Q4 2019 Earnings Call

February 27, 2020

[music].

Operator: Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the L Brands Q4 2019 Earnings Conference Call. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I will now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer of L Brands. You may begin.

Good morning, My name is Amy and I'll be your conference operator today at this time I would like welcome everyone B L brands fourth quarter. Once you 19th earnings Conference call. Please be advised that today's conference is being recorded.

Because presentation, there will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone if you require any further systems. Please press Star show I would now turn the call overcoming any Preston Chief Investor Relations Officer, Albert you may begin.

Thanks, Amy Good morning, everyone and welcome to L brands fourth quarter earnings conference call for the period, ending Saturday February 1st 2020.

Amie Preston: Thanks, Amy. Good morning, everyone. Welcome to L Brands Q4 Earnings Conference Call for the period ending Saturday, 1 February 2020. 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 and in our press releases. Our Q4 earnings release, additional commentary, and earnings presentation are available on our website, lb.com. All of the results discussed in today's call are adjusted results and exclude the significant items described in our press release. Stuart Burgdoerfer, EVP and CFO, and I will handle the call today. Thanks. Now I'll turn the call over to Stuart.

As a matter of formality I need to remind you that any forward looking statements. We may make today are subject current safe Harbor statement statements found in our FTC filings and in <unk>.

Our first fourth quarter earnings release additional commentary and earnings presentation are available on our website <unk> dot com.

The results discussed in today's call or a job to results and exclude the significant items described in our press release.

Stuart Burgdoerfer, EVP, and CFO and I wont handled the talk to that.

Okay. So now I'll turn the call distort.

Stuart Burgdoerfer: Thanks, Amy, good morning, everyone. I'd like to take a few minutes before we open up the call for your questions to highlight some key points related to the transformative transaction with Sycamore Partners that we announced last week. As you know, last Thursday, we announced the sale of 55% of the Victoria's Secret Lingerie, Victoria's Secret Beauty, and PINK global businesses, collectively Victoria's Secret, to Sycamore Partners for proceeds of approximately $525 million. The transaction is the result of a comprehensive review of a broad range of options undertaken by the board, with input from outside financial advisors, designed to best position our brands for long-term success and to drive shareholder value. We believe this transaction will highlight the value and performance of the standalone Bath & Body Works business, enhance management focus, and reduce structural complexity.

Thanks, Amy and good morning, everyone.

I'd like to take a few minutes before we open up the call for your questions to highlight some key points related to the transformative transaction with Sycamore partners that we announced last week.

As you know last Thursday, we announced the sale of 55% of the Victoria's secret Lingerie Victoria's secret beauty.

<unk> global businesses collectively Victoria's secret to Sycamore partners for proceeds of approximately $525 million.

The transaction is the result of a comprehensive review a broad range of options undertaken by the board with input from outside financial advisors designed to best position. Our brands are long term success and to drive shareholder value.

We believe this transaction will highlight the value and performance of the Standalone Bath and body works business enhanced management focus.

Reduce structural complexity.

Additionally, we believe that a private entity structure.

Stuart Burgdoerfer: Additionally, we believe that a private entity structure creates the best environment for a Victoria's Secret turnaround. While we recognize that Victoria's Secret's performance has deteriorated meaningfully over the last several years, the brand leads the lingerie category in North America and has high levels of global awareness. We believe that Sycamore, which has substantial experience in the retail industry, will bring a fresh perspective and greater focus to the business. We are pleased that by retaining a significant ownership stake, our shareholders will have the ability to meaningfully participate in the upside potential of this iconic brand. Andrew Meslow, former Chief Operating Officer of Bath & Body Works, has been promoted to Chief Executive Officer. He has been with the business for 15 years and has an exceptional understanding of the business and its customers.

Creates the best environment for Victoria's secret turnaround.

Well, we recognize that Victoria secrets performance has deteriorated meaningfully over the last several years.

Ran leads the laundry category in North America, and has high levels of global awareness.

We believe that Sycamore, which has substantial experience in the retail industry will bring a fresh perspective, and greater focus to the business.

We are pleased that by retaining a significant ownership stake our shareholders will have the ability to meaningfully participate in the upside potential of this iconic brand.

Andrew Mezz <unk>, former Chief operating officer, a Bath and body works has been promoted to Chief Executive Officer.

He's been with the business for 15 years and has an exceptional understanding of that business and its customers.

Stuart Burgdoerfer: Nick Coe, previously Chief Executive Officer of Bath & Body Works, has been named Vice Chairman of Bath & Body Works Brand Strategy and New Ventures. In his new role, he will focus more intently on the strategic position of the business, the evolution of the brand, product development, and new ventures and acquisitions. We are confident that this succession plan, which leverages the unique partnership established by Nick and Andrew to advance the long-term strategic direction of the brand, is the best arrangement for the business. Upon the close of the transaction, which is expected to occur in Q2, Les Wexner will step down as CEO and Chairman of L Brands to become Chairman Emeritus, remaining as a member of the board. We intend to use the proceeds from the sale, as well as approximately $500 million in excess balance sheet cash, to reduce debt.

Nicole.

Previously Chief Executive Officer, a Bath and body works has been named Vice Chairman, a Bath and body works brand strategy and new ventures.

In his new role you will focus more intently on the strategic position of the business. The evolution of the brand product development and new ventures in acquisitions.

We are confident that this succession plan, which leverages the unique partnership established by Nikin, Andrew to advance the long term strategic direction of the brand is the best arrangement for the business.

Upon the close of the transaction, which is expected to occur in the second quarter last wexner will step down as CEO and chairman of L brands.

To become chairman Emeritus remaining as a member of the board.

We intend to use the proceeds from the sale as well as approximately 500 million an excess balance sheet cash to reduce debt.

Stuart Burgdoerfer: There are also about $2.5 billion in balance sheet lease liabilities related to Victoria's Secret. After accounting for the expected debt and lease liability declines on an adjusted debt-to-EBITDAR basis, we expect that our overall leverage ratio will be close to its current level. We know that you have many questions about what the new standalone Bath & Body Works business will look like from a financial perspective. In the investor presentation, which we made available with the transaction announcement, we have allocated our international business and masked functions to Victoria's Secret and Bath & Body Works for the past five years.

There are also about two and a half there are also about 2.5 billion and balance sheet lease liabilities related to Victoria's secret.

After accounting for the expected debt and lease liability declines on an adjusted debt to EBITDAR basis.

We expect at our overall leverage ratio.

I'll be close to its current level.

We know that you have many questions about what the new Standalone Bath and body works business will look like from a financial perspective.

In the Investor presentation, which we made available with the transaction announcement, we've allocated our international business and master functions to Victoria's secret and Bath and body works for the past five years.

Stuart Burgdoerfer: Over the next several months, we will be reviewing the functional and corporate support required for the standalone Bath & Body Works business with a view up to simplifying our existing structure and recognizing that we will still be supporting the Victoria's Secret business through transition services agreements with various terms, which will minimize near-term dyssynergies. The management team, in conjunction with our board, will also be evaluating the capital structure and cash priorities for the standalone Bath & Body Works business. It is our intent, when we have greater clarity on the above, to conduct meetings with analysts and investors and provide the financial characteristics and growth plans for the standalone Bath & Body Works business. Thanks, over to you, Amy.

Over the next several months, we will be reviewing the functional and corporate support required for the Standalone Bath and body works business.

With a view of two simplifying our existing structure and recognizing that we will still be supporting the Victoria's secret business their transition services agreements with various terms, which will minimize near term dis synergies.

The management team in conjunction with our board will also be evaluating the capital structure in cash priorities for the Standalone Bath and body works business.

It is our intent when we have greater greater clarity on the above to conduct meetings with analysts and investors and provides the financial characteristics and growth plans for the Standalone Bath and body works business facts and over to you and me.

Amie Preston: Thanks, Stuart. That concludes our prepared comments. At this time, we'd be happy to take any questions you might have. In the interest of time and consideration to others, please limit yourself to one question. Now I'll turn it back over to Amy.

Thanks word that concludes our prepared.

At this time, we'd be happy to take any questions you might have in the interest of timing consideration to other please limit yourself to one question and now I'll turn it back over to Amy.

At this time is will be conducted question and answer session in order to ask your question. Please press Star then one number one on your telephone keypad. Your first question comes from the line of Omar Saad with Evercore ISI almost your line is open.

Operator: At this time, we will be conducting our question-and-answer session. In order to ask a question, please press star, then 1 on your telephone keypad. Your first question comes from the line of Omar Saad with Evercore ISI. Omar, your line is open. Omar, if you're on mute, please unmute.

[noise] Jeremy seasoning.

