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Limited Brands, Inc. (LTD)

October 17, 2012 8:30 am ET

Executives

Amie Preston

Leslie H. Wexner - Founder, Executive Chairman, Chief Executive Officer, Chairman of Executive Committee and Group President of Lingerie

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

Martin Waters - Executive Vice President of International

Analysts

Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

Oliver Chen - Citigroup Inc, Research Division

John D. Morris - BMO Capital Markets U.S.

Barbara Wyckoff - Credit Agricole Securities (USA) Inc., Research Division

Janet Kloppenburg

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Omar Saad - ISI Group Inc., Research Division

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Marni Shapiro - The Retail Tracker

Jennifer Black

Erika K. Maschmeyer - Robert W. Baird & Co. Incorporated, Research Division

Laura A. Champine - Canaccord Genuity, Research Division

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Amie Preston

Good morning, everyone, and welcome to our annual investor update meeting for Limited Brands. We're glad that you can all make it. Also, I want to welcome everyone that's listening in on the webcast. I'm Amie Preston. Just need to cover a few formalities and then we'll get started.

As everybody knows, the dreaded Safe Harbor statement so any forward-looking statements we make today are covered by the Safe Harbor statement and our SEC filings. Please remember to silence your cellphones. We've got a great day planned for you today. We're very excited. We're glad you can all make it. And now, it is my pleasure to introduce our CEO and Chairman, Les Wexner.

Leslie H. Wexner

Good morning. Every time I'm introduced by Amie there's terror in her eyes. She's afraid what I might say or do. Relax. I'm only kidding.

Well, welcome, everybody. And I think there's a number of people that are with us by webcast and a number of the leaders of our business aren't here today. They're doing what they're supposed to be doing, either in stores or at home, somewhere in Asia, doing the work of the work to get us ready for the holiday business. I was -- just lead off with kind of a mood setter. We talk a lot of in the business about the mood elevator and just a quick idea is we all wake up some mornings and you don't want to get out of bed, you didn't even have breakfast and you're positive you've already had your burnt toast. It's other days you could take on the world, you just can't wait to go at it and that's a pretty normal human state to be at different places on different days. And if I could coach you as a group or as individuals, it's a good thing to know. I try to ask myself this before I shave or certainly when I'm driving to the office, where am I on the mood elevator? Because if I'm at the bottom, pessimistic, angry, whatever, bitched out, it's not a great day to make decisions or have meetings. Because -- yes, we can all identify with that. And there's other days where I'm so enthusiastic, so optimistic, just feel appreciative and grateful for everything around me. I'm looking at trees and birds and people and kind of big stupid grin and that's the highest place on the mood elevator.

So just a good thing to know. So I would hope today that you're in a really good place on the mood elevator. I am. Right at the top and I think for a lot of reasons that you will hear today. And what got me ascending to an even higher level was last night coming into town. I stopped by and saw our new store in 34th Street which had a quiet opening, and the week before, I was in London. I went there 3 months before that store opened, deliberately I didn't go to the opening because I had real work to do. And so I was riding pretty high after seeing the Bond Street store and optimistic about what I would see at 34th Street. And to kind of set a challenge for you after you see the Bond Street store and certainly, all of you had the opportunity today, hopefully after this meeting to wander down, I think those 2 stores are simply the 2 best stores in the world. Not our 2 best, the 2 best specialty stores, maybe retail experiences in the world. That's a tall statement, but I'm that optimistic. It's really good and I think it reflects an understanding and a thinking about the enterprise, the business that we're in, retail, it's optimistic in terms of it having been insightful and forward looking. I think it'll be much discussed, and very seldom am I that enthusiastic about our own work. I tend to be critical because I know we can do better and I know we can do better than these 2 examples of stores. It's going to be hard. So I'm in a really good place.

Today, to set the agenda for the program, let's start with Stuart Burgdoerfer. Most of you know Stuart, CFO, and then follow with Martin Waters, the President of International. And then I think we can take a break, if time allows, and then I'll wrap up with some remarks and we'll have a lot of time for questions. So I would hope it's a very good day.

Martin has made great progress in our International business and great progress in understanding our business so that, that firewall that we talk about that separates our North American business from the rest of the world is successful and doesn't detract and draw down energy and time from the North American business and the core of our enterprise.

And Stuart has done a wonderful job in the enterprise and I think most of you have worked with him. You meet him in private meetings. But I've really come to appreciate the breadth and depth of understanding that he has of the business and his partnership with the operators of the business are really penetrating insights, good guardian financially, but more importantly can link the financial piece of the business, which is important, to the operations and the understandings.

And so Stuart has come a long way and I'm very proud of him and very proud to introduce him this morning. Stuart, come on up.

Stuart B. Burgdoerfer

Good morning. I'd also want to add my appreciation for you being here and welcome for those here in person and those participating on the web. Les, thanks for those kind words, very much appreciated.

So I'll get into the numbers and the slides pretty quickly, but I'd do it in the same spirit that Les shared in terms of kind of what's on my mind and what am I feeling. I'm feeling 2 things. I'm proud of what our business has accomplished over the last 3 or 4 years and you've seen the results, many of you own our stock and follow our company closely and we are proud as a management of what has been accomplished.

But more importantly, frankly, I'm even -- my state of mind is even stronger in terms of how significant I think our opportunities are for future growth. So we are proud of what we have accomplished. But again, the strength of you about our opportunities for growth, which we'll talk about today, that feeling is even stronger. So very optimistic about the near-term and the longer term for Limited Brands.

