Q3 2020 L Brands Inc Earnings Call

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Good morning, My name is Brad and I will be your conference operator today.

At this time I would like to welcome everyone to the L brands third quarter 2020 earnings Conference call.

Please be advised that todays conference is being recorded.

During the question and answer session. If you would like to ask a question. Please press Star then one on your phone keypad.

I will now turn the call of <unk>, Miss Amy Preston Senior Vice President Investor Relations and company Affairs and L. Brands you may begin.

Thank you.

Good morning, and welcome [laughter] L brands third quarter earnings conference call for the period, ending October 31st tape outs and 20.

As a matter for Mt, Libya and need to remind you that any forward looking statements. We may make today are.

And subject to our Safe Harbor statement found in our <unk>, and see see filings and and or perhaps rightly. So.

Joining me on the call today are <unk> and <unk>, that's flow C O L brands and Stuart Burgdoerfer interim CEO of Victoria's secret and CFO and the L brands.

All right. So we've just got from call. It today, our adjusted results and exclude the special items described in our press release day.

Thanks, and now it turn the call over to Andrew.

Thanks every thanks, Jamie and good morning, everyone.

The third quarter of 2020 continued to be an unprecedented time for the world the retail industry and certainly our business.

Our first priority continues to be the safety of our associates and our customers.

Our new operating models and our stores are focused on providing a safe environment, while also providing and engaging shopping experience.

Additionally, we remain focused on the safe operations of our distribution centers fulfillment centers and call centers, while maximizing our direct businesses.

We delivered record results from the third quarter, and we could not have done so without the hard work and dedication of all associates across our business and.

Our stores distribution and fulfillment centers call centers and our home offices.

I'd like to express our deep appreciation for their dedication and their efforts.

And the third quarter, we significantly exceeded our internal expectations driven by record results of Bath and body works as well as an improved performance at Victoria's secret.

As we look to the remainder of the year, we have a cautious view of the fourth quarter given the high level of uncertainty around the pandemic itself and the potential for further restrictions.

While we are optimistic about our Christmas product assortment and our continued strong execution and both stores and online we do expect significant challenges and generating store channel sales growth.

Our typical holiday volumes are about three times larger per week, and the average week and the third quarter of historically.

And the current capacity limitations that range from 25 to 50 per cent of normal capacity will not allow us to see the same number of customers on peak days that we have in prior years.

The situation remains fluid as additional capacity limits have been recently announced and further restrictions may occur.

Additionally, the hours, which stores are permitted to be opened or fewer than last year and we will be closed on Thanksgiving day. This year versus opened in prior years.

We also have additional constraints and our direct channel fulfillment and shipping capacities.

As a result, we will be taking action to spread our big promotions, which historically have occurred on single days over a longer time period.

We have also added additional registers to stores in both businesses.

We expect continued increased cost pressures in the fourth quarter as a result of higher stores selling costs safety equipment and supply costs increased fulfillment expense and higher parcel carrier surcharges and the direct channel we.

We believe that all of the factors mentioned above have the potential to lead to a very wide range of financial outcomes for the fourth quarter of higher end of which would approximate last year's operating income of results.

We will continue to stay close to our customers and leverage the speed and agility that we have and the business to optimize our fourth quarter results.

Thank you and back over to you and me.

Thanks, Andrew.

That concludes our prepared comments and.

It's time, we'd be happy to take any questions you might have.

And the interest of time and consideration to others. Please limit yourself to one question.

Thanks, and I'll turn it back over to the operator.

Thank you and once again, if you would like to ask a question. Please press Star then one.

Our first question of the day will come from Matthew Boss of JP Morgan Your line is open.

Great. Thanks, and congrats on the continued momentum.

And maybe Andrew just start can you elaborate on the balance.

Right and that you're seeing between the category drivers and Bath and body works today, how would you rank multiyear and market share opportunities across the box and well and.

And a cautious view for the fourth quarter given that the factors that you mentioned have you seen any material slow down and trench of eight.

Sure. Thank you Matthew.

So on your first question you know as we mentioned in our prepared a prepared remarks from last evening. We did see continued strong balance of performance across all of our categories and.

So I think there has been understandably a lot of attention paid to the tremendous growth that we're seeing and our soap and sanitizer business and we certainly challenge ourselves fortunate to be a major player in that category and have been for many years as a reminder, historically that category.

Soap and sanitizer business has been about 14% of the total business and 29, T. and as an example, and as we've talked about on this call throughout the course of the year that penetration has grown significantly and Q1. It was about a quarter of the business Q2.

A little over a quarter of the business and the Q3. It was still at about 21% of the business up from a mid teens last year or so significant growth of still doubling in terms of absolute volume in that business, but as we called out and the remarks, we're also seeing very strong.