Omar Saad: Hey, sorry about that. Thanks for taking my question. I was wondering if Stuart, if you could talk a little bit more about the rationale behind the Victoria's Secret spinoff. Was there a lot of interest in the brand? You know, it's, it's such an iconic asset, and it's just, you know, been such a big part of the L Brands. You know, and any thoughts, maybe a little bit more detail or any further thoughts on, you know, how the structure of that brand could evolve in a private environment that obviously the public shareholders, you know, could still benefit from? Are there certain specific things you guys see in that business that will help it operate better in a more of a private environment? Thanks.

Hey, sorry about that thanks for taking my question I was wondering if Stuart if you could talk a little bit more bought the rationale.

Hi, the Victoria's secret spin off was there a lot of.

Interest in the brand.

It's it's such an iconic asset and it's just been such a big part or the I'll be franchise, you know and any thoughts maybe a little bit more detail or any further thoughts on you know how the structure of that brand could evolve in a private environment, but obviously the public shareholders.

Still benefit from are there certain specific things you guys see in that business that will help to operate better in a more of a private environment. Thanks.

Stuart Burgdoerfer: Yeah. Thanks for the question, Omar. There was a significant interest in the brand for the reasons I think that you, Omar, and you know, the capital markets and people generally understand. With that said, as you know, the results of the brand, including the financial results, have been challenged, and that pattern continued in 2019 and is projected to continue, you know, certainly for a portion of 2020. While an iconic brand with leading positions in key markets, financially, as you know, has been reported financially, the business has gone through a very challenging period financially, and again, that continued and accelerated in some regards in the Q4.

Yep. Thanks for the question OMART. So there there was a significant interest in the brand odd for the reasons I think that you own and [noise].

And you know the capital markets and people generally understand a with that said as you know the results of the brand.

Including the financial results have been challenged in that pattern continued in two.

2019, and is projected to continue you know certainly for a portion of of 2020 and so while a an iconic brand with leading positions in key markets. A financially as you know as has been you know reported financially the business has gone through.

Very challenging period.

Financially and again that that continued.

And and accelerated in some regards in the in the fourth quarter and so are you know a management with advice from financial and legal advisers and heavy input from the board as appropriate a very substantial.

Stuart Burgdoerfer: You know, management, with advice from financial and legal advisors and heavy input from the board as appropriate, a very substantial process was undertaken. From that, got to the conclusions of a sale of a majority interest and, you know, certainly had interest from a number of parties, but through a process that you would understand, you know, would occur, got to the deal that we've disclosed with Sycamore. With respect to the potential of the business and how we thought about it, we felt strongly about retaining a stake. As you mentioned, this is an iconic brand with very strong positions.

Process I was undertaken and from that Oh, I've got to the conclusions of a sale of the majority interest in.

And you know certainly had interest from a number of parties, but through a process that you would understand I'm you know would occur got to the deal that we've disclosed a with sycamore with respect to the the potential of the business and how we thought about it we felt strongly about.

Retaining a stake a as you mentioned this is an iconic brand a with very strong positions.

Stuart Burgdoerfer: With new leadership and new perspective, coming from Sycamore, who has a lot of experience in the, the retail sector, as you know, we believe that this business can be stabilized and turned around, and that significant value can be created, and specifically for L Brands shareholders through that 45% retained stake, that's part of the sale of the majority interest. A thorough process, thoughtful process, meaningful interest, retaining a stake to participate in upside.

And with new leadership, and new perspective are coming from Sycamore, whereas a lot of experience in the retail sector. As you know a we believe that this business can be stabilized and turned around and and that's significant value can be graded and and specifically for L brands shareholders.

Through that a 45% retained stake.

That's part of the the sale of the majority interest so.

Uh Huh [laughter] thorough process thoughtful process meaningful interest retaining a stake or to participate in upside we have a history in our own a past a with respect to other transactions that weve entered into a in the rational.

Stuart Burgdoerfer: We have a history in our own past with respect to other transactions that we've entered into in the rationalization of our portfolio, whether it was Alliance Data Systems or Express or other businesses, the sourcing business for Mast, warrants that we had on Lerner, all kinds of different ways that we retained interest in businesses sold, majority interest sold. In each of those cases, L Brands shareholders benefited from the value created, monetized through that retained interest. It's a terrific business. We will be providing significant support to the business, as mentioned through these transition service arrangements, doing so to try to minimize dissynergies that could otherwise occur if one rushed with respect to those things.

Section of our portfolio, whether it was a alliance data systems or express or other businesses. The sourcing business for mast warrants that we had on learner all kinds of different ways that we retained a interest in businesses sold majority interest sold and in each.

Each of those cases, a L brands shareholders a benefited from the value created a monetize through that retained interest. So it's a terrific business, we will be providing significant support to the business as mentioned through these a transition service arrangements doing so.

Two or try to minimize dissynergies that could otherwise occur if one I rushed with respect to those things. So we think we've got a good form of transaction.

Stuart Burgdoerfer: We think we've got a good form of transaction. We're energized about the future. We have some experience, importantly, with Sycamore, good experience with them as an organization. The combination of all those things, again, through a thorough process, overseen by the board, has got us to this outcome. Thank you, Umar.

We're energized about the future we have some experience importantly, with sycamore good experience with them as an organization and so the combination of all those things again through a thorough process overseen by the board has got us to this outcome. Thank you Omar.

Operator: Thanks. Thanks, Omar. Next question, please.

Operator: Thanks. Thanks, Omar. Next question, please. Your next question comes from the line of Oliver Chen with Cowen and Company. Oliver, your line is open.

Thanks.

Thanks Omar next question please.

Operator: Your next question comes from the line of Oliver Chen with Cowen and Company. Oliver, your line is open.

Your next question comes from the line of Oliver Chen with Cowen and company all over your line is open.

Oliver Chen: Hi, regarding a VS strategy, you previously identified bras and marketing as big priorities. Has the transaction changed the mindset or timing? What are your thoughts with strategy around that as well as digital as you contemplate the priorities?

Hi regarding vs strategy you you previously identified broadband marketing it as big priorities as the transaction change the mindset or timing and what are your thoughts with that strategy around that as as well as digital as you contemplate the the priorities.

Thanks Oliver.

Stuart Burgdoerfer: Thanks, Oliver. You know, in many respects, many of the elements of the strategies that we've talked about and the opportunities that we've talked about, I would expect, Oliver, will continue. Things as fundamental as the opportunities around marketing or the growth in, in the core category of bras for Victoria's Secret Lingerie, or for that matter, PINK, those strategies will continue. I think, you know, in some respects, we might see differences in execution, if you will, in terms of how those opportunities are pursued. As indicated, the, the transaction was signed, the definitive agreements, I should say, were signed a week ago at 3:15 AM, and I happen to know that.

In many respects.

Many of the elements of the strategies that Weve talked about in the opportunities that we've talked about I would expect Oliver will continue and things as fundamental as a the opportunities around marketing or the growth than in the core category abroad for Victoria's secret lingerie or for that matter bank a those strategies.

We'll continue I think a you know in some respects or we might see differences in execution. If you will in terms of how those opportunities our pursuit.

But as indicated the the transaction was signed a definitive agreements I should say were signed a week ago at 315 in the morning, and I happened to know that and the you know the time between signing and closing will be you know roundly three months a subject to regulatory approval.

Stuart Burgdoerfer: And the, you know, the time between signing and closing will be, you know, roundly 3 months, subject to regulatory approvals and other work. So in terms of specifically what will change, obviously, you know, the transaction needs to close, and the current leadership of the business will engage appropriately, and some of that's already begun with Sycamore, as to a relaying of where the business is and what its best opportunities are. And from that, as we move through, as the business, I should say, moves through 2020, a re-articulation of the strategy and changes that may come from new perspective will become apparent and evolve as the business moves through the next 12 to 18 months. That would be my, our expectation. Thanks.

As in other work.

And so in terms of specifically what will change obviously, you know the transaction needs to close.

And the current leadership of the business will engage appropriately and some of that's already begun with Sycamore.

As to to a relying of where the business isn't what its best opportunities are and from that as we move through as the business I should say moves through 2020, a re articulation of the strategy and changes that that may come from new perspective, a will become apparent.

And animate evolve as the business moves through the next 12 to 18 months that would be my my expectation our expectation.

Yes.

Thanks, Oliver next question.

Operator: Thanks, Oliver. Next question.

Operator: Your next question comes from the line of Susan Anderson with B. Riley FBR. Susan, your line is open.

Our next question comes from the line Susan Anderson with B. Riley FBR. Your line is open.

Hi, Good morning, Thanks for taking my question and I was curious about how you're thinking about the growth of BBW for 2020, well that kind of across all categories like even seeing or are you planning new products or categories. Maybe if you could talk a little bit about the product strategy. There as we look out this year. Thanks.

