform and was a very significant technology project. And I'm knocking on wood or a hard surface anyway, but it is up and running. And there hasn't been any significant adverse set of startup issues related to that, and that's a big deal. And that new platform will enable us to do a lot of things. Now we need to make further investment to do those things, such as buy online, pickup in store. But another key input to achieving that consumer outcome will be the RFID project that's underway for Victoria's Secret. And it's critical that we have a very good information about our specific inventories. And we have broad assortments at Victoria's, particularly in the bra category, and so we want to make sure that we have accurate information. And this RFID project I'm mentioning will help enable a buy online, pickup in store project that we'll likely get after in 2020 after we do the RFID work this year. We are making further investments in the digital business beyond the platform, including rolling that new platform to the international side of our business and continuing to enhance the consumer experience. And then we are also making a significant investment in digital fulfillment capacity for Victoria's. And while outsourced, we're adding a lot of capacity for the Bath & Body side of the business as well given the growth and further potential in that business. So a lot going on, a lot of investment happening related to the online business, which again, as you know, is now running $2.4 billion, $2.5 billion for L Brands, growing at a very healthy rate on an overall basis and highly profitable.

Your question comes from the line of Jay Sole with UBS.

Stuart, I want to just ask another question just about margins at Victoria's Secret. From a big picture perspective, the company has done a great job cutting costs. You mentioned La Senza, Henri Bendel. But Victoria's Secret North America is still doing over $7 billion in sales like -- but obviously the margins have come down. What's the opportunity if you wanted to look at more cost cuts? Not necessarily closing stores, but just more efficiencies to overall improve the margin, what might those be? And then also, can you just talk about the path to profitability in China? You made some comments in the prepared remarks about that business getting a little bit better. Can you just tell us where it stands today and what you see going forward?

Yes. So With respect to the Victoria's business and managing the expense side of the business, just working down the P&L and talking about the biggest categories of expense, again, beyond getting margin rates where they had been. Again, the biggest cause of decline, profit rate and profit dollar decline, at Victoria's has been erosion of margin rates, merchandise margin rates to be specific. And that's about pricing and promotion and having merchandise with emotional content. But that wasn't your question. You're asking about the expense side of the business. So moving down the P&L, the biggest variable expense we have is store payroll. And we believe that it's important to have appropriate coverage of square footage and of traffic volumes to drive the selling opportunity that exists in our stores. We also believe it's important to pay our associates. We have outstanding teams at a competitive level to ensure that we can attract and retain appropriately skilled store associates, and we got a lot of them given the selling opportunity in the business. But -- so with respect to store payroll, not a lot of opportunity on a rate basis for a reduction. With respect to occupancy cost, obviously, the action that one can take, there are 2 major things that one can do beyond driving sales volume. One is to adjust investment in remodel activity or new stores, and we've done that. We've dramatically reduced almost to 0 the investment levels at Victoria's Secret given the current state of performance. And as leases roll off or where there's opportunity to close stores, and again, we closed more stores this year than we had probably a factor of between 2 and 3x we had done previously, so that's the other action that one can take. And then there are…

Your next question comes from the line of Kimberly Greenberger with Morgan Stanley.

Stuart, my question is on PINK. I'm wondering if you can just remind us what the mix is between intimate apparel and loungewear at PINK. Is it 50-50, 60-40? And then are there any initial thoughts that you can share from Amy about what is not working in apparel? And then with regard to the swim elimination, I think it was a 5% hit here in the first quarter. How should we think about the elimination of swim in the PINK business but a reintroduction at the Victoria's Secret Lingerie business? And is there any thought to bring swim back?

Yes. Thanks, Kimberly. So the first question was about the mix -- merchandise mix between intimates and apparel. At present, it's about 50-50. So bras and panties together, about 50%. And the balance of the business, largely apparel, about 50%. As I mentioned in an earlier comment, we believe we have our greatest competitive advantage and strong attributes around customer or consumer loyalty in the intimate apparel business. And so it's our intention, Amy's intention, Les' intention, the team's intention, to grow the intimate business faster than the apparel business. So I would expect that, that mix of about 50-50 will skew to intimates being obviously greater than 50% over the next year or 2. That's our focus for the reasons I mentioned. With respect to the apparel part of the business, and Amy will comment on all of this on September 10 when we have our time together, she's relooking at all of it in terms of price points, good, better, best opportunities, fabric and fabrication, surface design, various logo treatments, et cetera. She's looking at all of it, testing a lot of things, seeing some positive consumer reaction to some of the things that have been tested. And as we've mentioned consistently -- and Kimberly, you're familiar with one of the additional advantages that PINK has in its operating model, its business model, our short lead times and a mindset around speed and agility, so they are chasing hard. I'm not going to sit here and tell you that she's got all the answers because she doesn't. But she's working and seeing some -- working very actively and applying the BBW and other retail playbook to this business. And we're encouraged based on what we're seeing, but the results of her work will show up most in the fall season. You know that we've got campus reps that we have very active dialogue with, and she's certainly making good use of that resource and ensuring that, that resource is truly telling us what we need to hear, and I think they are. So a lot going on. And we're optimistic that, certainly, as we move through the year and particularly in the fall season, that we'll stabilize and then get back to positive growth in sales and margin in PINK.