Performance from all of our other categories. So again, our two other big categories of home fragrance and body care each of them grew by more than 30% a in the third quarter as well, so strong and balanced business across the board and that's true and our stores channel and in our direct.

Channels.

On your second part of your question around the multi year opportunity again, I think it's important to understand that even before the pandemic Bath and body works has for years been experiencing and nice consistent growth really across all of our categories and our market share opportunity.

Is still large while we while we have a big market share and all of our categories. Each.

Each of those categories themselves, meaning a this soap and sanitizer category the home fragrance category and the body care category are experiencing growth at the industry level.

And we continue to see the opportunity for us to gain share and each of those.

In terms of your last question around trend.

I would say that consistent with what we talked about on the last earnings call certainly as stores have been opened longer we have seen some say a normalization of the sales trend in our stores channel.

And that continued and certainly from the.

The end of the second quarter through the third quarter, but still even at the end of the quarter, we're performing quite quite nicely.

Double digit comps our direct channel as you can see from our results has continued to deliver very consistent results, regardless of when whether or not stores were closed back in the early part of Q2 or here through the end of Q2 and early part of Q3 as all stores have reopened.

Hopefully that helps with a lots of questions. Thank you.

Thanks, Andrew next question please.

Thank you. The next question comes from Ike Boruchow of Wells Fargo. Your line is open.

Hey, Good morning, let me add my congrats just really phenomenal quarter. So I guess my question is actually now around all and Victoria's Secret I guess, maybe Andrew has anything changed on how to handle your ownership of the brand and and and I guess really two questions. The first is it fair to say that the asking price.

For the brand has moved up.

Given the material EBITDA improvements that you've been making over the past six months and the influx and that he was not driving and then two is there actually a chance that given the success and it seems how big of managing the brands and making these key strategic changes that maybe ultimately you decide that you don't Wanna or something.

So the business and you're actually feel like you're creating a lot of value with the improvements you're making thanks so much.

I think like where it got net debt to Stuart.

Good morning, Ike and thanks for the kind words about the quarter.

We've been working hard as you recognized and stabilize and begin to turn around and.

Victoria's secret, we had a very strong quarter and and a lot of ways, including financially.

And again and and response to your question about do we think we increased the value of the business absolutely we do.

You know as businesses are valued off of historic and forward looking EBITDA and cash flow, we made material progress on those measures.

And the third quarter, and we would expect that the business is worth of meaningfully more than it and it might of been a in the recent past we're at the beginning we've got a lot more to do there was a lot of additional growth and opportunity and the business.

But there's no doubt that the third quarter of wasn't important inflection point in the business with respect to the second part of your question. The board's been clear about the strategic intent of for a Bath and body works and Victoria's secret and that is to ensure that.

Both businesses are value appropriately income.

Including the appropriate valuation of Bath and body works, which we believe will be enhanced through.

A separation of the businesses, we continue to be on a path.

After we got a good good visibility to the full full of Q4 result to work with our advisors that we hired a back and August JP Morgan and Goldman Sachs to work with those advisors and too Big and you know a process and Ernest to to pursue the options for the separation of the two.

Two companies that.

Thanks, Stuart and thank site next question. Please.

Thank you. The next question will come from Alex <unk> wall of Us of Goldman Sachs. Your line is open.

Good morning, and thank so much but taking the question here I had a question on the negotiation with with landlords you mentioned and you achieved a combination of rent waivers on statements and when they come to closure periods of some of that Lisa.

Lisa and that the trials I wonder if you could share a little bit more color on the size and scope.

Of those.

Insights and simple achieved.

And then second question is on also on real estate yet she of projects about what he works and 2020 I'm just wondering how you're thinking about and the number project going forward.

Thanks, Pat works, so well start with Stuart and and go to Andrew Good.

Good morning, Alex I with respect to the negotiations with a debt.

Developers and landlords and property owners as we indicated and our remarks, we made substantial progress on those discussions in the third quarter.

They're very important discussions.

Fundamental discussions and as would be the case and and any important negotiation. There was a lot of compromise and probably on both sides of it. Both parties. If you will are probably a little unhappy about the results if you will.

With that said the the outcomes of those negotiations.

It did not have a a overly material effect on the third quarter and their effect on the fourth quarter is still subject to a full papering and finalization of those negotiations.

We will provide more update after we conclude the fourth quarter about the specifics and the impact on Q4 again, if that Q4 impact will be more significant than the Q3 and packed and again that the element of that in Q3, we would we would comment as.

Not being overly material to the total result, so more to come a good progress and a full accounting of it if you will or will be in a better position to do that after the fourth quarter. After all the deals get a fully signed off and and fully executed.

Total standpoint, but very good progress.