Susan Anderson: Hi, good morning. Thanks for taking my question. I was curious about how you're thinking about the growth of BBW for 2020. Will that come across all categories like we've been seeing, or are you planning new products or categories? Maybe if you could talk a little bit about the product strategy there as we look out this year. Thanks.

Well, what I would say generally Susan and this it's Alex I'll go onto explain in more deeply the those strategy from a merchandising standpoint in the three major categories of the business has been working.

Stuart Burgdoerfer: Well, what I would say generally, Susan, and this, I'll go on to explain it more deeply. The strategy from a merchandising standpoint in the three major categories of the business has been working. It's the business's view that they'll continue that strategy, and that may not sound exciting or revolutionary, but the reality is that strategy has been working well. With that said, there will be, you know, regular delivery of newness in the merchandise assortments, which has been the goal of the business over time and in most periods, delivered very effectively. From a merchandise category standpoint, no revolutionary change in 2020 because it's not needed. The business is running well.

And so it's the businesses you that they'll continue that strategy and that may not sound excited.

Revolutionary, but the reality is that strategy has been working well and with that said there will be you know regular.

Delivery of newness in the merchandise Assortments, which is has been the goal of the business overtime and and in most periods delivered very effectively.

From a merchandise category standpoint, no a revolutionary change a in 2020, because it's it's not needed the business running well and again with that said I wouldn't want you to think that the business thinks about just selling the same thing you know day after day in month after month or is a regular flow of newness and.

Stuart Burgdoerfer: Again, with that said, I wouldn't want you to think that the business thinks about just selling the same thing, you know, day after day and month after month. There is a regular flow of newness in each of the major categories, and that will continue in 2020. Thanks.

Each of the major categories and that will continue and in 2020.

Thanks.

Susan next question.

Amie Preston: Thanks, Susan. Next question.

Operator: Your next question comes from the line of Tiffany Kanaga with Deutsche Bank. Tiffany, your line is open.

Your next question comes from the line Tiffany Kanaga with Deutsche Bank Securities. Your line is open.

Tiffany Kanaga: Hi, thanks for taking our questions. I know you're not providing 2020 guidance. Perhaps you could discuss the cadence this year for the pressures against Bath & Body Works operating profit growth. At what pace do you anticipate these headwinds rolling off, and how are you thinking about the longer-term algorithm for growth?

Hi, Thanks for taking my questions I know, you're not providing 2020 guidance, but perhaps you could discuss the cadence this year for the pressures against Bath and body works operating profit growth at what pace do you anticipate these headwinds rolling off how are you thinking about the longer term algorithm for growth.

Well, there's a there's a lot in that question, but you know the business has the potential and and and has has delivered this pretty consistently to deliver a comps in the low to mid single range a in most periods of time and to do that are managing.

Stuart Burgdoerfer: Well, there's a lot in that question, but, you know, the business has the potential and has delivered this pretty consistently to deliver comps in the low to mid-single range in most periods of time. To do that, managing margin rates and expenses with discipline and growing, you know, operating income dollars pretty effectively. You know, that's-- it's been at the 9 to 10% CAGR range, both top line and operating income over the last several years. The business has had a very strong run. We have reasons to believe that the business has a lot of future potential.

Margin rates in expenses with discipline and and growing you know operating income dollars a pretty effectively you know that's that's been at the 9% to 10% CAGR range, both topline and operating income over the last several years the businesses had a very strong Ron we have reasons.

Believes that the business has a lot of a future potential but in terms of you know financial planning. If you will that business tends to think about those things with appropriate balance because it serves the business well in terms of the management of breast and investments and so on and so forth and and.

Stuart Burgdoerfer: In terms of, you know, financial planning, if you will, the business tends to think about those things with appropriate balance because it serves the business well in terms of the management of risks and investments, and so on and so forth. And, you know, we believe that there's, you know, comp growth in the low single range. There's ongoing growth in the direct channel that's growing at a very healthy rate. There's some growth potential in terms of, you know, number of stores, but want to manage that carefully in terms of making sure that we're managing risks related to real estate in a thoughtful way we have been. You've heard a lot about the White Barn remodels.

No. We believe that there's you know comp growth a in a low single range, there's ongoing growth in the direct channel. This growing at a very healthy rate others. Some growth potential in terms of a number of stores, but want to manage that carefully.

In terms of making sure that were they're managing risk related to real estate in a thoughtful way we have been you've heard a lot about the white barn, Remodels Oh, we have a lot of flexibility in our real estate plans and importantly, the growth of I'll get into a subject I know is out there, but just while we have the opportunity the growth.

Stuart Burgdoerfer: We have a lot of flexibility in our real estate plans, and importantly, the growth. I'll get into a subject that I know is out there a bit, just while we have the opportunity. The growth in store count in 2020 is expected to be substantially all outside of enclosed shopping malls, and we have a lot of flexibility in that plan. Sales growth related to store count, comp growth, very strong growth online are all drivers of growth, and again, managing the margin rates carefully and the expense structure carefully. Historically, that's resulted in a very strong overall financial result.

In a store count and 2020 is expected to be substantially all outside of enclosed shopping malls and we have a lot of flexibility in that plan. So sales growth related to store count comp growth very strong growth online or are all.

Drivers of growth and again, managing the margin rates carefully in the expense structure carefully and historically that's resulted in a very strong overall financial result.

Amie Preston: Tiffany, I'd just add that two of the most important investments that we're making in the Bath & Body Works business are for those White Barn store remodels, which are driving high returns and investing in additional fulfillment capability to support the growth of the direct business, which has also been growing at above a 30% rate. Those investments will continue. Some of the sourcing pressure-related investments will moderate in the back half of the year as we start to lap the tariff implementation.

Tiffany I'd just add to the most important investments that we're making the bath and body works business our airport the.

White barn store, Remodels, which are driving high returns and investing in additional fulfillment capability to support the growth up the direct business, which has also been.

Growing at about 30% right. So those investments will continue.

Oh, the sourcing pressure related investments will moderate in the back half to be or as we start to lap the terror implementation.

Thanks, Stephanie next question.

Stuart Burgdoerfer: Thanks, Tiffany.

Amie Preston: Next question.

Operator: Your next question comes from the line of Edward Yruma with KeyBanc Capital Markets. Edward, your line is open.

Your next question comes from the line its adverse remotely Keybanc capital markets I've heard your line is open.

Edward Yruma: Hey, thanks for taking the question. Just real specifically back to the BBW sourcing comment, you know, help us understand exactly what the impact will be from tariffs, I guess, in the first half. Are you seeing any other issues, I guess, with supply chain on the BBW side, maybe the constituent components? Then finally, just kind of remind us, how big of a business is the hand sanitizer business? Thanks.

Hey, Thanks for taking my question I'm, just real specifically back to that BBW sourcing comment.

You know help us understand exactly what the impact to be from tariffs I guess in the first half.

Are you seeing any other issues I guess with supply chain on the BBW side, maybe the constituent components and then finally, just a kind of remind us how big of a business is a hand sanitizer business. Thanks.

Okay, maybe we'll start with the last part of that first the hand science sanitizer businesses about 5% of the total business.

Stuart Burgdoerfer: Okay, maybe we'll start with the last part of that first. The hand sanitizer business is about 5% of the total business. It is, you know, presently growing at a very high rate for reasons we would all understand. With respect to tariff impact for BBW, thank you. Yeah, the impact in terms of year-on-year impact in 2020 will be a little more than $0.01 a share for the full year. You know, some pressure, but not extraordinary pressure. That'll moderate as we. It's a little more weighted to spring than to fall. Some pressure on tariffs. There is just generally inflation in the supply chain. Generally, there's inflation in most world economies and inflation in the supply chain.

It is you know presently growing at a very high rate for reasons, we would all understand with respect to tariff impact or Uh huh.

Thank you.

Thanks.

Yeah, the intact and.

In terms of year on year impact in 2020, it'll be a little more than a penny a share a for the full year. So you know some pressure, but but not extraordinary pressure a and that'll that'll moderate as we it's a little more weighted to this spring.

And to fall Oh, so some pressure on tariffs and and there is just generally inflation in the supply chain generally there's inflation in most world economies and and a inflation in the supply chain. The business has been able to largely offset that but there is to the extent that there's degradation in the merchandise margin rates.

Stuart Burgdoerfer: The business has been able to largely offset that, but to the extent that there's degradation in the merchandise margin rates at BBW, it's a function of the shift of business or I should say, not, it's not really shift, but the outpaced growth of Direct. Direct growing at a very fast rate and a lower merchandise margin rate for that business, even though the bottom line is similar to the store's profit rate. Some channel mix effect related to Direct, some cost pressure impact, tariffs being one driver of it.

At BBW, it's a function of the shift of business from.

