Q4 2020 L Brands Inc Earnings Call

Yeah.

Yes.

Okay.

[music].

January 30th 2021.

As a matter of for them outlet and eat to remind you that any forward looking statements. We may may caught in her car per day are subject her safe Harbor statement found it and or at C. C filings and didn't her preferably at six.

Joining me out and the call today or Andrew that flow C. E O L brands and bathroom. It works Martin and water C E O Victoria's secret and <unk> CFO at the out brands.

Alright, so we discuss it and call today are are just at results and exclude the special items described and our press or at least.

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

Thank you Amy and good morning, everyone.

As we reported last night, we delivered record results and the fourth quarter and we could not have done so without the hard work and dedication of our whole team of associates and partners.

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

Before we take your questions. This morning, I thought it would be appropriate to take a few minutes to reflect on the year. We just completed.

Which presented many challenges, but at the same time yielded so many accomplishments and our business.

To highlight just a few of these accomplishments for L brands and total.

We led with our values and and emphasis on safety. So we could be confident and our decisions and actions to support associates customers and our business.

We shifted how we ran the business and thanks of technology didn't Miss a beat and managing the calendar and processes that drive our businesses each day.

We created ways to navigate the pandemic and support our associates and partners to ensure we could continue to deliver results.

We took significant actions to increase liquidity and end of the year was 3.9 billion and cash and delivered 1.8 billion and free cash flow.

And restructure of the organization to prepare us to operate as two separate businesses go forward.

We successfully spread business across the fall season, with sales volume and margin rates that outpaced expectations.

While the above comments reflect what we did tactically. It's also important to reflect on how we got there, particularly and a year, we saw of substantial social unrest and political divisiveness.

The leadership of the business focused on advancing of healthy high performance culture, including efforts around diversity equity and inclusion for ourselves our business and our communities.

In addition to continuing to develop our internal leadership talent.

We also recruited of number of new leaders and important roles that both deepen our capability and add to the diversity of our team.

Shifting now to accomplishments that relates specifically to Bath and body works.

For the year, we increase sales by $1.1 billion or 20%.

And operating income by over $600 million or 50% and.

And delivered results, we could not of predicted and the middle of of of global pandemic and a year of significant change.

We further enhanced our brand positioning with evolved designs strong product acceptance emotionally compelling on trend seasonally right merchandise and marketing.

We matched our customers mindset about wellness self.

Self care and nesting at home.

And we established soaps and Sanitizers as true traffic drivers and of solid third pillar of the business.

We continue to leverage our speed and agility and made smart choices to plan and replay and the business and manage inventory took.

So commercialized chase and allocate product and.

And divert and move inventory, where it was most needed while also of building continuity and capacity into our supply chain and of larger network of fulfillment and distribution centers.

All of which gave us of velocity of inventory flow to match increased science for our products.

We more than doubled R. U S direct business to $2 billion or 31% of the total business inside of 12 months breaking high watermarks multiple times during the year.

And importantly, we were among the safest as well as most fun and first of place in the mall for Christmas.

We expect of 2021 will not be easy as the world the retail environment, and our enterprise and business continue to evolve and as we lap. These extraordinary 2020 results.

What was continued smart management of the brand and business I know, we can become a fully separate Standalone public corporation and proactively accelerate to our next phase of growth.

And with that I'll turn it over to Martin waters.

Thanks, Andrew and good morning, everyone.

First let me say, how excited I am to be joining of this morning and for the opportunity that I have to leave the Victoria's secret business.

Victoria's secret team led by Stuart has accomplished of remarkable turnaround and the last six months.

And the full season, we deliver at about 400 million of 300 per cent increase and operating income at of profit rate of 15 per cent of sales.

And that is a result of improved merchandise assortments more disciplined inventory management.

Best of management of promotions.

Two of selling execution online and and stores and of course of the positive impact of our profit improvement plan.

While much has already been accomplished I'm highly energized by the opportunities that we have in front of us to reposition and grow this iconic brand as a standalone business, thanks, and I'll turn it over to Amy.

Thanks Tonight and that can clinic per per per.

There at comment at.

At this time, we'd be happy to take any questions. You might have we are all at different locations today, So I'm going to do my best to get rack that question to at the right.

As a reminder.

Interest of time and consideration to other please.

To one class and thanks, and I'll turn it back over to Catherine.

We will now begin our formal question and answer session. If you would like to ask a question. Please press of Star one on your telephone keypad only record your first and last name and your name is required to announce of your question to withdraw. Your question you May Press Star too and the first question is coming from semi and Segal B and.

Capital markets. Your line is open.

Thanks, everyone Big Congrats on such a nice way to cap of the year. So so congrats.