Thanks, Stuart and Hi, Alex Thanks for the question so to your point, a and 2020 Bath and body works.

Is is working on approximately 56 real estate projects that is down materially from our historical run rate of the last few years of closer to 200 projects annually.

As a reminder, you know when we made the decision to reduce that number of back early in the first half of the year based on the onset of the pandemic and out of and abundance of caution to make sure we were managing and cash flow and capital spending overall the decision to reduce the number of of deals of this.

Your was not driven by any change and the performance that we've seen associated with those remodels over the last several years, which continue to be very pleased with of that progress.

So all of that said as we look forward to 2021, and it's still critically important for us to read the results you're of the all important fourth quarter to help influence any go forward capital investment strategy around real estate and we have a very flexible and agile pipeline as it applies.

Two of real estate portfolio.

All of that being said you know, we'll provide more of a directional guidance on our next earnings call, but I would expect that the 2021 counts would be up from a the number of projects that we've executed against here and a 2020.

Great. Thanks, Andrew Thanks that was my next question. Please.

Thank you. The next question will come from Lorraine Hutchinson of back.

And of America excuse me you May go ahead.

Thanks, Good morning, and I think you were very clear and you're still capacity constraints for holiday.

To ask about E Commerce, and we think about fourth quarter E. Commerce have you been able to secure additional fulfillment capacity there and are there any constraints on growth and that channel and the fourth quarter.

Great. Thanks, Graeme will start with Andrew.

Hi, Lorraine [laughter]. Thank you for the question.

So we have so we have been able to secure significantly more capacity of four I'm speaking now for about the body works I'll let.

Stuart speak to Victoria's secret, but in the case of Bath and body of works, we have dramatically increased our capacity as we've moved through the year or 2020 and to the point, where and third quarter, we were able to be looking at about two and a half times the amount of capacity that we had last year and.

That's obviously what allowed us.

To run a the the growth that we ran of well over 100% and the direct channel in Q3 as you can imagine as we move into the fourth quarter.

What we're up against from a historical sales and capacity is significantly higher than what we saw through the first three quarters of the year. So while we will have a significantly more capacity available year over year in the Q3 <unk>.

And almost certainly won't be at the same level of growth as what we were able to achieve and the first three quarters of the year of.

Hopefully that's helpful.

Thanks, Dan true Stuart Laura.

Laura and with respect to Victoria's secret and capacity.

We do have some additional capacity versus what we had a year ago of but there is some impact related to the pandemic and the operation of our fulfillment centers and.

Thats off some of the increase that is associated with a second facility that we opened this year. So there is some net increase and unit capacity, but not as great. As we would have expected given the need for social distancing within our.

Centers to ensure that we have a safe environment for our associates. Additionally, that's that's a comment about units we've experienced significant average unit retail growth.

Both online and in stores and Victoria's secret.

And so that does provide further upside of the range in terms of revenue growth versus of strict view on units. So we feel like we can generate meaningful growth in the fourth quarter, you have and a larger denominator and I'll hop absolute value it will moderate to some extent of.

And and and will manage the balance of ensuring that we keep all involved sales.

Provide you know the right experience for consumers and again importantly, a big source of growth or through pricing increases average unit retail increases that we realized in Q3, and we would expect to continue in Q4. Thanks.

Thanks, Stuart and Thanks, Laurie next question please.

Thank you. The next question will come from Susan Anderson of B. Riley Your line is open.

Hi, good morning, nice to see the improvement and yes, and the coronary and I'm curious can you talk about the performance of Pink I think and you noted that day with double digit comp and the logo shop and curious what changed this quarter of <unk> versus the previous quarter, and where I think it had struggled and where you're seeing that strength come from.

Thanks.

Good morning, Susan It's Stuart So you know like first I would want out of as it relates to tip Bank I would want to comment on the strength and abroad and panic businesses in the quarter. In addition, as you mentioned the logo shop of collections have done well and I think it's a combination of.

Merchandising execution, meaning.

Pacific improvement and the Assortments, along with work that Amy Hawk has done.

And evolving the positioning of the pink brands and as it relates to the pink logo shop.

Obviously, a strong endorsement of that work on the brand in combination with you know advancement in the assortment and strong selling both and stores and online. So I think it is a combination of factors and certainly a positive signal for the business, but again I'd also want to highlight of strong performances and abroad and panic categories at Penn.

As well thanks.

Great. Thanks, and thanks, Thanks and.

Next question please.

Thank you. The next question will come from Roxanne Meyer of MKM partners. Your line is open.

Great Good morning, and congratulations on the exceptional third quarter.

You know you laid out.

Clearly our capacity constraints and stores I in terms of managing the traffic flow as well as on line and is Oh wait a free and I know you gave a you know kind of how you think about peak performance and fourth quarter of being equal to operating income maybe last year, but is there a range of tops.

