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Limited Brands (LTD)

Q4 2010 Earnings Call

February 24, 2011 9:00 am ET


Diane Neal - Executive Vice President, Chief Executive Officer of Bath & Body Works and President of Bath & Body Works

Stuart Burgdoerfer - Chief Financial Officer and Executive Vice President

Martyn Redgrave - Chief Administrative Officer and Executive Vice President

Amie Preston - Vice President Investor Relations

Sharen Turney - Executive Vice President, Chief Executive Officer of Victoria's Secret Megabrand & Intimate Apparel and President of Victoria's Secret Megabrand & Intimate Apparel


Stacy Pak - Prudential

Thomas Filandro - Susquehanna Financial Group, LLLP

Michelle Tan - Goldman Sachs Group Inc.

Paul Lejuez - Credit Suisse

John Morris - BMO Capital Markets U.S.

Jeff Black - Lehman Brothers

Emily Shanks - Lehman Brothers

Todd Slater - Lazard Capital Markets LLC

Kimberly Greenberger - Morgan Stanley

Neely Tamminga - Piper Jaffray Companies

Janet Kloppenburg - JJK Research

Lorraine Hutchinson - BofA Merrill Lynch



Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Limited Brands Fourth Quarter Year-End 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Amie Preston. Ms. Preston, you may begin.

Amie Preston

Thanks, Tiffany, and good morning, everyone, and welcome to Limited Brands’ Fourth Quarter Earnings Conference Call for the period ending Saturday, January 29, 2011.

As a matter of formality, I need to remind you that any forward-looking statements we may make today are subject to our Safe Harbor statement found in our SEC filings. Our fourth quarter earnings release is available on our website, Also available on our website is an investor presentation, which we will be referring to during this call. This call is being taped and can be replayed by dialing 1-866-NEWS-LTD. You can also listen to an audio replay from our website.

Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO, Victoria's Secret; Diane Neal, CEO, Bath & Body Works; and Martyn Redgrave, EVP and CAO are all joining us today. After our prepared comments, we'll be available to take your questions for as long as time permits. So that we can speak to as many callers as possible, please limit yourself to one question. Thanks, and now I'll turn the call over to Stuart.

Stuart Burgdoerfer

Thanks, Amie, and good morning, everyone. We're very pleased with our fourth quarter performance. Our adjusted earnings per share increased 25% to $1.26 per share versus $1.01 per share last year. Our reported 2010 result was $1.36 per share versus $1.08 last year. Both this and last year's reported results include significant items as detailed in our press release. This year's reported fourth quarter results include pretax gains from the sale of Express shares and the payment of an Express dividend totaling $52 million or $0.10 per share.

2009's reported results include a tax benefit of $23 million or $0.07 per share, primarily related to the reorganization of certain foreign subsidiaries. All results discussed on this call exclude these significant items in both years. Our fourth quarter earnings per share of $1.26 significantly exceeded our beginning of the quarter expectations of $1.02 to $1.17 per share. This upside was driven by the 10% comp increase versus our initial forecast of up low-single digits.

To take you through the fourth quarter results as detailed on Page 1 of the presentation, net sales were $3.456 billion versus $3.063 billion last year, and comps increased 10%. The gross margin rate increased 100 basis points to 41.8%, primarily driven by leverage on buying and occupancy expense. The merchandise margin rate increased slightly despite a negative impact of about 60 basis points related to the increase in Mast sales to Express and Limited Stores, which are recognized at 100% this year versus 75% last year.

The change in revenue recognition is a result of the change in accounting for our Express investment to the cost method versus the equity method last year and the sale of our remaining investment in Limited Stores. This accounting change, which occurred in the third quarter of 2010 will continue to have a negative impact on our consolidated merchandise margin rate in the first two quarters of 2011.

SG&A dollars increased by $67.8 million or 10%, and the SG&A rate improved by 50 basis points. The major drivers of expense growth are as follows: over half the dollar increase in SG&A was driven by increased store selling costs, including costs related to new stores in Canada; total selling cost leverage as a percent of sales; about 25% of the increase was related to certain unusual expenses in the quarter, including a significant increase in stock compensation expense due to a lower forfeiture rate as a result of lower associate turnover; and separately, the write-offs of an intangible trade name asset. And most of the remainder of the increase was driven by an increase in marketing costs, which held flat as a percent of sales.

Turning to operating income on Page 2. Total operating income increased $128 million or 22% and 150 basis points as a percent of sales to $713.5 million or 20.6% of sales. By segment, the Victoria's Secret segment increased by $83.8 million or 230 basis points as a percent of sales to $394.8 million or 19.6% of sales. Bath & Body Works increased by $35.4 million or 130 basis points as a percent of sales to $330 million or 30.5% of sales. And the other segment operating loss declined by $8.7 million to $11.3 million. Total non-operating expenses were roughly flat at $47.5 million, as the loss of income from Express and Limited Stores was offset by a decline in interest expense.

Turning to our full year results on Page 3. Excluding the significant items described in our press release, earnings per share increased 67% to $2.06 versus $1.23 last year. Our operating income and earnings per share results were records for the company. Net sales increased 11% to $9.613 billion versus $8.632 billion last year, and comps increased 9%. The gross margin rate increased 270 basis points to 37.8%. About 2/3 of the gross margin rate increase was driven by an increase in the merchandise margin rate, and the remainder was driven by buying and occupancy expense leverage. SG&A dollars increased by $176.9 million or 8%, and the SG&A rate improved by 70 basis points.

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