Andrew Soaps and Sanitizers aside can you speak to any changes you observed and how your customers shop. During the pandemic of what you think proves longer lasting maybe just help us think through characterize and the growth and new customers vs higher frequency of shop vs. Higher of you are thank you.

Thanks, and in and room, obviously, yeah. Thank you send me and for the question.

And so on your first part of the question in terms of growth outside of class and Sanitizers I think it's just important to remind everyone and we've said it and.

And the prepared remarks, and both Q3 and and queue for sales and sanitizer was a significant growth driver for the business in 2020 really the whole.

Year, but as we called out we saw about.

Two thirds of the growth come from outside of soaps, and Sanitizers and and as we said on prior calls really the biggest trend within that two thirds has been and our home fragrance.

Business as we've seen the customer of clearly as.

As he or she is spending more time at home and and spending more attention on making their home.

Comfortable place to do business schooling.

At cetera, we've seen again continued strong growth there, but importantly on the on the year, we did see a strong.

Double digit comp growth and all of our categories. So.

So again at a very balanced performance with the exception as you mentioned of <unk>.

Hopes and Sanitizers that really experienced outside's growth across the entire time frame.

And when you think when we think about customer behavior in general we.

We did see that our customer of spending.

Across all categories and across both channels.

It was up significantly year over year from a total number of customers.

Because we had stores closed for about 90 days and the first half of the year and because of the store customer store only customer at the beginning of the year represented a little over three quarters of our total customers that did mean that we saw of decline and number of customers who shopped at.

And stores for fiscal 2020, but we were able to almost fully offset that by the increase that we saw and our direct customers and and our dual channel customers. So while we finished 2020 with us.

Slight decline and the total number of of customers we.

And we did see customer engagement metrics improve substantially so spending by all customers up over 20% and importantly, strong growth and both direct and dual customers and as a reminder of dual customer dual channel customers spend an order of magnitude more than three Thai.

Jim's a single channel customer and and the last piece I would emphasize at again, we saw strong cross category.

Growth and customers meeting number of customers, who shop multiple categories within the business as opposed to just one and as we saw that strong growth really led by cuss.

Customers engaging and subs and Sanitizers, we saw that spending also increase substantially.

So hopefully that helps.

Great great. Thanks, so much of congrats again and best of luck of the year.

Hey, semi and next question, please and if.

Question is coming from Lorraine Hutchinson Bank of America. Your Lane is open.

Thanks, Good morning, and drives hoping to get your perspective on longer term and the longer term outlook for Bath and body works margin. If we use 2019 at the base can you talk through the puts and takes and and where do you see the opportunity for margin to shake out <unk>, 2020, and and and into the coming.

Two to three years.

Alright, and thanks for the question.

So.

Obviously, we went into a little bit of detail and are prepared remarks.

Last evening, so important to recognize that 2020 was was definitely an outlier here in terms of the operating margin result that we achieved at 28 and a half.

Which is as you're pointing out was up substantially to even 2018 and 2019, which were very good years for the business up over 500 basis points.

When we look at that opera mate operating margin improvement and.

About half of that improvement came from significant gay.

Gains in merchandise margin rates.

And again those merchandise margin right improvements were achieved by significantly reducing promotional activity within the year and that promotional activity was against all of our different vehicles. So we saw less clear and selling more full price selling we saw fewer.

Days of power of traffic driving promotions.

We were able to actually take promotion on pricing up even on essentially flat ticket pricing and we had fewer shop wide discounts and then we had offered historically through email or direct mail.

So as we think about that.

Level of improvement.

Our assumption is that we will have to give some of that improvement that we saw and fiscal 2020 back as we move beyond.

The the snapback, if you will of stores got reopened and the tremendous growth that we saw and our direct channel demand up over 100%.

For the year, so as we begin to lap some of that activity. We do expect that some of that merchandise margin gain and we will have to give back but as you know and we've talked about on many calls and the past we are constantly doing read and react testing to understand what what our customers are responding to in terms of premiere.

Sure and what it's required to drive.

Both traffic as well as customer acquisition and unit <unk>.

Selling to maintain market share of gain market share. So those are all important considerations that we will use as we move through 2021 and beyond.

The other half of the operating margin improvement that we saw and 2020 was really driven by leverage of both SG&A and buying occupancy on obviously, the very high sales growth total sales grew by 20%.

For the year and comp sales and the time frame that we were open and grew by 45%. So obviously.

We do not expect that level of ongoing sales growth and so there will be some deleverage as we.

As we returned to more normal sales growth go forward and as we continue to make investments into our operating costs around and safety and supplies.

And to wages, and labor and stores and supply chain and into investments and capability and digital and Omnichannel.

So the net net of all of that as as we said and are prepared remarks, we do believe that the right long term operating margin structure for the BBW segment as of currently exists is and that low to mid twenties, but the the pace at which we get to that will be completely dependent on the business results that we see.