Oh I should say, that's it's not really shipped but the outpaced the growth of direct so direct growing at a very fast rate and a lower merchandise margin rate for that business, even though the bottom line is similar to the stores profit rate, but some channel or mix effect related to direct.

And then some cost pressure impact tariffs being one driver of it and then a consumers are a.

Stuart Burgdoerfer: Our consumers are strongly reacting to big days where there's a little bit of headline promotion, and the dollar results are very good, but the strength of consumer reaction on some of these big days has a little bit of pressure on the rate. Three drivers of a little bit of rate pressure in that business. Overall, still very healthy dollar growth, margin dollars, and operating income dollars.

Strongly are reacting to a big days, where there's a little bit of headline promotion and the dollar results are very good but the strength of consumer reaction on some of these big days has a little bit of pressure on the rate. So three drivers of a little bit a rate pressure in that business, but overall still very.

A healthy dollar growth margin dollars in operating income dollars. Thanks. Thank you.

[Analyst] (Goldman Sachs): Thanks. Thank you.

Thanks next question please.

Amie Preston: Thanks. Next question, please.

Operator: Your next question comes from the line of Ike Boruchow with Wells Fargo. Ike, your line is open.

Our next question comes from the line of.

With Wells Fargo, Inc. Your line is open.

Hey, good morning, Steward and Amy Stuart you talked about the two would have ability to lease liabilities that are going with Victoria's secret can you talk about any remaining lease liabilities to Victoria's that that will all be lbbw balance sheet and then now that the business a is gonna be.

Ike Boruchow: Hey, good morning, Stuart and Amie. Stuart, you talked about the $2.5 billion of lease liabilities that's going with Victoria's Secret. Can you talk about any remaining lease liabilities to Victoria's Secret that will remain on the LB or BBW balance sheet? Now that the business is going to be smaller from a revenue perspective, at least, should we think about potential changes to the dividend policy in terms of how big the dividend is versus what the new BBW, LB capital structure should take in? Thanks.

All over in the revenue perspective at least should we think about potential changes to the dividend policy in terms of how big the dividend is versus what the new BBW LP capital structure should should take him.

Thanks site so.

Stuart Burgdoerfer: Thanks, Ike. BBW slash LB will have some contingent liability exposure related to Victoria's Secret store leases and some office leases. That exposure, in terms of a gross exposure, is roundly or roughly $400 million. The accounting literature requires us to book a liability that estimates the potential, you know, what I'll call net exposure related to that, and we'll go through a process to do the probabilities related to those, again, gross exposures.

BBW Slash L B will have some.

Contingent liability exposure.

Related to Victoria's secret store leases and some office leases.

Ah that exposure in terms of a gross exposure is roundly or roughly $400 million.

The accounting literature requires us to a book a liability that estimates.

The potential you know what I'll call net exposure.

Ah related to that and we'll go through a process to to do the the probabilities related to those again gross exposures. They run off overtime as a you know the leases run through their terms, but in a in a gross way related to the two and a half billion, which is the lie.

Stuart Burgdoerfer: They run off over time, as, you know, the leases run through their terms, but in a gross way, related to the $2.5 billion, which is the liability that is coming off the L Brands books, we've got a contingent exposure of about $400 million, and we'll have an accounting exercise to do or an economic exercise to do. That is, what do we think our net exposure is related to that gross liability? With respect to Ike, the dividend policy and capital structure planning for Bath & Body Works, frankly, we've just got work to do. We've just signed this deal last week. We'll be doing analysis. We'll get input from outside advisors. We'll have the appropriate conversations with the board, and when we know more, we'll tell you.

Ability that is coming off the I'll be books, we've got a contingent exposure of about 400 million and we will have an accounting exercise to do or an economic exercise to do that is what do we think our net exposure is related to that gross a liability.

With respect to like the dividend policy and capital structure planning for.

A bath and body works frankly, we've just got work to do a we've just signed this deal last week.

We'll be doing a analysis will get input from outside advisors will have the appropriate conversations with the board.

And when we know more will tell you, but but the question is the right question, we need to take a look at it we will take a look at it a in when we have something to a report we will but it it should get and it will get a fresh look including a review and approval by the ball.

Stuart Burgdoerfer: The question is the right question. We need to take a look at it. We will take a look at it, and when we have something to report, we will. It should get, and it will get a fresh look, including review and approval by the board at the appropriate time. Thank you.

At the appropriate time, thank you.

Amie Preston: Thanks, Ike. Next question, please.

Thanks I next question please.

Operator: Your next question comes from the line of Alex Walvis with Goldman Sachs. Alex, your line is open.

Your next question comes from the line as well this with Goldman Sachs. Alex Your line is open.

Good morning, and thanks for taking the question you issued guidance the fast quotes out you know inclusive of Victoria's secret and I Wonder if we could I spend a moment I'll not you know I can you talk about what's embedded in your comp expectations for the consolidated comp down low single digits, what does that imply thought.

[Analyst] (Goldman Sachs): Good morning, thanks for taking the question. You issued guidance for Q1, you know, inclusive of Victoria's Secret, and I wonder if we could spend a moment on that. You know, can you talk about what's embedded in your compact expectations for the consolidated compound, low single digits? What does that imply for BBW and VS specifically? Then also, within that guide was a comment that BBW operating income, you know, would be flat to slightly up. Can you share the building blocks behind that expectation? Thank you.

BBW N.V. I, specifically and then also within that guide was that comment that BBW operating income would be flat to slightly up.

Okay. So on a comp guidance Alex good morning, first of all with respect to the comp assumptions.

Stuart Burgdoerfer: Okay, on the comp guidance, Alex, good morning, first of all. With respect to the comp assumptions, within the total, it would be for the Bath & Body Works comp to be up mid-single digit, and for the Victoria's comp to be up, pardon me, down, pardon me. For the Victoria's Secret comp to be down between mid-single and high-single digit. With respect to Bath & Body Works' operating income assumptions, you wanna comment, Amy?

Within the total it would be for the Bath and body works a comp to be up mid single digit.

And for the Victorias a comp to be up between mid and ER pardon me down pardon me for the Victoria's secret comps to be down a between mid single and high single digits.

With respect to Bath and body is operating income assumptions you want to comment sure. Yeah. I think that's just a reflection again, if something that cost [noise] sure. We've talked about extensively here and of course, we're not.

Amie Preston: Sure. Yeah, I think that's just a reflection, again, of some of the cost pressures we've talked about extensively here. Of course, we're not planning the business to continue at this double-digit comp rate. I mean, the business is going to work very hard to chase back into what's working and maximize their opportunities from a cost or from a comp perspective. Those cost pressures on, what Stuart mentioned, was the mid-single-digit rate in a lower volume quarter, in the Q1, will put some pressure on the operating income.

Planning the business to continue at this a double digit comp rate I mean, the business going to work very hard to chase back into what's working and maximize their opportunities from a cost or from a comp perspective, but there is cost pressures on.

What Stuart mentioned was a mid single digit rate in a lot where volume quarter in the first quarter will put some pressure on the.

Operating income.

Stuart Burgdoerfer: Important to know, and you would, you would appreciate this, Alex, I mean, management will be incented, you know, and is incented, including financially, to, to beat these numbers. That's what you would expect, and in fact, that's, that's how it works, so. We'll work hard to do better than this, that's our current view.

An important to know than you would you would appreciate this Alex a management will be Incented, you know in his insensitive, including financially to to beat these numbers. That's what you would expect and in fact, that's that's a how it works. So we'll work hard to do better than this but that's our current view.

Thanks that what next question please.

Operator: Thanks, Alex. Next question, please.

Operator: Your next question comes from the line of Kimberly Greenberger with Morgan Stanley. Kimberly, your line is open.

Your next question comes from the line as Kimberly Greenberger with Morgan Stanley Kimberly's. Your line is open.

Hi, This is Alex straight non for Kimberly Greenberger. Thank you for taking my question I just wanted to touch on the international component of the by somebody works business could you give us a sense of how large it is on a sales in stores basis, and and how you might have been projecting not to grow maybe prior to that.

[Analyst] (Baird): Hi, this is Alex Stratton on for Kimberly Greenberger. Thank you for taking my question. I just wanted to touch on the international component of the Bath & Body Works business. Could you give us a sense of how large it is on a sales and stores basis and how you guys have been projecting that to grow, maybe prior to the transaction announcement?

Transaction announcement.

Yeah and in terms of its size the the operating income associated with it is about a $30 million didnt bring all my detailing that international business and growing at a very fast rate number of.

Stuart Burgdoerfer: Yeah, in terms of its size, the, the operating income associated with it is about $30 million. I didn't bring all my detail on that international business in.

[Analyst] (Baird): Yeah.