Line that.

That we can expect you know mathematically in terms of how high is high based on the constraints that you have thanks a lot.

So a good morning, we want to be really thoughtful of rocks and on this subject, we know that you're trying to build models and and come up with your own views, but as we expressed and are written remarks and Andrews comments to introduce the call. This morning, there is a lot of.

Uncertainty.

And what were comfortable sharing is at the higher end of of our forecast ranges that we think we can approximate of last year's operating income as you. Appreciate there's a lot of variables and revenue and margin and the expense structure and we really don't want to deal with certain aspects of the piano.

Given the uncertainties that we've talked about so there are constraints, we've outlined them and we will also by the way work like heck to maximize the business, obviously and the quarter, but we're really going to do a to reinforce that the view is at the higher end of our internal ranges.

It would be about at last year's operating income level. Thanks.

Thanks correctly and next question please.

Thank you. The next question will come from Simeon Siegel of BMO capital markets. Your line is open.

Thanks, Good morning, guys and really great results across four contracts and your can you speak to your merch margin expectation of BBW and Fourq you I understand of spreading out of the promotional cadence, but just any help thinking through wide promotions would be up when demand is clearly stores. So strong and I think we're talking about supply constraints and I guess conservativism, obviously, it can be and answer and then star.

Actually where I don't know if I missed it did you say how you're approaching go forward inventory receipts for both brands. Thank you.

Thanks, Tim and Andrew.

Sure so.

Thanks for the questions I mean, it I think it's important to understand.

How we got to the merch margin improvements that we saw in Q3, and then talk about how we might see that play out slightly differently in Q4. So in in the third quarter, we were able to increase margins across the board of by combination of both from.

You are a days of of.

Of promotion deep promotional activity year over year down relatively substantially order of magnitude about half as many big deep.

Deep promotional days in the <unk> and the third quarter versus the third quarter of prior year.

But then we were also able to increase or the price point on many of those promotions and so the combination of those two things as well as not having to have an end of third quarter of false sales. The way we have historically because we saw such good response to our collections and sold down.

To the point, where we were actually putting some of our holiday product on the floor late in the third quarter. Those were the drivers of the improvement in Q3.

As talked about and our prepared remarks, we also did testing and the third quarter to understand how to lap some of the very large days that we've got in the fourth quarter from a promotional standpoint and attempt to to regain the sales and margin dollars associated with those big days and and doing those.

Yes affirmed that the best way to do it is to try to take the pressure off of those peak days of the spread them out across multiple days.

But also a half of them at higher price points than we have historically so.

So really the issue of why we would expect.

Our margin rates to moderate margin rate improvement to moderate.

And probably more closely approximate last year is that combination of more days, we're going to <unk> and the third quarter of there were fewer days of big promotion in the fourth quarter of the will end up having to be more days of day promotion in order to spread out of that.

As Stuart mentioned earlier, obviously, we're going to continue to be very nimble, we're going to continue to drive to the best possible outcome. If we're seeing better product acceptance and are able to either reduce the number of promotional days and or raise those promotional pricing as the way we were and third quarter, we'll obviously do that but as.

We go in and look at the the magnitude of those big days that sort of going in assumption.

Okay standard stork on inventory.

Simeon and and as an overall comment and Andrew of May may have something to add for Bath and body, but as an overall comment in terms of how were of.

Approaching inventory receipts, the first thing I would say, which if you.

The findings of the statement of the obvious is that we're approaching them with a heck of a lot of intensity.

ER and the additional points I'd want to make is really beginning with the onset of the pandemic.

Particularly for Victoria's secret given the store closure plans, but you're just otherwise you know trend and the business and.

We began planning this spring very conservatively with.

With respect to inventory receipts.

And fortunate outcome of that is.

That through that that better inventory position.

Where we don't have to have broad based as many broad based promotions, along with better assortments better selling effect and as online and and stores its really giving rise to this significant margin rate improvements that we experienced in the third quarter and that we would expect and the fourth quarter.

With that said, where we've got sales trend you can be sure of that works chase and like that and the good news is that we have supply chain partners manufacturing partners that we have longstanding relationships and a very clear minded about how to move quickly and and with agility and the best we can so overall had a very conservative.

Position with Victorias.

It's paying big dividends to the company.

In combination with again, better merchandise better assortments, better presentation, better marketing better selling and.

And where we got to try and we're chasing like Heck and no and you may want to comment.

On the BBW stores.

Sure. Thanks Stuart.

I would echo a lot of of Stuart's commentary around appreciation for the supply chain and the and the tremendous flexibility and agility that all of our internal and external partners have been able to accommodate us with so far this year, we talked about on the last quarter.