Swim?

Oh, thank you. Swim, you mentioned that we've gotten back into that category, in large part, due to third-party brands. And with respect to PINK, I would say anything's possible, Kimberly. There is some, what we call, gym to swim offering in the assortment now, where athleisure tops and bottoms, that would be suitable in terms of their style and so on, would be suitable for use in that occasion or as part of her life in that way. Our offer today, it's a small offering, but there's an open mindedness to it. But it won't be a key thing for the balance of this year, but we'll see how it progresses as we move into the following year. Thanks.

Your question comes from the line of Oliver Chen with Cowen and Company.

We had questions related to the innovation that you see ahead at VS. Some of the survey work we've done around customers does point to fit as well as comfort being issues. Also, customer segmentation across the store. I would love your thoughts on that and what you think may happen as you continue to evolve the brand and add more emotional content.

Well, the first thought I have, Oliver -- and thanks for the question and read your report with interest. The first thing I would say is that the subjects that you researched and wrote about are -- is what John and his team are most focused on, which is how to evolve the assortment to ensure that the merchandise offering best addresses her needs. As you know, from all the consumer work you do, sometimes she's able to clearly express what she's looking for. And there other times, where a leading consumer brand, and we have our examples of this, is able to drive the market through our own innovation. And again, that's what you're asking about. We believe that there is a very significant opportunity with respect to fashion, with respect to an elevation of the merchandise, with respect to not selling as much, what we would call, commodity or commonly available merchandise in the bra, panty and sleep and loungewear categories. And based on early work but substantial work, John is on it and has a very strong point of view that makes a lot of intuitive sense. We've done a lot of consumer research over the years, as you would expect us to. It's inherent in running a business. And certainly, the attributes around comfort and other things that you mentioned in your report, we understand well and believe that we have leadership positions in many of those attributes or those characteristics that consumers are looking for. But John is on it. He brings good experience. His team is on it with him. He's leading. He's got a clear point of view, and substantial changes to the assortment are coming. You'll see that beginning in August. John will be with investors with the balance of the team on the 10th of September to more fully articulate his assessment and his game plan. And we've got strong reasons for optimism about the progression in 2019 for the Lingerie business. Thank you, Oliver.

Stuart, there was one other follow-up on the store and customer feedback about customer service as well as thinking about navigation in the store. I know you've done a lot of work in the past with conversion as well as testing, optimizing service in the past, but if you could brief us on that opportunity. It seems like an important opportunity going forward as well.

Thank you, Oliver. So we agree that there's opportunity to make the store more easily understood and navigated and to further strengthen the interactions between our associates and customers. And as part of what John and the team and Amy and her team are focused on, it includes, Oliver, more easily understood and navigated store and continued work in terms of the interactions between our sales associates and our customers. Thank you.

[Operator Instructions]

Your question comes from the line of Alexandra Walvis with Goldman Sachs.

I know we had a brief comment earlier on the swim business in response to Kimberly's question. I wonder if you could reflect on the swim launch at Victoria's Secret. I'd love to hear your thoughts on that, what's the impact it's having on the business. And on e-commerce traffic, what's the customer response been? And how you're feeling about the levels of fashion price points and so forth? And should we expect any changes there going forward?

Sure. Thanks. So as we have communicated, the reentry into swim was an initial test. The decision was made to do that late last year. The financial outcome to date and expected for the balance of the season is in line with our expectations, so it's doing well and meeting our expectation. It's not having a material impact on the overall business because it was a reentry and a test. What we have learned, despite what may be out there on the Internet, is that there has been strong positive reaction to the assortment generally, including at higher price points. And I realized there's chatter out there with commentary about the good, better, best pricing. But what I'm conveying in response to your question is we've had a strong positive reaction to all of the price points we have offered in a good way. Certainly, there's some learning that we're achieving through the test. But again, overall, it's gone well, it's meeting our expectations. The business will get substantially larger a year from now. It remains focused as an online business, but one of the very positive aspects of the test has been the positive consumer response to the swim offering at higher price points, in addition to the more moderate price points that we had historically been in. So that's where we stand on it, and we're encouraged about the test and will be expanding our business there over the next several years. Thank you.

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

I was wondering if you could talk a little bit about John Mehas' feelings about the legacy bra platforms at Victoria's Secret. They think that, that older product seems to be holding back a rebound in the Lingerie category. And I'm focused on what you said about fashion newness and when it's right, they'll go for it. And I'm wondering if we'll see an evolution in the legacy platforms or if they'll fade away and be replaced with greater fashion platforms.