Stuart Burgdoerfer: It's growing at a very fast rate. Number of doors... Somebody's gonna hand me a piece of paper here, so we can be responsive. Thank you. Ending the year with 266 stores. Retail sales approaching $400 million. Our revenue, round numbers, these are 2019 numbers, a little more than $40 million, 'cause it's all franchise, and the operating income rate, you know, extraordinarily high, almost 70%. Again, I just rattled off a lot of stuff. About 260 doors ending the year, growing about 20%. Retail sales growing about 30%. Our revenue, as you would expect, growing about 30%, a royalty-based model, and a very high profit rate business, delivering operating income in 2019, in round numbers, about $30 million.

Doors.

Somebody is going to Hanmi a piece of paper here. So we can be responsive.

Thanks.

200, and about 200, ending the year with 266 doors.

You know retail sales approaching $400 million.

Our revenue a round numbers. This these are 19 numbers a little more than 40 million, that's because it's all franchise and the operating income rate you know extraordinarily high almost 70%. So again to read this rattled off a lot of stuff about 260 doors ending the year growing about 20%.

Retail sales growing about 30% or revenue as you would expect growing about 30% of royalty based model and a very high profit rate business delivering operating income in 19 of in round numbers about 30 million Bucks. So it's a terrific business, we see a lot of additional Uh huh.

Stuart Burgdoerfer: It's a terrific business. We see a lot of additional potential growth in this business. It's it today is within that international segment that's part of the L Brands reporting segments. As we move forward, you know, I think it'll be more apparent to folks what the value of this is to the business. Hopefully, the profile I've just shared dimensions that for you, and we see a lot of future growth here. Again, retail sales in 2019, I agree, 30%.

Central growth in this business.

It's it today is within that international segment, that's part of the L. be reporting segments and as we move forward no I think it'll be more apparent to folks what the value of this is a to the business, but hopefully the profile of just shared a dimensions that for you and we see a lot of future growth.

I was here again.

Retail sales in 2019 I agree 30%.

Thank you.

[Analyst] (Baird): Thank you.

Thanks, Sally next question please.

Operator: Thanks, Alex. Next question, please.

Operator: Your next question comes from the line of Mark Altschwager with Baird. Mark, your line is open.

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

[Analyst] (Baird): Great. Good morning. Thank you. I wanted to follow up on the BBW real estate plans, I guess, a couple components here. First, with the remodels, can you just remind us what you're seeing in terms of the lift and productivity there? Then, I know you said there is a lot of flexibility, but in the investor presentation, it does, you know, look like you're planning a bit of an acceleration in the BBW square foot expansion this year. If you could just speak a bit to that, and just bigger picture, where you see the white space opportunities in North America, and ultimately, where that square footage number or store count can go. Thank you.

Great. Good morning, Thank you.

Wanted to follow up on the BBW real estate plans I guess, a couple of components here first with the Remodels can you just remind us what you're seeing in terms of the lift and productivity. There and then I know you said there is a lot of flexibility, but the in the investor presentation. It does it looks like you're planning a bit of an acceleration in the BBW.

Our foot expansion. This year you could just speak.

Big to that and you just bigger picture, where you see the white space opportunities in North America, and ultimately where that square footage number or store count can go. Thank you.

Stuart Burgdoerfer: Sure. The lift that we see, when we remodel a store to the, what we refer to as the White Barn format, which is most typically the shop-in-shop format, is roughly 20%. That lift sustains, meaning it's not a boom splat, where you get it for a short period of time, and then it reverts back to where it was before. It sustains in multiple years. We've analyzed the heck out of this, or I should say, the BBW team, along with the real estate team, both, have analyzed the heck out of this, and that lift persists and gets to a good financial outcome and, you know, allows us, has allowed us to remodel a very large portion of the fleet. That, that would be the perspective on the remodels.

Sure.

So the lift that we see a when we remodel a store to the what we refer to as the white barn format, which is most typically the shop in shop format is roughly 20%.

And that lift sustains, meaning it's not a boom splat, where you get it for a short period of time and then it reverts back to where it was before it sustains in multiple years, we've analyzed the heck out of this or I should say the.

The BBW team along with the real estate team both have analyzed the heck out of this and that lift or persists.

And gets too good financial outcome and and read the allows US has allowed us to remodel a very large portion of the fleet so that that would be the perspective on the.

On the Remodels with respect to the new store activity as I mentioned in an earlier comment.

Stuart Burgdoerfer: With respect to the new store activity, as I mentioned in an earlier comment, substantially all the new stores are off mall, not in enclosed shopping malls, in power strips with a very strong economic profile. We, of course, you would expect that we look at cannibalization, and we do. Think of it as, as we close stores, we're closing stores in, you know, mid-tier or lower-tier malls, and then we're opening stores in power strips. Now about 45%, a little more than 45% of the business' stores are not in enclosed shopping malls. You know, it's a sound approach and strategy. We've gotten more experience.

Substantially all the new stores are off mall, not an enclosed shopping malls in power strips.

With a very strong economic profile a we of course, you would expect that we look at cannibalization and we do but think of it as as we close stores were closing stores in you know a midyear or lower tier malls.

And then we're opening stores.

And power strips.

Now about 45% a little more than 45% of the businesses stores are not an enclosed shopping malls. So you know it's it's a it's it's a sound approach in strategy. We've gotten more experience you might ask why the acceleration is because the ones that we have done.

Stuart Burgdoerfer: You might ask, Well, why the acceleration? It's because the ones that we have done in, in the last, you know, 12, 18, 24 months, have performed so well that we're, we're, we're pursuing it with more intensity. All that said, we've got a lot of flexibility. Even in the 2020 plan that we shared, roundly, only about 25% of those leases are actually signed. We've got a lot of flexibility, should we see some dramatic change in the business. We're not expecting that, obviously, but should we see that, we've got a lot of flexibility. We believe the real estate strategy is a good one, and it's further shifting the business to locations outside enclosed shopping malls. Thanks.

And the last 12 18 24 months have performed so well.

That were where were pursuing it with more intensity and all that said, we've got a lot of flexibility. So even in the 2020 a plan that we shared.

Roundly only about 25% of those leases are actually sign so we've got a lot of flexibility should we see.

Some some dramatic change in the business, we're not expecting that obviously, but but should we see that we've got a lot of flexibility. So oh, we believe the real estate strategy is a good one in it and it's further.

Shifting the business to locations outside a enclose shopping malls. Thanks.

Thanks, Mark next question. Please [noise].

Operator: Thanks, Mark. Next question, please.

Operator: Your next question comes from the line of Kate Simmons with RBC Capital Markets. Kate, your line is open.

Your next question comes from the line of Kate Fitzsimmons with RBC capital markets take your line is up.

[Analyst] (RBC Capital Markets): Yes. Hi, good morning. Thank you for taking my question. Stuart, could you just provide some greater detail about the nature of some of the dissynergies as well as some of the TSAs associated with this transaction? How should we think about maybe the shape and the time frame of them potentially offsetting the dissynergies here? I believe some of the TSAs go out about 5 years. Just some color there would be helpful. Thank you.

Yes, hi, good morning, Thank you for taking my question.

Stuart can you just provide some greater detail about the nature of some of the dis synergies as well as some of the T. assays associated with this transaction.

Should we think about maybe that the shape and that the timeframe and then potentially offsetting the dis synergies here I believe some of the T. assays go out and about five years. So just some color that would be helpful. Thank you.

Stuart Burgdoerfer: You're welcome. The first thing I'd say is we're going to work like heck to minimize the dyssynergies, which is what you would expect us to do. The areas of the business that have the longer terms in terms of the length or duration of TSA, are those that have greater scale and/or complexity. The longest TSA and the one that's the most complex is the TSA related to technology. We'll work carefully in partnership with Sycamore, Victoria's business, to over time migrate systems and separate systems at logical points that minimize the economic cost.

You're welcome.

So the first thing I'd say as we're going to work like heck to minimize the dis synergies, which is what you should expect us to do.

And so the areas of the business that have the longer.

Terms in terms of the length or duration of of T. I say are those that have greater scale and or complexity and so the longest t. as a in the one that's the most complex is is the TSA related to technology.

And well work carefully a in partnership with Sycamore Victoria's business.

To overtime migrate systems and separate systems at logical points that minimize the economic cost.

Stuart Burgdoerfer: You know, the specific amount of dyssynergies is to be determined, but unlike perhaps some other transactions that we may have read about, we don't have to separate all these systems on day one, nor is it our intention to do that. What we're gonna do is share many systems for a meaningful period of time. At logical points of separation, we will, we will separate the systems. We believe from that, that we will incur less one-time cost and less dyssynergy than we would expect that, that-- or that we otherwise might incur. Apart from that, there are opportunities through a simpler go-forward business, the Bath & Body Works business, specifically, the amount of corporate overhead and complexity will be substantially reduced.

And so.

The specific amount of Dissynergies Oh.