Quarter recall that originally at the onset of the pandemic Bath and body works also cut back receipts pretty dramatically.

But then ended up needing to chase back into many of those many of those receipts through Q2 and that trend continued in Q3 of chasing too to the upside as we enter fourth quarter as we shared and our prepared remarks, we feel good about our overall inventory position, we feel very fortunate.

And that that our supply chain has been able to weather the pandemic and has figured out how to operate both in a very safe way, but also you know increased capacity and.

And output relative to our sales increase.

The reality as I shared earlier as you know we did exceed our expectations from a from a sales and a sell through on our seasonal goods in the third quarter and so as I mentioned in the prior answer around margin, we were able to cut back and not and do a fall a end of Q3 sales this year based on that so.

Through that obviously has allowed us to be very very clean from an inventory standpoint, as we come into the fourth quarter and also allowed us to get an early read on some of our holiday goods at the end of the third quarter and and were pleased as we mentioned in our prepared remarks, we're pleased with the early product except.

And so that we're seeing to those holiday Assortments and we believe our overall inventory levels are positioned appropriately as we now head into the fourth quarter.

Great. Thanks, Andrew next question please.

Thank you. The next question will come from Omar Saad of Evercore. Your line is opened Sir.

Good morning, Thanks for taking my question great quarter.

And your I wanted to ask follow ups and BBW of kind of think about the stickiness of some of the categories that obviously have been so strong drink co. Good maybe you could frame the growth new customers coming into the franchise versus greater spend from existing customers and I'd also like to hear your views on the stickiness of soaps versus home fragrance versus body care and.

Lastly, as part of this does does the vaccine news of positive vaccine news news affect the way you plan for beyond the pandemic next year and and beyond thanks.

Thanks, So mark.

Thanks Omar so.

And your first piece, Oh, I guess of the maybe the stickiness second but on the customer piece.

As we shared on the last earnings call coming out of the first six months of the year based on the stores closure for about 90 days in the first half of the year, we had seen fewer customers a year to date through the first six months ago.

The good news is in the third quarter, we saw substantially more customers a year over year and both channels.

Stores and are on line channel, but that does still leave us year to date as we exit the third quarter down slightly.

Low single digit customers fewer than than last year and at this point again, driven by that approximately 90 day period, where the majority of our stores were closed in terms of the profile around the customers as you would expect we've seen tremendous growth out of our direct channel customer file.

Order of magnitude about double last year and within that we've seen a very nice growth amongst new customers and new to the brand and new to the channel and we're seeing nice improvements and the number of customers who shop, both in stores and online directionally.

Directionally you know those that.

Number of customers is up over.

Over 70% year over year and as a reminder of those are our most productive customers spend of about three times more than a single channel customer.

To spend within the customer mix. We're also seeing very nice of you would expect growth and our soap and sanitizer customer base.

And that has allowed for more cross category shopping of customers as well and similar to the cross channel mix benefits of cross.

Cross category mix benefit is also significant meaning that a customer who shops multiple categories.

Is more valuable than of customer, who only shops single category.

As your question then around stickiness and around how if at all.

The vaccine would impact our planning for next year I I guess at a high level all of us are hoping and praying for a vaccine to come as soon as possible so that.

First and foremost you know all of our all of our friends family Associates a.

Okay and can live in a a safer world go forward.

Certainly we would expect that that will start to have some impact on customer shopping behavior.

But I do believe that some of what we've experienced so far this year is probably here to stay in terms of of how customers behave.

For example of some of the growth and movement to the direct channel I think has been an acceleration of a multi year trend that we had already been observing and so I would expect that to continue.

When you think about our categories I think the good news is for Bath and body works the categories that we play and we're again super strong and relevant before the pandemic and a couple of cases, I think they've actually been enhanced.

By the pandemic, specifically subs and sanitizers and and to a lesser extent, but still material our home fragrance business as well with people spending a lot more time.

In their homes.

But but I would expect that those again were strong categories. Before we will continue to be strong growth categories at the industry level and for our business go forward and I do think that some personal habits will of change on a relatively permanent basis in terms of of customer focus on.

Handwashing and and overall safe.

Safer lifestyle choices when it comes to keeping clean.

Go forward, so long winded answer to say nothing about nothing about what we're seeing would have us or have any less confidence in the long term prospects of the business.

Great great color so far thanks.

Thanks Omar next question please.

Thank you. The next question comes from Janet Kloppenburg of J.J.K. Research Associates. Your line is open.

Good morning, everyone and congratulations on a great quarter and four.

For and two I was I wanted to clarify that you of promotional strategy is to match last years I understood over more of days, but it is within your EBIT guidance is that also assume that your promotional levels will be shallow year over year and other whats the depth of discount.