Yes. Thank you, Janet. Thanks for the question. And you've followed retail a long, long time. I've been involved in it for a while. Our company has been involved in it for a long, long time. This business, fundamentally, is about fashion. We're not about selling basic commodity product year after year after year. That's not the business that we're in. Others are in that business and that's fine, and they have operating models and all kinds of things that make that work for them. But that's not what our company has done for more than 55 years. We're about fashion. And when we lack fashion, lack newness, lack innovation, where it's not interesting, the result becomes apparent. And so in answer to your question about is John focused on that or what's his assessment, again, he'll, for himself, articulate all that in early September. But our observation, his observation is that there is a substantial opportunity to remix the assortment, and that's not just words on a PowerPoint chart or my comment on an earnings call. He's doing real work on that with the team and it's substantial work. And he's working with our sourcing partners and our vendor partners, which we have strong relationship and good capability. And there's a lot happening. Will it all be perfect and all work right out of the box? I'm sure it won't. But he's making substantial change. We believe it's positive change that makes sense. And that -- the specifics of that will become apparent as we move through the fall season. And again, he'll share his thinking in September with you and the investment community. So -- but a substantial change, a substantial opportunity for more fashion in the business. Thank you.

Your question comes from the line of Paul Lejuez with Citi Research.

This is Kelly Crago on for Paul. You've talked about substantial changes coming in August on the product side at VS. It sounds like John has already made some progress. Does that include any changes on the marketing side as well? And then on -- in swim, you also mentioned that you saw some success in third-party brand in swimwear. Is there any opportunity to expand partnerships with third-party brands within the lingerie assortment?

So cutting to the chase, Kelly, will there be any changes in marketing related -- or in concert with the change in the merchandise assortment? And the very simple answer to that question is yes. And are we going to get specific about that right now? No. Do we have it all figured out at this very moment? No. Is it being worked on? Yes, very actively by the right folks, and there will be change coming. So that's -- we're encouraged by that and excited about that. And so there's real opportunity, not only in changing the merchandise assortments themselves, but how we communicate those changes and the nature of those items to our consumer. So we're enthused about that, and there is active work happening in that space. With respect to the potential for additional or different third-party brands in the swim business, absolutely. We've been pleased, as I mentioned in prior commentary, been pleased with the overall result. But we'll continue to look at our offering in swim, including the offerings from various third-party brands. And I'm confident that there'll be a change there, and that's not a negative comment about who we're doing with -- business with today. We've been, again, pleased on an overall basis. But again, like with anything, you want to continue to evolve it, advance it, change it and I'm sure it'll be an ongoing change in the lineup, if you will, of third-party brands. With respect to third-party lingerie, also, we've done some tests. We believe there's some potential there in our business through collaborations of various types and we're actively working in that space as well. With respect to third-party lingerie, active work happening there as well. Thank you.

Your question comes from the line of Kate Fitzsimons with RBC Capital Markets.

I guess my question is on BBW. What are some trends in the business that is getting the team excited that they can maintain the momentum for the remainder of 2019? And saw that the inventory investment is coming for the back half, just what's the view on balancing the top and bottom line as you guys start introducing more units into the system?

What's got the Bath & Body Works team most excited is that they -- probably 3 or 4 things. One, they've got strong growth at healthy margins in all of their major books of business. So that's really good. The metaphor of firing on all cylinders, they are in terms of the home fragrance business, the hand soap business and the body care business. So that's got them excited. What leads to that is the regular introduction of newness and fashion in those categories. If we take some examples, recent examples, the launch of gingham in their body care business and fragrance categories has -- had a very strong positive consumer response. It's sophisticated, it's elevated and their customer and new customers both have responded very well to it. So what's got them excited is -- and they don't -- they're not -- they don't bat 1,000%. They don't get it right every time, but their major books of business are performing well. And where they've introduced compelling new fashion and newness in their key items, key categories, they've gotten a strong consumer response, so that's got them excited. And they leveraged a very fast supply chain to manage the risk of that. They do a good job of it. With respect to inventory, and we commented about inventories, some inventory investment at Bath & Body Works. Obviously, the top line trend in the business is very good. But we missed some business in 2018 because we got very lean on inventory. And so the last thing you want to do is literally not be able to fulfill your sales potential because you got too lean. So learning from that and doing it in a balanced way, we're making a little bit more investment ahead of key holiday periods to ensure that we've got the appropriate in-stock positions to maximize the business. So that's what's going on. That team has managed inventory in an extraordinary way over the last 10 years, improving turn to beyond 4x a year and driving strong sales and margin result, consumer experience as part of that. And so our confidence level in that team working with our vendor partners to manage the supply chain, inventory flow, all of that, is very, very high based on a lot of strong results over the years. So not concerned about it. Thank you.

Thanks. And thanks, everyone, for joining us this morning. I hope everybody has a happy Memorial Day weekend. Bye.

This concludes today's conference call, you may now disconnect.