<unk> is and as I described of continuous testing and that will do throughout the year.

Hopefully that makes sense.

Thanks. Thanks.

Thanks Serene next question please.

And the next question is coming from eight borough channel of Wells Fargo. Your line of something.

Hey, good morning, everyone I'm not sure of this question of <unk>.

Would be for maybe store it if he has all of them, but just two quick ones on the Victoria's secret business I guess I'm not sure how much color you could give us but just curious.

And could you give us some color on if there is if and when there is a potential sale of the business how to think about tax leakage and that scenario and then again I know you're not giving guidance on vicky's, but given the trajectory of seems like the business is scaling pretty quickly it seems like EBITDA and that brand could approach a billion potentially.

Of this year, just just any color on what your expectations are for go forward profitability would be helpful.

Thank thank good morning.

Stuart Yep Yep good morning, like thank you.

So as you point out and your <unk>.

Question I.

You know and Ah, we're pursuing a dual path.

Approach.

To the separation of Victoria's secret tool path, meaning.

Looking at a spin option where of Victorias would become it's own public company and so.

Separately of sale option, where we would sell at two.

A third party.

And I think as you as you mentioned and your question of sales scenario.

Very likely to have significant tax cost to it.

Whereas a spinoff done and the appropriate way, which would certainly be our intent would be of tax free transaction. So it's one of many considerations, but obviously the tax leakage could be significant and of sales scenario.

And that with a range of other factors will be considered by the board as we as we work through this process will get the right at advice from and.

Legal and and banking council and so on but the spin option as of tax free option, but we believe it can be accomplished in that way and that would be one of the advantages of.

Of of spin option, so that would be our perspective on that.

And then I guess, we commented on and our.

Prepared and.

Comments that got circulated in terms of the profitability of of the new car.

What we mentioned and what I believe Martin believes we believe is that the business can be managed well and deliver meaningful growth.

And and operating income rate range, and EBIT range of between 10 and 15% and.

And as many of you.

Have recognized we're basically in that range at this point.

At the meaningful progress that we've made in the and the back half of the year. So there should be at 10 to 15 per cent business will obviously shifts more to gross as.

And as we move forward and the Dollarisation of that is meaningful.

Other it's on and EBIT basis, or and EBITDA basis.

And and we're excited about the growth of the business. Thanks.

Thanks.

Thanks hike next question please and.

And the next question is coming from Roxanne Meyer M. K N partners. Your line is open.

Great, Thanks, and congratulations on and you're strong results for the corner and the year.

My question is around BBW store of growth strategy and.

Specifically on the international and I'm, just I'm curious what the long term strategy is there and and as part of that you know any thoughts around developing and owned stores strategy vs franchise, and then if you could I I'm also curious to hear I know that almost half of the are you at stores are off now are.

And are there certain characteristics of your top performing off mall like eight locations are of format that you can point too. Thanks a lot.

Thanks, Roxanne and her.

Hi, Good morning, Roxanne. Thanks for the question so on.

The first part of your question regarding international Uhm and.

International as we called out and our remarks had a strong year international and many ways mirrored the results. We saw in North America in terms of challenging business and the first <unk>.

Water and first half of the year with store closures.

But our international partners franchise partners did a very.

Very very good job of building substantially their digital capabilities and capacity through 2020.

Which led to closing the ear and a very strong way for both Q4 and and the year of growing sales and operating income nicely and.

And as you saw and our materials were also.

Planning our partners are very bullish on the business. So we're planning further growth in 2021 of <unk>.

50 to 75 stores.

And primarily existing markets that are franchise partners already operate strongly in.

And so they are bullish we are bullish on the continued.

Opportunity for growth there to your specific question around are we contemplating or would we contemplate moving from the franchise model two and one store model I think the short answer on that is right now no. We're very comfortable and pleased with the model that we have and place the results that we're getting.

The relationships, we have with our partners I'll never say never but again not not part of our growth strategy here and the next several years.

And to the second part of your question.

Again, we called out specifically and our prepared remarks, you know that with the tremendous growth of digital and with the continued chain.

Change and our portfolio to focus on and off mall stores.

We're down to only about 35% of our revenue coming from.

Mall stores. So obviously the other almost two thirds coming from digital and off mall.

Your question around what are the type of operating performance, we see out of those off mall stores again as Bath and body works has become much more of a destination.

In and of itself, what we see and are off mall locations not surprisingly is significantly higher conversion rates than we see and mall stores.

If someone is coming into and off mall location and they almost certainly have already decided before they before they made the trip that they intend to make a purchase and so that operating.

Profile is certainly stronger and are off mall locations at.

And probably not surprisingly are are operating costs and general are lower and are off mall locations and so of their profit rates tend to be on par or better than an average mall store and then importantly, again I think partly driven by the pandemic, but also probably driven.