Counting won't be lower and hi, Stuart I was wondering on the Victoria's secret business. If you now feel confident that you understand the direction that the plan and.

Needs to move and two we capture a topline and margin and if you know you're able to go forward and what that defined strategy or if you're still in that and a bit of a test and learn and and people yet. Thank you.

Thanks, Dan It's Andrew.

[noise] Hi, Janet. Thank you my question and so I'm on the promotional strategy. The short answer is it's a mixed approach. So on some some days within the fourth quarter, our promotion level or will be the same as last year, because those are big of shop wide.

Deals that we'll be doing and expecting to.

Be at a similar depth of promotion just spread out over more days of specific example, there would be our black Friday promotional strategy. How you know that that is a shop wide deal would extend over more days than it did last year, but in other cases, where the promotional strategy is around day sharp price.

Point around and individual item and.

In general we are planning for those price points to be up versus last year, but again, the the impact then being the spread of those prices over four days than what were in the last year timeframe. Okay.

Okay and camps.

Yes.

Janet Thank you and good morning, what I would say is with respect to the tank and the Victorias brands and the categories, you know intimate apparel, and and sleep and lounge apparel and beauty.

I think through John's leadership, Amy's leadership of Greg's leadership.

We have developed.

Pretty pretty clear points of view of.

About the future direction of the brands and the significant categories with that said, Oh, well continue to to learn and of all.

And but but I think that the merchant leaders and merchant Ceos have developed points of view that are resonating with consumers as evidenced through the results and the ability to improved margin rates meaningfully while still delivering a very healthy evolve.

James but I wouldn't want to suggest from that comment that we won't continue to listen and learn and evolve because we will.

But I think we're off to a we're off to a good start we do have points of view, we're executing against those points of view, but it's still early days and there's more to do and and we will continue to evolve as we move through the next sequence of time. Thanks.

Thank you.

Thanks, Janet next question please.

Thank you and the next question comes from Kimberly Greenberger of Morgan Stanley. Your line is opened Miss.

Great. Thank you so much excellent execution here, Andrew and Stuart I understand obviously, both businesses seems to normalize through the third quarter and you're not offering for Q guidance today for very understandable reasons, but one of the things that might be just helpful to help us think of.

Out of it is if you could share of the two brands and maybe their exit rate how are things looking as the business normalized in October and and Andrew and you talked about holiday volumes in store at three times debt.

Third quarter average I think and Uh huh.

If you or Hindsighting holiday this year.

And what sort of level of store productivity would you think would be a very solid performance. How many you know coming through the holiday season is that running at 70 or 75 or 80% of last years levels I'm just wondering how you might great at.

And then lastly, Stuart if you could just help us understand the expansion of 870 basis points and gross margin between the components much margin expansion of buying and occupancy leverage and whether any of the expense savings that contributed thank you.

Hey, Kimberly so I take that last question.

The total company gross margin rate expansion and.

The 870 basis points with roughly equal between merchandise margin rate and buying and occupancy average rental.

And more weighted to merchandise margin of rate expansion and number two store for.

And another question per store right.

Right.

She was asking about exit rates and I think some of the assumptions on on BBW stores were excellent productivity yeah. Okay.

So on the exit rates and sorry for for Victoria's and and I think the same is true for BBW Kimberly the kind of most recent selling trends year on year change, our Oh, and overall basis, consistent with Q3 and total so that.

No you are curious about current trend of business and our our perspective on and <unk>.

Well sharing and again it happens to be the case for both businesses is that the current run rate of the business similar to the overall Q3 total as Andrew commented on earlier. However, we all know that that you know that the fourth week of November in size and significance and you know dwarfs everything else, but the business is running pretty consistent.

So that's what we'd offer there.

[laughter] and the second part of your question Kim that sounded like a pretty coy way to try to have us give something resembling guidance.

But but I'll attempt to offer a response without going into detail and that but.

At the end of the day with the capacity constraints that we've articulated and and I know as you. Appreciate the reality is the situation around capacity and regulations outside of our control is a very fluid one with a different states and and municipalities are changing perspectives on that on a per.

Frequent basis.

But if we just use of our overall view, which.

Prior to any of those jurisdictional changes, we had gotten comfortable in both businesses running between 40 and 50% of Max capacity to last year and again, some jurisdictions will require us to operate with less than that but if you think about that as as a cap if you will on traffic.

On the biggest days of the year because again, it's only on the biggest days of the year, where that Max capacity does come into play but.

But with with the traffic on those biggest days of the year, you know being down 50 plus percent based on those capacity.

Constraints, even with the big.

Improvements, we're seeing and both businesses around conversion and around average dollar sale you can understand that we will not be able to hit a the total volumes that we saw on those biggest days from last year, thus the strategy to spread them out.

