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Limited Brands (LTD)

Q1 2011 Earnings Call

May 19, 2011 9:00 am ET


Stuart Burgdoerfer - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

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

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

Martyn Redgrave - Chief Administrative Officer and Executive Vice President

Amie Preston - Vice President Investor Relations


Stacy Pak - Barclays Capital

Dana Telsey - Telsey Advisory Group

Jeff Black - Citigroup Inc

Michelle Tan - Goldman Sachs Group Inc.

Paul Lejuez - Nomura Securities Co. Ltd.

Brian Tunick - JP Morgan Chase & Co

John Morris - BMO Capital Markets U.S.

Howard Tubin - RBC Capital Markets, LLC

Jennifer Davis - Lazard Capital Markets LLC

Marni Shapiro - The Retail Tracker

Roxanne Meyer - UBS Investment Bank

Jennifer Black - Jennifer Black & Associates

Neely Tamminga - Piper Jaffray Companies

Kimberly Greenberger - Morgan Stanley

Laura Champine - Cowen and Company, LLC

Lorraine Hutchinson - BofA Merrill Lynch

Janet Kloppenburg - JJK Research



Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Limited Brands First Quarter Earnings Conference Call. [Operator Instructions] Thank you. Ms. Amie Preston, Chief Investor Relations Officer, you may begin your conference.

Amie Preston

Thanks, Michelle. Good morning, everyone, and welcome to Limited Brands First Quarter Earnings Conference Call for the period ending Saturday, April 30, 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 first quarter earnings release and related financial information, including any non-GAAP or adjusted financial reconciliation tables, are 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 of Victoria's Secret; Diane Neal, CEO of Bath & Body Works; and Martyn Redgrave, EVP and Chief Administrative Officer, are all joining us today. After our prepared comments, we will be available to take your questions for as long as time permits. [Operator Instructions] Thanks, and now I'll turn the call over to Stuart.

Stuart Burgdoerfer

Thanks, Amie, and good morning, everyone. We're pleased with our record first quarter performance. Our adjusted earnings per share increased 60% to $0.40 per share versus $0.25 last year. Our reported result was $0.50 per share versus $0.34 last year. Both this and last year's reported results include significant items as detailed in our press release. This year's reported first quarter results include the following:

A pretax gain from the sale of Express shares of $86.4 million or $0.17 per share.

A pretax non-cash expense of $50 million or $0.10 per share related to the multiyear funding of our charitable foundation. We plan to fund this commitment by contributing about 1/3 of our remaining investment in Express shares, which allows us to meet our commitment in a tax efficient manner. After this contribution, we will continue to own approximately 5 million shares of Express stock.

Also excluded is an income tax benefit of $11 million or $0.03 per share related to the favorable resolution of certain income tax matters.

The 2010 reported result includes a pretax gain of $48.7 million or $0.09 per share related to a cash distribution from Express. All results discussed on this call exclude these significant items in both years.

Our first quarter earnings per share of $0.40 per share significantly exceeded our "beginning of the quarter" expectations of between $0.26 and $0.31 per share. This upside was driven by the 15% comp increase versus our initial forecast of about 2% to 4%.

To take you through the first quarter results as detailed on Page 4 of the presentation. Net sales were $2.217 billion versus $1.932 billion last year and comps increased 15%. The gross margin rate increased 200 basis points to 38%, primarily driven by leverage on buying and occupancy expense. The merchandise margin rate increased slightly, despite a negative impact of about 80 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. 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 second quarter.

SG&A dollars increased by $65.6 million or 13% and the SG&A rate improved by 40 basis points. Total expenses, including buying and occupancy, increased by 10%. 3/4 of our SG&A expense growth relates to investments that we made in store selling and marketing to support and drive sales growth.

Stores selling costs increased by 12% and leveraged as a percent of sales. Marketing costs increased by about 20% and deleveraged slightly as we invested in the quarter in initiatives to drive sales, including media and in-store visual merchandising and marketing. The remaining increase in SG&A relates to growth in our home office expense across various categories, including investments related to our international business, merit increases and incentive compensation.

Turning to operating income on Page 5. Total operating income increased by $81.8 million or 44% and 250 basis points as a percent of sales to $266.8 million or 12% of sales. By segment, the Victoria's Secret segment increased by $72.4 million or 340 basis points as a percent of sales to $239.7 million or 16.6% of sales. Bath & Body Works increased by $16.5 million or 250 basis points as a percent of sales to $54.2 million or 11.3% of sales. And the other segment operating loss increased by $7 million to $21.7 million driven primarily by an increase in certain -- $27.1 million driven primarily by an increase in certain legal reserves. Total non-operating expenses increased by $7.8 million as the loss of income from Express and Limited Stores was partially offset by a decline in interest expense.

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