And by just a longer term shift and customer behavior, we saw a pretty substantial outperformance of our of mall locations. This year vs. Our mall based location. So about a cop about twice as high and off malls vs malls for the full year.

And so that again are important elements and why we continue to move and the direction strategy wise that we've articulated in terms of shifting more and more to off mall locations.

Hopefully that helps thank you.

Thanks Crafts and next question please.

Our next question is coming from Matthew Boss J P. Morgan Your lane is open.

Thanks, and congrats on another great brands.

At two part question you decided you were pleased with February topline could you just elaborate on trends that you've seen post holiday, maybe my concept and then Stewart.

<unk> net debt I believe is at a 10 year lull, how would you prioritize capital of allocation of opportunities following to be at transaction.

Okay, Thanks, Matt, so and or when it start.

[laughter].

Sure So as we mentioned.

And the remarks February.

It's coming out and we saw a few days left and the physical month, but it's certainly trending to be a very solid months for bath and body works.

Frankly performance of that is in line to slightly better than what we achieved and fourth quarter and therefore at the higher end of of what we were expecting as we came into the quarter, but as we mentioned.

We've already reflected that performance of February and our current guidance and.

Terms of a little bit more of color around February and even late January as we moved out of semi annual sale, which takes up our first couple of weeks of January.

So looking at essentially the last six weeks, we've been very pleased with of performance of our new spring product both in the.

Theme floor set that was focused on Valentine's day, which was the last couple of weeks of January and the first couple of weeks of February as well as as we've moved past Valentine's day now are tropical based.

<unk> and theme.

In stores and online has also been performing well. So again good early reads on our spring merchandise and strategies overall.

Great, Thanks, and and start over to you you want Martin on February.

Or yeah.

Yeah, Martin and you want to Rebecca Shaw and then yeah.

Yeah sure of happy to at very similar to what Andrew said with what pleased with February very so at results with the 90% of the month of that saying at or above what we saw and queue for overall and that's driven by significantly higher.

Significantly higher merchandise margin rates less promotion Ality and they're really good response to R. V Day collection, and we had a very good V day period and over all of the response to spring motion dies, you've been very positive. So so we're we're upbeat and we're bullish thank you.

Thanks, Martin and store it.

And and that.

Yep.

And so mad as you point out.

We've we've generated at a lot of cash and we're holding a lot of cash and and the business and it was and intensive effort, including support from lots of people, including our partners and then of a strong operating result, but we are we end of the year with $3.9 billion of cash.

And so as we think about where we are and as we think about the next roundly six months five or six months with respect to the separation.

We are evaluating the the subject at you asked about which is what are you gonna do with all this money and and how do you think about it.

We haven't made any decisions we are getting outside of advice.

We've retained Goldman and J P. Morgan to help us with the separation and and they're giving us their perspectives on on the subject you ask about as well.

So we're evaluating options.

Board, obviously will review thinking and and will approve of anything that we do but and the answer to your question. What what are we thinking most of that we're thinking about reducing debt.

We're thinking about buying stock, we do believe and the opportunity.

Unity to drive.

Appreciation and the stock including through of rewriting of of Bath and body works and we're also thinking about resuming of dividend, but these are all of things that were just thinking about no decisions have been made obviously when we make decisions will communicate those.

And we're thinking about.

The timing of that evaluation and the timing of of.

Of those decisions in terms of before or after or multi stuff for single step.

With respect of the separation so it's a big subject of good news is where and a good place. So we've accumulated a lot of cash.

And the maturity profile of life you know it was very healthy we took a number of actions this year to improve that maturity profile. So we start the subject and a very sound position.

But again, we believe at appropriate to reduce that there is absolutely and opportunity we think with respect to the repurchase of chairs and the company paid of dividend for a long period of time and that is an important.

Morton form of a return for shareholders and of company like this so we're evaluating all of it but have not making decisions. Thanks.

Thanks store next question please.

The next question is coming from Susan Anderson of B Riley Your Lane is open.

Hi, Good morning, let me off of my congrats on a nice into the year I guess I'm going to follow up on the Pink business I think and they're prepared commentary you talked about 80 per cent Comcast and I love those shop and curious split per cent of apparel is Logan L. Now and then also how at the other apparel performed.

Martin or Stuart and I'm happy to jump and thanks for the question students. So yeah, we're pretty pleased with the performance of the Pink business I think the the way to think about pink is that approaching half of the business is and they intimate category at about the other half of the.

Of business broadly round numbers is and the apparel segment at about half of that half and apparel is logo and that's why we saw significant growth. So hopefully that helps you dimension the business over all.

That is helpful. Thanks, so much.

And.

Next question please and.

Next question is coming from Kimberly Greenberger Morgan Stanley Your Lane is open.