And without without going into more detailed guidance hopefully that's a helpful helpful model.

Thank you so much.

Thanks, Kimberly next question.

Thank you. Our next question comes from Mark Altschwager of Baird. Sir Your line is open.

Good morning, Thanks, and great quarter.

Wanted to ask just.

Bigger picture questions on margin, so and you're starting and BBW. It looks like operating margins. This year are on pace to be kind of mid to high Twentys and how are you thinking about potential normalization and.

Fiscal 21, or maybe if you don't want to give specific numbers I guess any learnings from 2020 that would impact the prior framework such as that business could operate at structurally higher margins versus the roughly 23% of business was that over the last several years and.

And then you know per Stewart of its pretty remarkable recovery and the vs margin this quarter.

Yeah. It would seem like the business is now well and the way to break even this year and if we carry forward. The Q3 inflections and next year the brand would seem to be nicely profitable again, but obviously tough to extrapolate one quarter. So just understanding that there is a lot of near term and certainty any high level thoughts you can share and where the brand is from a.

Run rate profitability perspective today. Thanks.

Thanks Mark.

Hi, Mark or so.

To your question around Bath, and body works and and how we're thinking about operating.

Margin rates as we move out of this you know very unique year and frankly.

Probably need to think about as we lap. This year next year. So I would say, it's it's likely that book 2020, and 2021 will be somewhat unique in terms of what that operating margin profile looks like especially and different time periods throughout the year, but if we're talking about a more or less.

Long term basis for the business, we've been very consistent and saying that we believe this is a business that can and should operate in the low twentys per cent range from an operating income of oral less.

And there's nothing of that we're seeing today that would make us have a different perspective on that on a go forward basis.

Sure Hi, Mark Good morning, what I would say about Victoria's secret is of.

Based on the third quarter results were ahead, mark of where we thought we would be.

And I say that not in of hopefully of boesel way at all of its just were ahead of where we thought we would be and and with that said there. We got a lot more to do so we've made good progress strong quarter happy about that proud of the effort of so many people to make that happen, but it's one quarter as you point out of.

And your question.

However, you know strategically you know as you know from your following of us and and others and the industry.

Similarly, situated businesses with brand power and and strong categories and with and within our own history cash.

Can be mid to high teens operating income rate businesses. They can if you look at lots of players over long periods of time.

And performing really well and executing really well that's that's where you can be now we're a long way from that we've just finished one solid quarter. So we got a lot of work in front of us.

But there's a lot of opportunity and and so we're taking it one week at a time and one month at a time and trying to do the right stuff with respect of the merchandise assortments that customer experience the brand positioning the quality of the team and the culture of the business and and we're off to a good start, but we got a lot in front of us.

But I would say the potential is when executing well.

That there should be you know a 10% to 15% operating income rate business and that's that's potential that we should be able to realize and the next you know several years next year or two if we really execute well lot in front of us, but that's the potential thanks.

Thanks, Mark next question please.

Thank you. The next question will come from Dana Telsey of Telsey Advisory Group. Your line is open.

Good morning, everyone.

Nice to see the improvement and the continuation of strength of Bath and body wax Stuart on the Victoria's secret turned around and they see you mentioned that there were significant guide posts to watch for as you think about going through 2021, what should we be looking for whether it's in Monterrey, and paying and indicate that we should lean twice.

And as you think and feel about BBW and going through 2021, how are you thinking about the category penetration and its potential movement from what happened and 2020. Thank you.

Good morning, Dana and so with respect to a Victoria's secret and and guide posts in 2021.

What I would say a Dana is is a healthy revenue line and what I mean by that is revenue growth or revenue outcomes.

They don't come with healthy margins are a sign of a problem and and you know that from all the work that you have done and and that you do.

So for US it is a.

A healthy balance between unit volume.

Average unit retail pricing good better best execution, ultimately again coming through a healthy topline with very healthy margins along with a continued execution on the profit improvement plan that we.

Started simple matter or put into into action I should say a in August so it's those healthy revenue and margin metrics and strong execution from our brands standpoint, and a merchandizing standpoint, along with no good channel mix and and healthy margin characteristics of.

Those would be the guide posts. Thanks.

And ER, Hi, Dan and thanks for the question so.

Again.

From a current focus where we are really heads down and trying to deliver the best possible fourth quarter, but certainly as we are working on.

The product development pipeline looking out to 2021, you know at a high level, we would expect that we will see a moderation and and whatever has been tremendous growth rates and our soap and sanitizer business.

And the more balanced growth that we would look for across the portfolio as we move into 2021. So we would expect to see probably on a relative basis higher growth out of body care and home fragrance relative to the growth, we would expect out of soap and sanitizer.