Just to be determined but unlike perhaps some other.

Transactions that that we may have read about we don't have to separate all these systems on day, one or is that our intention to do that but in fact, what we're going to do this share many systems for a meaningful period of time and again at logical points of separation, we will leave pulled a separate the systems and we believe from that that way.

We will.

Incurred last onetime cost and less dyssynergy a than we would expect are that the or that we otherwise might incur apart from that there are opportunities through a simpler go forward business, the bath and body works business specifically.

The amount of corporate overhead and and complexity will be substantially reduced and so there are going to be some dis synergies related to the subjects that we talked about and and offsetting that and will work out the dollars as we learn more and we've done some initial work on it but not yet ready for.

Stuart Burgdoerfer: There are gonna be some dyssynergies related to the subjects that we talked about. Offsetting that, and we'll work out the dollars as we learn more, and we've done some initial work on it, but not yet ready for, for, you know, hadn't been finalized and more to do before we get more specific about it. There will be opportunities to simplify this business from a multidivisional business now to a single business called Bath & Body Works. From that, there, there will be opportunities to, to offset some dyssynergies with reductions in corporate and other overheads. Thank you.

For a hadn't been finalized and more to do before we get more specific about it but there will be opportunities.

To simplify this business from a multi divisional business now to a single business called Bath and body works and from that there there will be opportunities to to offset some dis synergies with reductions in corporate and other overheads.

Thank you.

Operator: Thanks, Kate. Next question, please.

Okay next question please.

Operator: Your next question comes from the line of William Reutter with Bank of America. William, your line is open.

Your next question comes from the line of William Reuter with Bank of America. William Your line is open.

Hi, just trying to work through the go forward free cash flow. It seems like it should be relatively strong have you thought about what capex for the BBW business on a standalone basis might be.

[Analyst] (Bank of America): Hi, just trying to work through the go-forward, free cash flow. It seems like it should be relatively strong. Have you thought about what CapEx for the BBW business on a standalone basis might be?

Yeah, we've given some thought to it a in and you know round numbers you know I would say and this is driven by the investments in real estate, but in round numbers I would say between 303 hundred $50 million and again that reflects.

Stuart Burgdoerfer: Yeah, we've given some thought to it. You know, in round numbers, you know, I would say, and this is, you know, driven by the investments in real estate, but in round numbers, I would say between $300 and $350 million. Again, that reflects the majority of that related to the remodeling of stores and the opening of new stores that we've talked about. We'll have more work to do on it, but we've done some initial work on it, and it's in that range. With that said, a lot of that is very flexible. You know, on the real estate CapEx, you know, we have an ability to make adjustments to that quickly.

The majority of that related to the remodeling of stores in the opening up new stores that that we've talked about we'll have more work to do on it but we've done some initial work on it and it's in that range and with that said a lot of that is very flexible and so you know on the real estate Capex.

You know, we have an ability to to make adjustments to that quickly you know in our own history back and the the great recession of 2009, we took our Capex run.

Stuart Burgdoerfer: You know, in our own history, back in the, the Great Recession of 2009, we took our CapEx from, you know, $500 or $600 million run rate, this is for the whole L Brands company, down to about $200 million in the span of about 12 months. You know, if times get tough, we can hit the brake pretty hard. The profile for BBW will be lower, obviously, than the L Brands total. That's why you're asking about it. Again, ballpark number, $300 to $350 would be a good starting assumption.

Five or 600 million dollar run rate. This is for the whole LP company down to about 200 million in span of about 12 months. So you know times get tough we can hit the break pretty hard.

<unk> file for BBW will be lower obviously, then they'll be total that's why you're asking about it and again ballpark number three or 350 would be a good starting assumption.

Thanks, Phil next question please.

Operator: Thanks, Bill. Next question, please.

Operator: Your next question comes from the line of Paul Lechway with City Research. Paul, your line is open.

Your next question comes from the line of Polish way with Citi Research. Your line is open.

Hey, Thanks, guys. Stuart curious if you could maybe talk a little bit more about the international opportunity at Bath and body works, how fast you want to move in which countries might you be targeting and even just just higher level is there anything that you feel like BBW was getting held back from doing as part of.

[Analyst] (Citigroup): Hey, thanks, guys. Stuart, curious if you could maybe talk a little bit more about the international opportunity at Bath & Body Works. How fast do you want to move, and which countries might you be targeting? Even just, just higher level, is there anything that you feel like BBW is getting held back from doing, as part of the combined entity with VS, that now you'll be able to do better, as a separate entity? Thanks.

The combined.

And the with Fiesta now you'll be able to do better as a separate entity. Thanks.

Stuart Burgdoerfer: Thanks, Paul, and good morning. With respect to kind of the last part of that question, first, you know, the short answer, Paul, would be no. Do I think that Bath & Body Works being part of L Brands has in some way restricted the pursuit of growth internationally? The answer is no. As you know, that we're pursuing that on a franchise basis. It's not capital constrained. I think, you know, we have strong relationships with our franchise partners globally. It is a big opportunity for us. It's been broad-based. You know, as we tighten up our communication about Bath & Body Works over the next few months, we'll really hone in on that opportunity and framing that opportunity, Paul.

Thanks, Paul and good morning, with respect to kind of the last part of that question.

First you know the short answer Paul would be no do I think that Bath and body works being part of L. Brands has in some way restricted.

The pursuit of growth internationally. The answer is no as you know that we're pursuing that on a franchise basis.

It's not capital constrained.

I think you know we have strong.

Relationships with our franchise partners globally.

It is a big opportunity for us a it's been broad based you know as we.

Tighten up our communication about Bath and body works over the next few months will really honing in on that opportunity in framing that opportunity Paul but again for the last part of your question I.

Stuart Burgdoerfer: Again, for the last part of your question, I wouldn't say it's been constrained in any way because of, you know, its form being part of L Brands, but it is a big opportunity. Frankly, we were, you know, if we go back 3 or 4 years, Paul, we've been surprised in a good way, a positive surprise, about consumers' reaction to Bath & Body Works in different major regions of the world. I think we owe the capital markets, you know, a fuller articulation of that opportunity, and that'll be part of our work over the next few months, as we really expand and tighten up the communication of growth opportunities for Bath & Body. Thanks.

I wouldn't say, it's been constrained in anyway, because of you know the it's it's it's form being part of a bell brands, but it is a big opportunity and frankly, we were you know if we go back three or four years, Paul we've been surprised a in a good way positive surprise about consumers reaction to Bath and body works.

Different major reagent regions of the but I think we owe the capital markets.

A full or articulation of that opportunity and that'll be part of our work over the next few months.

As we really expand and tighten up the communication of growth opportunities for Bath and body. Thanks.

Thanks, Paul next question please.

Operator: Thanks, Paul. Next question, please.

Operator: Your next question comes from the line of Jamie Merriman with Bernstein. Jamie, your line is open.

Your next question comes from the line of Jamie Merriman with Bernstein, Jamie Your line is open.

[Analyst] (Bernstein): Thanks. Thanks very much. If I could just start, you know, the direct business BBW has been growing so strongly, as you said. I'm just wondering if you could talk about what investments you're making in omni-channel capabilities. I know that you recently, you know, re-platformed the Victoria's Secret e-commerce business, and I'm wondering if something similar needs to be done at, at BBW, or if you're happy with the, the, the tech underlying the e-commerce platform. Thanks.

Thanks very much.

[laughter]. They can just start you know the direct business BBW has been growing strongly as he said so just wondering if you talk about what investments, you're making an omni channel capabilities and I know that.

He recently, you know re platform to the Victoria's secret ecommerce business and I'm wondering if something similar needs to be done it Abu Dhabi or if you're happy with the stuff that tech underlying E commerce platform. Thanks.

Stuart Burgdoerfer: Yeah, the short answer is we're pretty happy with it. The most important thing to note about the direct business for Bath & Body, in my view, is that the front end, the technology in the front end, is outsourced. It's provided by a third party, and the fulfillment model, you know, distribution, and flow is also outsourced. It's more of a variable model, a capital light model. We are making significant commitments with our partners on it. On an overall basis, we're pretty pleased. There are two initiatives that the business is pursuing. They're both in pilot stage. One is buy online, pickup in store. This is for Bath & Body, in a pilot stage.

Yeah. The short answer is we're pretty happy with it the most important thing to note about the direct business for Bath and body in my view is that the front end the technology in the front end.

It is outsourced it's provided by third party.

And the fulfillment model you know distribution.

And and flow is also outsourced so it's more of a variable model.

A capital light model, we are making a significant oh amendments with our our partners on it.

But we're on an overall basis, we're pretty pleased to our two initiatives that the business is pursuing there both in pilot stage.