Great. Thank you so much I couldn't morning, I wanted to ask two quick follow up questions. One on the sales versus the spin debate.

Is there a prize for the Victoria's secret business that makes a sale even with the tax consequences more attractive Dennis spin and then just a follow up on the get question do you have eight and he sort of.

Target at leverage ratio for BBW, and or Victoria's secret that you'd like to get too and any thoughts on when we might see some action on that pay down. Thanks.

Thanks and that is store.

Oh Kimberley in terms of like what's the threshold price that might sales the scale sales versus then as you appreciate.

There's a lot of judgment and that question and that's a judgment at the board will make.

So it wouldn't be appropriate to kind of speculate on what the the and the miracle.

The threshold would be we could all throw numbers against the wall and and those numbers. What I will say is those numbers are substantially greater than they were a year ago. So I think we all appreciate that based on the performance of the business, but the.

Judging and involved and that is important and is not based on a single factor, but obviously valuation and cash generation are important considerations as we evaluate the plus months, but but again I think gives you appreciate the the.

The.

We could all do math and speculate, but it's more involved and that and the good news is as we think about what the valuation of the business business may be and the and the public markets again, we we can all do that math and and it certainly implies a bigger numbers with respect to what would be required at tilt the scale of.

If you will so it's a good question.

And important question, but not one that will will throw and number out of.

And a call this morning, and again the board will make that determination.

With respect to leverage.

And what we would say is is we're doing the capital structure of work, we do believe that.

Leverage and the two and a half to three range on a lease adjusted basis of feels like a good target, but we are continuing to refine our views on that and then with respect to.

When might we see some action as I mentioned and the comments with respect of Maths question, we're looking at the subjects.

Important judgement to make about timing of actions and two step thing or at one step thing and and in terms of of decisions and and actions and and we're evaluating those things and and the board again will will make those determinations, but nothing to announce today.

Thanks, Thanks to the colors too at.

Sure thing.

Kimberly next question please and.

Next question is coming from L. My side of Evercore Your line of something.

Thanks for taking my question and thanks for all the information a couple of quick follow ups and Victoria's secret that you know the great margin performance there.

Was there a big lift from the the shift of the UK stores and to the J V and the other key drivers behind that margin transformation and I'm I'm sure promotions and reduce promotions as part of it and and and maybe also was E. Com are you seeing an infection and econ profitability and Victoria's Secret and then Martin maybe you could touch on you know you've been at the company.

And a long time, you know the brand really well, maybe you could touch on where where you see the Victoria secret brands position today, and and and and you're kind of ideas for for the and longer term brands strategy. Thanks.

Thanks, and my heart start to you and they take that first part.

Yep.

<unk> with respect to the back half of them are and and and more particularly even the fourth quarter of the the.

Result related to the UK was not a major driver of the profit improvement for the quarter of year on year, we are very pleased with what.

We're doing there go forward and how it at.

Will improve the operating result of the business for us or the recorded result of the business for US and we think next is of great partner, but in terms of did it make a big impact financially ear on your and the fourth quarter of the answer to that is no but again, we feel good about what we did with respect to the the.

Digital business and did it and prove its profit right meaning.

Meaningfully of year on year of the answer to that is it did and that was driven by the improvement and merchandise margin rates that we saw across the business and so that effect was significant and the online business and it's a very profit profitable business and a good business and in addition to growing top line the <unk>.

Profit right and the business improve meaningfully again, driven by the improvement and the merchandise margin right. Thanks.

Thanks start and and.

Martin and attack.

And how you're thinking about brand positioning.

Yeah, I'd be delighted to thanks, so much for the question of them. So you know and taking on this role I think about having four key priorities. So first day, it's about establishing a happy and healthy culture within the business and secondly, it's about really improving of product of focusing on the architecture about good better.

Best pricing and being really shop on opening price points.

It's about leaning into digital so that we adult to digital first mentality and we expect it at.

Probably 50 per cent of our business going forward and then full of claim very importantly, it's about facing into the brand repositioning work and I couldn't be more of delighted to be leading the work to refresh the brand positioning to make it more relevant to make it more inclusive to make it more consistent with the attitude and lifestyle of them out.

And women and so we have a little too huh.

And we've carefully decided to make some changes and that change is summarized by.

Per asking us to move away from telling her what we think is sexy and what day, we think she should wear and how we think she should look to being there to help out of craft the store that she wants to tell so our job is to support her and whatever way that she need just too and we know that she's rooting for us the engagement that we saw and the fourth quarter of it was.

Significantly two previous years, both and social channels, and obviously and digital commerce generally and we're winning and go back by celebrating her and inspiring and supporting her to show up. However, she wants to show up. So you will see significant change and the way that the brand is presented and rather than expecting.