And I think it's fair to assume that on a mix basis again soap and sanitizer, which had been just under 15% of our business. Historically, we would expect to maintain at least at around the 20 per cent of the business, even as we move into next year and beyond if that's helpful. In terms of your modeling.

Thanks standard Thanks, Dana next question please.

Thank you. The next question comes from Oliver Chen of Cowen Your line is open.

Thank you and the Bath and body works Division nice job and all of the momentum and the digital connection between the online and mobile experience and then stores could you highlight and.

What's happening there and opportunities you have and door progress you made and how that may be important and fourth quarter as a customer is or are looking at all of these channels together and then on the product mix and BBW does that have material margin implications, we should know about over time. Thank you.

Thanks, all of her so on your on your first question.

Again, we've been very pleased with our ability to scale up our direct business through the year from a capacity standpoint, but also from a capability standpoint, and and I think maybe what you're probing on is obviously more and more customers how they.

Experience any brands, a bath and body works Victorias secret or any other brands tends to now be first.

And for most of through a mobile device and so we are very pleased with how well our brands translates on mobile devices and in terms of the look and feel brand projection that we give on those devices and our ability to service order.

Of course through mobile or through any digital platform has again continue to be very stable and continues to be something that we're proud of and we will continue to make investments into those capabilities as we move into future years as well and.

In terms of the product mix and any material impact that that has on margin and the short answer there would be not not a material one all of our of categories that we operate and our our high margin categories. The soap and sanitizer of business specifically within that is about at the average.

Of our overall margin a.

Margin profile, so nothing that that that growth or or change would have as an impact to our overall rates.

Thank you.

Thanks, Tom and where we're going to try to squeeze two more questions and so next question.

Thank you. The next question comes from Marni Shapiro of retail tracker. Your line is open.

Hey, guys congrats on a day quarter and the stores look fantastic set of holidays.

I've, two very quick ones and Pink I'm curious if you could talk a little about a little bit about the age of the consumer coming in are you seeing a younger shopper come in for debt bras and panties like the lately and nine sports bras and things like that as justice stores and suppose they had a pretty big footprint and owned that sort of first Brian panties.

Sperry and and then if you could just remind us I know youve rolled out and pick up in store and.

Curious, if you've had and if it meaningful at this point for you guys.

So more of me, we'll go to Andrew first for bump and <unk>.

<unk>.

Hi, Marni, yes, as we talked about on the last quarter call. We we were able to launch the buy online pick up and store capability or earlier in the year and we have been using that I would say sporadically throughout Q3 or two.

Really help with any of the times, we had capacity constraints or store closures on a rolling basis, we have not ruled it out broadly to two stores that are able to be opened and operating in a fully opened capacity.

Really the learning around around the capability has been interesting. It certainly appears to have some level of us some small level of incrementality of but really its most important for us as a what I'll call and insurance policy when or if we have stores that are unable to operate.

Keeping them opened and able to operate in that buy online pick up and store a manner, especially in our off mall locations is a very nice safety net to now have as of capability.

Day.

Stuart.

Good morning, Marty So as you know the target customer if you will a war of think is that college age a young woman <unk> and with that said you know the brands Appeals to a range of ages and I would say that you know Amy.

As it is and the team are doing a good job really executing two two targets of business through the projection of the business. The merchandise itself to that college age of customer and and again understanding that there is and age range around that that that customer of but but.

We feel she feels like we're doing a good job targeting that that that that college age customer.

That's what her comment would be that [laughter] thinks there.

Thanks Marni last question please.

Thank you. The last question for today will come from Carla Casella of JP Morgan Your line is open.

Hi, I'm at a cash flow question about that and the store closures are you have you and the <unk> you have the lease of.

And.

Breakage cost you talked about earlier in the air has all of GAAP and bankcard, and we have a catch up for that and the fourth quarter.

Good morning, Carl let Stewart, and there's a little bit of a catch up in the fourth quarter and of and that's where it'll be concentrated but Carla we feel very good about our cash projections and our liquidity, but a there is some catch up.

And ER and the fourth quarter, but a lot of moving pieces as you understand and we feel very good about our cash and liquidity position. Thanks.

Okay and your energy.

Got it.

Hi, guys and the international debt that you have been carrying the international facilities does that go with UK, Ireland business or is that related to and China or the other international.

Got it and largely relates to China, and we may end up paying that off and the near term here Carla. Thanks.

Okay, great. Thank you.

Yep.

Thank you that concludes our call pair of this morning, we'd like to wish you all a happy Thanksgiving day safe and healthy and thank you for your interest and <unk> L brands.

Thanks.

Thank you all for your participation on today's conference call at this time all parties me just kind of.