So let's get into some materials and meet some numbers. As we started and ended the presentation last year, and as I'll start and end this presentation, this is a meeting largely for our shareholders. Other partners are here today, bankers and insurance companies and rating agencies and so on, but we're really focused today on a review of our business including how we're performing for our shareholders. What's in front of you is information about shareholder returns over a 10-year period and you can see there's a list of very good companies there and they're broken down into quartiles and the good news is on a 10-year basis, we're in the top quartile and you can also see at the bottom of the page reference points for the S&P 500 index and the S&P retail index and our results substantially above those levels of performance.

The next few of this is the same information on a 5-year basis and you can see that we're moving up the list, which is a good thing obviously. That would be our goal is to maximize the long-term shareholder return for our owners and then on a 3-year view, even higher on the list.

So we're not confused at all about what the ultimate financial scorecard is for our business -- for any business, public or private, and that is producing return for shareholders. Again, the scorecard from a financial standpoint and our results have been very good.

If you're wondering why the 1-year column isn't there, I looked at -- reminded myself of what that is this morning. I think with dividend return, our 1-year return is about 40%. So not too shabby, they're 40% over the last 12 months.

So we are very focused on it, measuring ourselves against good companies. I'll talk later and you've heard us talk about 3 International specialty retailers. Uniqlo, Fast Retailing, the Japanese company H&M and Inditex. And we look to them mostly in terms of learning and setting new goals for ourselves from an operating income rate standpoint and a growth potential standpoint, but those companies are on this list and we're doing pretty well versus those companies as well in terms of our shareholder return.

So good returns for our shareholders and again, we'll talk about how we're going to continue to produce those returns through the day today.

What's driven that? You're familiar with our earnings per share growth. The 288 is at the high end of the most recent external guidance that we gave in August, but we have grown the earnings of the business pretty substantially since 2008.

And as you're familiar, those that know our business but maybe for those that are newer to the story, we are very committed to returning excess cash to our shareholders. And we do that primarily through 3 basic vehicles: Our regular dividend; share repurchases; and special dividends.

Our regular dividend over the last 3 years, we moved from $0.60 to $0.80 to $1. On a special dividend basis, we've paid out $8, $8 of special dividends over the last roughly 2.5 years and we've been an active repurchaser of our shares. And as you can see on the slide over this period of time, we've bought that shares in aggregate at $25, which certainly looks pretty good in relation to the current value of the business.

Very committed to returning excess cash to shareholders. $13 billion is about equal, I'm approximating, about equal to the current value of the company.

So we have returned $13 billion, which is about equal to today's value of the company, a pretty extraordinary statistic.

And 3 years ago, in this meeting, October of 2009, the management of the company announced its intent, its goal, its commitment to achieving a 15% operating income rate as a percent of sales. Many of you -- how many people, show of hands were here in that meeting, October 2009? Fair number of people in attendance that day. Maybe some people were skeptical about whether we'd accomplish that or not. We certainly saw that as a very challenging goal for us at the time. Our operating income rate was 7.9%. But we worked work very hard and recapped how we have made the progress that we have and we have surpassed the 15% level of operating income rate, and I'll talk later again about the potential for us to be in the high teens and bumping up against 20% operating income as a percent of sales as we move forward.

But we said we were going to do something. There was some debate as I've mentioned before about whether we should provide a timeframe or not. We were so committed to getting to this level that we went public and we said we were going to do this by 2012 and we were nearly a year early in achieving that result.

How did we get that done? 3 things on the chart. At the end of the day, they may be the most important 3 things in terms of a review of our performance over the last 3 or 4 years.

As you know, it starts with great brands and great categories. Brands and categories with emotional content. Victoria's Secret and Bath & Body Works are the clear, clear category leaders, the category defining brands, very important to understand, and we're in great categories. We're not in a very crowded apparel, a set of categories and that wasn't an accident. The business took steps over about a little more than a 10-year period to get out of the general apparel business and to really focus its time, its energy, its resources, its capital on these 2 category-leading brands. And in terms of assessing the company, its performance and its potential, there's a reason why it's #1 on this list and in many respects, it's the most important thing.

The second area of this chart in the middle of the page is, describes what we as a management have been most focused on and what we will continue to be focused on. And it's a list that may appear boring or not particularly insightful, it's simple in its nature. But it's really important that we continue to execute these things very well, a focus on customers and doing things really from a customer point of view, a focus on core merchandise categories, bras and panties and shower gels and anti-bac soap and home fragrance. Our focus on inventory management. Our focus on speed and chase, we'll talk more about that. And then the focus on getting even better in-store selling and operations.

And then lastly, a very hard thing for you to judge from the outside in. But I joined the company in 1998, I can tell you and I've been in some other organizations over about 25 years of my own work and the experience, the alignment and the focus of this management team is as important as anything again that you could assess about our company. Because when everybody's pulling in the same direction, it's so powerful in terms of how well a business can execute its plan and the good news is we've got a pretty experienced team, we're focused and we're aligned and it's very powerful in a business like ours.

Inventory. I've said many times, I'll continue to say it, because it remains my focus if inventory gets out of control I would expect to lose my job, it's a very clarifying statement.

When I wake up in the morning, Les, I remind myself of that and it gets me focused for the day. This is a chart of retail sales over time, that's the blue line, the higher line and then inventory growth over that same period of time. And you can see over this period that inventory has pretty consistently grown slower than sales. And in fact, over the whole period of time in aggregate, there's been about a 800 basis point spread, sales growing about 800 basis points faster than inventory.

One little blip there as we were rolling out systems for Victoria's Secret in the Spring of 2009, but again our focus is on growing inventory slower than sales.

And that's not about the CFO trying to wring out the last dollar of working capital. It has nothing to do with that, it's a nice side benefit. It's about having fresh, compelling assortments for her when she goes into our store or she's online. If we're turning our goods faster, the likelihood that those goods that she's seeing and experiencing in the store are the right goods, and we'll talk more about it.

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