You know a big reveal of big relaunch of the Brian This will the change and the positioning that of just describe will show up and everything that we do on a day to day basis and that means whether it be the imagery. When you turn on the screen on our website on your phone on the email that you get every day and a social media and the Macklowe of it arrives with.

For swim on Monday every single interaction that we have with the consumer either Polish is auton issues of the brand and we are determined that we will have Polish mentality and everything that we do from here almost so hopefully that helps give some color and I'm happy to talk more about it.

Privately if people want of him more thank you.

Thank you.

Thanks at Mart.

Next question please.

The next question is coming from Michael Binetti of Credit Suisse. Your Lane is open.

Hey, guys congrats on a nice holiday and thanks for all the help here and.

Yes, I'd like to ask about the the BBW digital customer.

You know how many how many of the new customers that you referenced earlier and the digital channel.

Are known to U R R and the database from the stores that that made me move back to the store channel has it reopens vs. Does that are that are new to you and the and the digital channel and then if I could just reflect back on some.

Some stores comments on the.

E Commerce margin.

And then you said you know a lot of it was the merch margin improvement, maybe maybe any thoughts you could give us on some of the other lines below merch margin and that channel. So he can think about how the profitability and leverage lines are looking aside from the merge margin.

Thanks at Andrew.

Yeah. So thanks for the question of Michael in terms of the growth we saw within a bath and body works digital.

About half of the.

Customers that were new to the channel.

We're also new to the brand overall, so had not made any.

Bath and body works purchase either online or in stores for.

The prior two years and about the other half were new to the channel maybe they were making their first direct purchase.

But had historically made a purchase in stores and again I'm speaking to the to the full year, there and and importantly, as I mentioned.

Specifically on that second group that would now be considered a dual channel customer of the spending associated with those customers relative to the spending of a customer who shops only online or only and the stores is order of magnitude three times greater so we're very excited about that growth and.

Dual channel customers and will work very hard to both.

Both retain those customers and to continue to drive their behavior go forward.

Thanks and store at any more color on Iraq operating margin.

Honestly and you know I'm, not really and it's not because I don't want to provide it or I don't have it in front of me cause I do but but the the big driver is what we commented on which is the merchandise margin right improve meaningfully materially year on year, two what we would describe as of healthy right and the profit right or the.

<unk> right within the.

And the Comm channel the digital channel for D. S. Newco is is very healthy and.

And and wouldn't offer of comment beyond that thanks. Thank you.

Thanks, Thanks, Mike of and Guy. Please if you could have one question he have and number of folks who are try and cat and.

And.

Ask questions and we're trying to get too. So next question please and.

The next question is coming from Katie Fitzsimmons R. B C capital markets. Your Lane is open.

Yes, hi, good morning, and thanks for taking my question and congrats on the results I guess my question is on Victoria's secret lingerie, and you ours and the 30 copying and the eighties, but overall you know branded calm down three and you guys are tightly can Charlie and the unit I've been saying no you're you're focuses on profitability of recovery, but we will be.

<unk> and some pretty significant inventory declines and that brands. So just curious how you're approaching balancing and returned to growth, which profitability has to be approach and he tells me and on the inventory. Thank you.

Martin.

And take that one show of happy too. Thanks, So the question and Katie. So I think you characterized at rightly that we've had significant.

Increases you've probably noticed we've had significantly less promotion of honesty.

And the reason for that is we go at their merchandise. So if you've got better stuff and you've got inventories manage more tightly and good things happen to the margin and we saw that particularly and January where we didn't need to lap the extensive saa's from prior year and we didn't need to laugh at the same number of plenty of parties et cetera et cetera. So we're saying just a <unk>.

[noise] healthy of business right now, but it's less dependent promotions and more dependent on talking about new and back and free rather than off and we're also seeing very good momentum and pink as well as long as of right and and beauty. So all I know we feel like we're on a good track and I think the word you used as balance and that's.

How I think about at that we while we want to ensure the quality of of earnings is good and at the profitability of the sales as opposed at at the same time, we want to drive both of them. So we want to be the market late and we want to have you know deep chairs and all of the core of categories of in which we operate so we're trying to keep it very careful balance on the tour.

To ensure that we're giving the right level of promotional support to drive Bowie and and at the same time hang onto the terrific games that we've made already and the way I would say at is that for the first half of the year. We expect that trying to continue because we're up against you know a difficult period from 2020 last year.

And as we move towards the back half of the yeah, well at all I mean, they were a little bit because we were already starting to see significant improvement and performance. So hopefully that gives you a bit more co located.

Thanks Smart and.

Next question.

The next question is coming from Paul Lashway Ah City Research your line of something.

Hey, Thanks, guys. I think you mentioned, 35% of BBW sales or mall curious if you could give that number for V. S. And also curious on BBW side, what is the absolute level of of sales productivity look like and and mall stores versus off mall stores after that big outperformance that you mentioned and all.