One is buy online pickup in store. This is for Bath and body a in a pilot stage and then the other is for now you know probably a couple of years in total a lot of refinement given the importance of it.

Stuart Burgdoerfer: The other is, for now, you know, probably a couple years in total, a lot of refinement, given the importance of it, is a pilot that the business has pursued with respect to a loyalty program that is now in about 300-- around 300 stores. In terms of initiatives, buy online, pickup in store, something in front of us and further refinement and then rollout of the loyalty pilot that's been going on now for probably 18, 24 months. Overall, pleased, and again, an outsourced model.

It is a pilot a that the business has pursued with respect to a loyalty program that is now in.

About 300, roundly 300 stores and so.

In terms of initiatives buy online pickup in store something in front of us and a further refinement and then roll out of the loyalty pilots. It's been going on now for probably 18 24 months, but but overall pleased and again an outsourced model.

[Analyst] (Bernstein): Great. Thank you.

Okay. Thank you.

Stuart Burgdoerfer: Sure.

Operator: Thanks, Amie. Next question, please.

Thanks, Jamie next question please.

Operator: Your next question comes from the line of Adrienne Yee with Barclays. Adrienne, your line is open.

Your next question comes from the line of aging <unk> with Barclays. Your line is open [noise].

[Analyst] (Barclays): Yes, good morning. A couple of clarifying questions. Is the mid-single-digit BBW comp for the quarter, is that what you're running quarter-to-date? Same thing for the Victoria's Secret side. What was the BBW segment free cash flow in 2019? My third kind of clarifying question, sorry, is, I don't understand or maybe the trajectory of a mid-single-digit comp. You have some deleverage with some investment in Q1. How does that look past Q1? Should we think about that mid-single-digit being the break-even comp? Thanks so much.

Yes, good morning, I'm a couple of clarifying questions is the mid single digit BBW comp for the quarter is that what you're running quarter to date same thing for the Victoria's secret side and then what was the DDW segment free cash flow in 2018, and then my second my certain kind of clarifying question sorry.

It's I don't understand or maybe the trajectory of a mid single digit comp you had some de leverage with some investment in Q1, how does that look past Q1, do we start should we think about that mid single digit being the breakeven comp. Thanks, so much.

Stuart Burgdoerfer: Yep. 3 questions. First is on comp results so far in February, we're not gonna comment on that. Don't mean to be unhelpful-

Yep. So three questions first is on comp results. So far in February we're not going to comment on that don't mean to be unhelpful, but were up 10%. We're comfortable with the guidance, we've given and Karen I'll say about that with respect to free cash flow, we've got more work to do.

[Analyst] (Barclays): Okay, sure.

Stuart Burgdoerfer: We're comfortable, we're comfortable with the guidance we've given, and.

[Analyst] (Barclays): Fair enough.

Stuart Burgdoerfer: That's all I'll say about that. With respect to free cash flow, we've got more work to do, obviously, on the capital structure of the Bath & Body Works business, which we've mentioned, and I don't wanna kind of shorthand that and give pieces of it without providing the whole picture. You know, the profitability of the business, it was asked and answered about the CapEx, but, but we're, we're doing more work on it, and in terms of the overall cash flow characteristics of Bath & Body, they're terrific, obviously, by the way.

Do obviously on the capital structure of the Bath and body works business, which we've mentioned and I don't want to kind of short hand that and give pieces of it without providing the whole picture you know the profitability of the business. It was asked and answered about the capex, but but world we're doing more work on it a and in terms of though.

All cash flow characteristics of Bath and body, they're terrific, obviously by the way, but but in terms of a full assessment of it which ultimately I think we'll get to the question of you know dividend policy. You appreciate that that should be done in a comprehensive way, which we will do and when we're ready to talk about it we will talk about and so that would be.

[Analyst] (Barclays): Yes.

Stuart Burgdoerfer: In terms of a full assessment of it, which ultimately I think will get to the question of, you know, dividend policy, you appreciate that that should be done in a comprehensive way, which we will do, and when we're ready to talk about it, we'll talk about it. So that would be my views on BBW free cash flow, and we'll get to it as soon as we can, but we wanna do it thoughtfully, and you can appreciate, hopefully, we've been busy.

My my views on on BBW free cash flow and and we'll get to it as soon as we can but we want to do it thoughtfully. Then you can appreciate hopefully we've been busy I wish there. Thanks.

[Analyst] (Barclays): Yes

Stuart Burgdoerfer: ... with some other things. Then thirdly, with respect to the mid-single digit comp, you know, getting to break even-ish or, or not a lot of growth, I should say, year-on-year growth, not break even, not a lot of year-on-year growth in operating income. Amie mentioned that it's a smaller quarter, and so as you think about, you know, leverage on fixed and variable costs, the result that you're, you're asking about for Q1 doesn't translate through all the quarters just based on the relative size of quarters. That would be my additional view on your, your third question. Thanks.

[Analyst] (Barclays): Yes

And then thirdly with respect to the mid single digit comp you know getting to breakeven ish or not a lot of growth I should say a year on year growth not breakeven that a lot of you're on your gross and operating income Amy mentioned that it's a smaller quarter and so as you think about leverage on fixed and variable costs are the result that you're.

You're asking about for Q1 doesn't translate through all the quarters just based on the relative size of quarters. So that would be my additional view on your your third question. Thanks, Okay.

[Analyst] (Barclays): Okay.

Thanks, Adrian next question please.

Operator: Thanks, Adrienne. Next question, please.

Operator: Your next question comes from the line of Roxanne Meyer with MKM Partners. Roxanne, your line is open.

Your next question comes from the line of Roxanne Meyer with MKM partners Roxane. Your line is open.

[Analyst] (MKM Partners): Great, thanks for taking my questions. Just two quick follow-ups. One, you mentioned the loyalty program pilot. I didn't realize it was already in 300 stores. I would love to get some feedback on how that is performing, you know, and how much more that customer involved in the loyalty program is spending, you know, how much more they're frequenting your stores. You know, as it relates to technology investments overall, I'm just wondering if, as a result of the separation, if you expect to accelerate investments in technology to further what is already very strong growth of BBW, particularly online, and where you see those opportunities aside from, for example, the Bulpus investment that you, the pilot that you mentioned. Thanks a lot.

Great. Thanks for taking my questions I'm, just two quick follow up one you mentioned a loyalty program pilot I didn't realize it was already in 300 stores I would love to get some feedback on how that is performing you know and how much more that customer in involved in the loyalty program is spending.

How much more their frequenting your stores and then you know as it relates the technology investments overall I'm just wondering if as a result of the separation. If you expect to accelerate investments in technology to further what is already very strong growth of BBW, particularly on line.

And where you see those opportunities aside from for example, the ball pits investment that you I. The pilot that you mentioned, thanks a lot.

Stuart Burgdoerfer: Yep. With respect to the loyalty program, we mentioned about, you know, it's in just shy of 300 stores. The business is pleased with the overall results and is evaluating the rollout, you know, timing to the balance of the fleet. Those would be the headlines. It is a points-based or rewards-based program based on her spending. It involves, you know, a mobile app and, you know, provides her, in addition to value of points and financial reward, gives her, you know, the opportunity to participate in some exclusive events and new products and so on. It's got some texture on it beyond, you know, just quote a discount, if you will.

Yep.

So with respect to the loyalty program. We mentioned about you know it's in just shy of 300 stores the businesses. Please with the.

Overall results and is valued evaluating the rollout you know timing to the to the balance of the of the fleet. So that those would be the headlines I. It is a a points based or rewards based program based on her spending it involves you know.

Mobile labs and provides for an addition to value of points in financial reward and gives her.

You know or the opportunity to participate and some exclusive events in new products and so on so it's got some texture on it beyond you know just quoted discount if you will so generally pleased with it and and determining the best way to roll it out to more stores and ultimately a nationally with respect.

Stuart Burgdoerfer: Generally pleased with it and, and determining the best way to roll it out to more stores and, and ultimately nationally. With respect to, you know, tech investment, otherwise in BBW, as I mentioned, a lot of the online platform for this business is outsourced. But to the extent that the company needs to invest in things like the buy online, pickup in store functionality, you know, we, we won't be constrained there. We don't have, you know, a specific game plan there in terms of the CapEx profile of that, given that we're just in what I'll call a manual test mode right now. There is opportunity there, as you would appreciate, and the business will have, have plenty of cash flow to, to invest in that as that, as that opportunity reveals itself.

To you know tech investment otherwise and BBW as I mentioned a lot of the online.

Platform for this business is outsourced.

But to the extent that the company needs to invest in things like that buy online pickup in store functionality.

We we won't be constrained there. We don't have you know a specific game plan there in terms of the the capex profile of that given that we're just in what I'll call. A manual test mode right now, but there is opportunities there as you would appreciate and the business will have had plenty of cash.