Small stores this year. Thanks.

Okay, let's start with Andrew and I think.

To start.

More and Paul Thanks for the question so.

Your question for at provide somebody walks around sales productivity and off mall locations vs more.

<unk> locations with the outperformance. So if we were talking at this time last year. The reality is on a selling sales per foot basis of small stores have historically outperformed.

Off mall stores by at relatively meaningful margin, but with the performance that we saw in and 2020 that I described where the comp was essentially double and the off mall locations vs. Mall. Those numbers are now closer, but mall stores on and absolute dollars per foot basis do store.

Outperformer off mall locations, but as mentioned are operating costs and off mall locations are at a lower than our operating costs and and modifications and hopefully that helps.

Thanks and Stuart.

Yep so.

All of US, we mentioned were and the 40 per cent range digital.

<unk> store going to 50 or 50 plus.

And then within store, it's about 80 20 mall non mall 80 20.

And the 20th comprised largely of street locations not exclusively but largely street locations. Thanks.

Got it thanks kind of good luck.

Okay. Thanks, Paul next question.

And the next question is coming from Cheney stricter of Geoffrey's Your lane is open.

Great. Thanks, so much and just a quick one on Bath and body works wanted to ask about the direct channel and if you had a sense of how much and that's it.

Film at and shipping backlogs you saw constrained sales and then any sense of of timeline or of time frame from from a meant there. Thank you.

Hi, Jane and thanks for the question so.

Bath and body works.

I had an incredible year, obviously sales up over 100 per cent fourthquarter sales growth was lower at about 75 per cent.

Certainly part of the reason that that sales growth moderated was what you're poking on in terms of some of the constraints we saw specifically with.

Shippers you P S Fedex et cetera, and their ability to handle the total industry level growth, but it's also important to remember that fourth quarter and specifically the holiday time frame and within fourthquarter is such a steep.

Slope.

For the Bath and body works online business that putting up even at 75% growth and queue for was a remarkable achievement and significantly above our expectations.

The second part of your question around how are we thinking about the growth go forward.

We're continuing to make big investments into our overall fulfillment capacity. We saw remarkable progress there of 2020 vs. 20th 19 fulfillment capacity up over 50 per cent, but we recognize that's an area that we need to continue to make investments and go forward and so short answer I do not see.

Shipping or fulfillment constraints as an impediment to the business growth as we move into 2021 and beyond.

Thanks, Andrew next question.

And the next question is coming from Gaby Carbone. Your line is open.

Hi, good morning, congratulations on of Great corner with one of them you can give a little bit a little bit more detail of on how you see e-commerce trends hang out at Bath and body of work diversity of stores channel kind of went excluding the kind of stores from last year. Thank you.

Thanks Gabby.

Yeah. So again, what we saw was remarkable growth online what we would probably have viewed as several years worth of growth all in one year and that channel.

And so certainly and I think it's only natural as we approached 2021 to be more conservative in terms of what we assume will be growth and that channel specifically for this year and we won't know the answer to some of those questions until we start to lap the timeframe.

From a year ago and a couple of weeks when stores were closed and direct was our only channel operating so we'll certainly be smarter over the next you know 90 to 180 days, but.

But but a lot to still learn as we think about the business longterm, though so again prior to 2020, the direct penetration to the total business was and the high teens per cent and we got all the way to 31% of the business and 2020.

We view that overtime that number should grow to the mid to high thirties, perhaps as high as 40 per cent over the next several years, but importantly, our goal is to continue to have strong growth and the direct channel, but also to maintain a strong vibrant growing store.

<unk> environment that is still of the ultimate expression of the Bath and body works brand and.

In terms of being able to really.

Stand for our tremendous fragrance experience and the interaction that we have between our associates and our customers, which we believe is such a strong part of the brand.

Great. Thanks, Andrew next question please.

And next question is coming from Dana Telsey of Telsey Advisory Group. Your line is open.

Good morning, everyone and nice to see the progress.

And do you think about the 30th of 50 store closures that you talked about from Victoria's secret for 2021 is that the normalized right that you expect of store closures going forward posted to and getting 41. This year and then just following up on Victoria's secret how do you see D. A Y journey progressing by category how should of different.

Thank you.

Thanks at Dana and Martin and when it take that one.

Yeah sure. Thanks day no further question. So as you know we close at 250 stores took that opportunity during.

During the pandemic, we think that it's reasonable to expect the next yeah 30 to 50 stores and will continue to review the fleet on a on a month to month basis reminder, about 96 per cent of our fleet is cash flow positive. So we don't feel like there's a burning platform too close hundreds of stores and.

Implied and your question is that we might be 30 to 50 store as of yet at forever and ever and and I don't think of that so so I would take at one year at a time expect 30 to 50 and will continue to update guidance as we go as it relates to a you all growth we have seen pretty consistent a O L growth across the categories, we sort of particularly.

A good growth and sleep and lambs categories. Good categories during Covid time and stay at home type of.

But also and I'll call luxury so I don't think there's a big difference there similarly, and pink Good day, you outgrow. It I think beauty is probably the one category, where there has been less to go out on the a O L growth, but overall and we should expect a continuation of of the trend that you've seen and queue for at least through the spring season and thank you.

Thanks, and Martin at two.

More of a question. So next question please and.

Question is coming from all of her Chin of Kelly and your line is open.

Hi, Martin and thanks regarding Victoria's secret at you think about marketing and and these changing nature of around beauty, what what demographics do you see as the most of opportunities there and new vs existing customers and then your comments and good better best.

Or are they where you want them to be uhm. It sounds like that's the important part of the strategy things.

Thanks Martin.

Yep happy to take that Oh of a thank you. So I think that part of our Brian and that has the most clearly defined democratic demographic targeting is peng well clearly we're going after the <unk> the consumer very important part of that random we know that our messaging around and diversity of equity inclusion sustainability Israeli resonating with that consumers.

And that's the most targeted I think as it relates to Victorias, we have a pretty broad church don't worry and actually we want the church to be even broader than it has been if anything we've been to specific and target and we think that as part of the brand narrative at described earlier that we should be appealing to more women more of of the.

Time for more stages of their life and that means that will be there at four and significantly more waste and we have been historically, whether that be true swim or whether it be true vacation of whatever it may be different life stages. So I would expect us to be less focused on a specific demographic target and.

And more focused on being broadly inclusive of all women and of all shapes and sizes and colors and ethnicities agendas and and areas of interest.

As it relates to good best at Best I think we all of critical of ourselves of saying that we haven't always had that balance right and that has led to some opportunity full of competitors to attack us at all cause space and.

And the fundamentals of merchandising take us back to those core principles make sure you have a really good opening price points and all of the key threshold categories and make sure that you are able to represent the brands and each of the good best of breast areas and so I think we're at the way we showed up and full whereas at a significant improvement and where are we.

And year over year old credit to the team and as we brought new players into our team with different merchandising and experience you know they have observations about areas, where we can see even further improvement during the fall and and and to next year of season, and so hopefully that gives you a bit more color of of highway thinking about it.

Thank you that's regard spank, thanks, a lot for her and one last question tank.

And our last question is coming from Janet Kloppenberg J J K Research Associates. Your line is open.

Good morning, everyone. Congratulations on the year of congratulations do it tomorrow.

From dramatic and all good things and.

Four uhm Angela I was wondering if as we think about quarterly sales per BBW issue and the very challenging comparisons you up again and should we think and it'll be pressure and two three and four of Clinton be some opportunity John and some of those period, how how would you.

One of us to think about that and pushed you at all from that and I was wondering about at 10 to 15 per cent operating margin call from Victoria's secret tests convenient to install of compete and if you're thinking of theaters uhm competition compunction, that's one type of color or.

Lower so of productivity and at me E limiting the upside opportunity I'll be at <unk> margin, but I'm just wondering about returning guys talk of levels from so much.

And scan at at Andrew.

And her.

Hi, Janet.

So you know as your question implied we're obviously up against some some incredible record performances as we move and 222 Q2, and even more so and Q3, but as we said we're really only providing guidance at this point per Q1, where we do see opportunity for meeting.

Full sales growth over last year wear stores were closed for about half the quarter and then as I mentioned earlier were really need going to need to get a handle on what level of stores performance do we see as we lap that closure period and and really looking at.

Two year results meeting 2021 back towards 20th 19 results and then similarly understanding how does direct perform up against those incredible results. So too early to speculate at this point, what that will mean for Q2 and beyond.

Thanks, and and Martin do and they take that question.

B as operating margin yeah sure of happy too and we don't see that there's a cap on the on a on a and I think it's a total of I'll, probably however, we do see that we want to leave room and a performance of a reinvestment and the business and you know we have a couple of specific areas, we want to make sure that and digital business that we're the best of the week.

Can be both and fulfillment and in terms of user of experience and we spent quite a lot of time over the last several years re platforming that business to get the fundamentals right and now we're in a position to offer a much better experience similarly, and those stores that we have at that some of them. Yeah, we'll need some love overtime and so we want to put ourselves in a position where we can do.

Live at the best possible brand of experience and quality of earnings at the same time and that's what's really behind the thinking of 10 to 15 per cent right. Thank you.

Mhm.

Thanks, Dan at that can create their call today. Thanks for your continuing interest and al brands.

This will conclude today's comprehends all parties may disconnect at this time.