Flow to to invest in that as that is that opportunity reveals itself and to some extent that we may do that working with our partners.

Stuart Burgdoerfer: To some extent that we may do that working with our partners, meaning, you know, third parties and some of that work we may do, internally. Thanks.

Meaning you know a third parties and and some of that work we may do internally. Thanks.

Amie Preston: Thanks, Rex. Let's take 2 more questions.

Thanks threats and let's take two more questions.

Your next question comes from the line of Lorraine Hutchinson with Bank of America right. Your line is open.

Operator: Your next question comes from the line of Lorraine Hutchinson with Bank of America. Lorraine, your line is open, open.

[Analyst] (Bank of America): Thank you. Good morning. For Bath & Body Works, could you talk a little bit about the difference in performance of enclosed mall stores versus strip centers? Then maybe some comments on the longevity and flexibility of the lease terms for both.

Thank you good morning for doesn't body works could you talk a little bit about the difference and performance of enclosed mall stores versus strip centers and then maybe some comments on the longevity and flexibility at the lease terms for Oh.

Stuart Burgdoerfer: Yep. Lorraine, good morning. The first thing is that our stores perform well in both, both in malls and off-mall. The first thing I'd want to register and register it clearly, is they perform well in both types of venues. Apart from that, or I should say, in addition to that, the conversion rates are extraordinarily high off-mall, which you would expect. It's more of a destination occasion. The good news about Bath & Body Works is based on, you know, its merchandise offering and the nature of the experience with customers. Bath & Body is a destination, both in malls and off malls, but the conversion rates are very high off-mall.

Yes.

So Lorraine good morning, the first thing is that the our stores performed well in both both in malls and off mall. So the first thing I'd want to register and register it clearly is they performed well in both types of venue.

Apart from that or I should say in addition to that.

The conversion rates are extraordinarily high off mall, which you would expect it's more of a destination occasion.

The good news about Bath and body works is based on you know, it's it's merchandise offering and the nature of.

Of the experience with customers Bath and body is the destination, both in malls and off malls, but the conversion rates are very high.

Off mall.

Stuart Burgdoerfer: Lastly, you know, occupancy costs as a percent of sales are lower off-mall than they are in enclosed shopping malls. The off-mall format is very strong financially. Again, both, both the types of store, if you will, are doing well, good growth, good profitability. The off-mall opportunity is a big one, and as you heard earlier, we're pursuing it aggressively. As a general matter, our lease terms are 10-year leases. As you know, we've talked about consistently in many of our stores, based on, these are in lower tier malls.

And lastly occupancy costs as a percent of sales are a lower off mall than they are a enclose shopping malls. So the off mall format is very strong.

Financially.

But again, both both the types of store if you will are doing well good growth good profitability.

The off more opportunity as a big one and as you heard earlier, where we're pursuing it aggressively as a general matter are a lease terms, our 10 year leases.

As you know we've talked about consistently in many of our stores are based on.

These are in lower tier malls, we have a lot of flexibility on month to month terms and we get to that place.

Stuart Burgdoerfer: We have a lot of flexibility on month-to-month terms, and we get to that place just based on the strength of our business and the provisions in our leases related to occupancy levels and whether name tenants are doing business in those malls. A lot of flexibility on in many situations, generally, a 10-year lease terms. Thanks.

Just based on the strength of our business and the provisions in our leases related to occupancy levels and.

Whether name tenants are doing business in those malls. So a lot of flexibility on on in many situations generally a 10 year lease terms. Thanks.

[Analyst] (Bank of America): Thank you.

Amie Preston: Thanks, Lorraine.

Thanks, Irene your question please.

Stuart Burgdoerfer: Sure.

Amie Preston: Last question, please.

Operator: Your final question comes from the line of Michael Binetti with Credit Suisse. Michael, your line is open.

Your final question comes from the line of Michael Binetti with Credit Suisse. Michael Your line is open.

[Analyst] (Credit Suisse): Hey, guys, thanks for taking our question with all the detail today. I guess, Stuart, since you mentioned earlier to Ike's question, some of the Victoria's Secret lease liabilities that'll remain with LB after the transaction. Could you step back a minute? Are there any other areas besides leases of liabilities that stay with LB? Just in case we missed anything, and then maybe even bigger picture, how would you frame the, you know, the downside that LB retains with this deal versus how much opportunity L Brands has to participate in the upside if the results do turn a corner? The obvious math, you keep 45% of the business. Do you participate linearly in the upside if the EBIT turns?

Yes, Thanks for taking my question with all the detail today I guess Stuart since you mentioned earlier dikes question some of the Victoria's secret lease liabilities that will remain with L.D. after the.

After the transaction could you step back minute are there any other areas besides leases of liabilities that stay with it'll be just.

Just in case, we Miss anything and then maybe even bigger picture how would you frame. The you know the downside that that will be retains with this deal versus how much opportunity L brands has to participate in the upside if the results do turned a corner, obviously obvious math to keep 45% of business, but do you participate linear linearly any upside if if the EBIT turns.

Yes, so a lot in that question I'm sure.

Stuart Burgdoerfer: Yep. A lot in that question.

[Analyst] (Credit Suisse): Sure.

Stuart Burgdoerfer: A lot in that question. You know, our downside is limited for reasons you would understand. We have the exposure related to lease liabilities that's been asked about, and again, on a gross or aggregate basis, around $400 million. You know, there are, you know, provisions on how much debt can be put on the business, that, on the VS business that were negotiated and agreed. We've got, you know, I think, good protection there in terms of how that might be managed. With respect to, you know, capital, you know, contribution requirements, there are essentially none of significance. There's a lot of upside in just doing the math of what this business could be worth.

A lot in that question so.

Downside is limited for reasons you would understand we have the exposure related to lease liabilities. That's been asked about and again on a gross or aggregate basis around $400 million.

You know there are provisions on how much debt can be put on the business that on the vs business that were negotiated an agreed. So we've got I think good protection. There in terms of how that might be manage a with respect to you know capital you know a contribution requirements.

There are are essentially nothing of significance.

And there's a lot of upside in just doing the math of what this business could be worth if we all thought about what this business was worth.

Stuart Burgdoerfer: If we all thought about what this business was worth, five or six years ago, you know, the capital markets were ascribing no value to it, if not negative value to it. It was important to us to retain a stake in that potential value creation, and at 45%, that's a meaningful stake. There is some downside. We've framed it or bracketed it for you, and there's a heck of a lot of upside that potentially could be very, very significant if you just went back and did math off of what the business had done at its peak. If you even took half of that in terms of its potential, the upside is very significant.

Five or six years ago, and and capital markets, where ascribing no value to it if not negative value to it.

And so it was important to us to retain a stake in that potential value creation in that 45%. That's a meaningful stake. So there is some downside weve framed it or bracketed. It for you and Theres a heck of a lot of upside that potentially could be very very.

Again, if you just went back and and did math off of what the business had done at its peak. If you even took half of that in terms of its potential the the upside is very significant but at this time, we felt it was important to.

Stuart Burgdoerfer: At this time, we felt it was important to have the value of Bath & Body Works realized in the marketplace, to have new input and ownership perspective through a private format. You know, we believe that those results have the potential to deliver a lot of value to shareholders, or arguably, they already have delivered value to shareholders, if one looks at the share price move between early January and what has happened since then. That's how we thought about it. Thanks.

I have the value at Bath and body works realized in the marketplace.

To have new input and ownership perspective or through a private format and you know we believe that those those results have the potential to deliver a lot of value to shareholders are arguably they already have delivered value to shareholders. If one looks at the share price move between or.

Right and what what has happened since then so that's how we thought about thanks.

And Michael I, just wanted to clarify one point that 400 million, that's not necessarily stay on our balance sheet that would be and that's the gross number yeah, well below an estimate of the portion of that we think could be reason that could be a probability based assessment of what our exposure is that 400.

Amie Preston: Michael, I just want to clarify one point. That $400 million does not necessarily stay on our balance sheet. That will be-

Stuart Burgdoerfer: Yeah, that's the gross number.

Amie Preston: Yeah.

Stuart Burgdoerfer: We'll book an estimate of the portion of that we think could be, you know, a probability-based assessment of what our exposure is, but $400 is a gross number.

It is a gross number so it won't be on the balance sheet it'll be meaningfully lesson that yeah, great. Okay, guys that concludes our call for today. Thank you for your.

Amie Preston: That'll be-

Stuart Burgdoerfer: It won't be on the balance sheet. It'll be meaningfully less than that.

Amie Preston: Yeah. Great. Okay, guys, that concludes our call for today. Thank you for your continuing support for L Brands. Thanks.

Continuing [noise].

Outbreak.

[noise] Genfund. This concludes today's conference call. Thank you for participating you may now disconnect.

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

[music].

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