Q2 2019 Earnings Call
After the speakers remarks, there will be a question and answer session. If he would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question press. The pound key. Thank you I will now turn the call over to MS. Amy Preston Chief Investor Relations Officer of L. Brands, you may begin.
Thank you Heidi.
Good morning, everyone and welcome to L brands second quarter earnings Conference call for the period ending Saturday August 32019.
As a matter of formality I need to remind you that any forward looking statements. We may make today are subject to our safe Harbor statement found in our FCC filings and in our press release it.
Our second quarter earnings release additional commentary and earnings presentation are all available on our website L. B dotcom.
All of the results discussed in today's call are adjusted results and exclude the significant item described in our press release.
Stuart Burgdoerfer, EVP, and CFO and I will handle the call today, Thanks, and now I'll turn it over to Stuart.
Thanks, Amy and good morning, everyone. Our second quarter earnings per share result at 24 cents was above our initial guidance of 15 to 20 cents with upside driven by favorability and income taxes.
Bath and body works continues to deliver strong results with an 8% comp increase and a 7% increase in operating income.
The operating income increase at Bath and body works and improvement in the international business and in the other segment as a result in the sale of the La Senza and the closure of Henri Bendel was offset by a decline at Victoria's secret.
Looking to the second half of the year, our number one priority continues to be improving performance at Victoria's secret.
As we noted in the commentary that we were released last night, John Me Haas, and Amy Hawk Ceos at Victoria's Secret lingerie and pink respectively have made significant changes to our fall assortments.
The significant amount of change in our fall merchandise assortments and promotional plans as well as the current trade environment and trade and tariff uncertainty.
Inherently result in a greater level level of uncertainty in forecasting our results for the third and fourth quarters than is typical.
That said, we believe that customers will react positively to our new merchandise and therefore as we said consistently we had assumed in our guidance that Victoria's secret trends will improve versus recent performance and that Bath and body works, we'll continue to deliver strong results.
You'll hear more from John and Amy as well as other business leaders at our Investor Day, which is scheduled for September 10.
Thanks and over to you Amy.
Thanks, Stuart that concludes our prepared comments at this time, we'd be happy to take any questions you might have.
In the interest of time and consideration to others. Please limit yourself to one question, thanks, and I'll turn it back over to Heidi.
Thank you and for anyone who has since Sterling. If you would like to ask a question just press Star then one on your telephone keypad and your first question comes from the line of Kimberly Greenberger with Morgan Stanley . Please go ahead.
Great. Thank you so much good morning, and my question is on the vs. Lingerie business. I think you said initial indications in the first part of August have been favorable I just am curious what you mean by that.
And do you think that the launch your rate piece.
Oh, the new fall assortment is enough.
To replace the lost volume in core Abramovich I'm, just wondering if we don't see an improvement from the first two and a half weeks of August it sounds like the trade secret will not be on track to deliver.
The expected third quarter numbers, so I'm just trying to understand what the puts and takes are thank you.
Thanks, Kimberly so as it relates to the new lingerie assortment, a modern Monterrey as we refer to it and initial results.
As we provided a commentary in our pre released a remarks.
The consumer reaction Kimberly to the new assortment of and the new items in the assortment has been favorable and positive and and consumer consumers reacting well.
But as you point out in your question and that in and all I can report to you as what Weve observed so far in and how things will progress as we see it based on what we believe for fall the reaction to the new stuff has been very good.
With that said it hasn't been to date sufficient.
To overcome a weakness in the balance of the launch ray assortment, including the effect of heavy promotions from a year ago that will continue through the fall season.
Importantly, there will be additional new merchandise flowing through the fall season. So the full fall assortment was not in stores in the first few weeks of August . So we're we're reading a partial result.
Additionally, we're very optimistic about our offering and the potential for growth in the sleep and lounge business that as you appreciate skews in terms of its proportion to the total to a greater percentage of that total as we move through the fall season.
Given this gift ability and just general seasonality for sleep and lounge.
We've got more work that we're doing on marketing a and we believe that our marketing effectiveness will improve as we move through the fall season.
So qualitatively that that would be the additional perspective that we have an answer your question. So consumer reaction again strong and favorable to the new offerings, yet not sufficient to deliver an overall result that changes the trend so far.
More new merchandise flowing through the balance of fall and a lot of work going on in marketing to more effectively market the changes and drive traffic into stores.
Thanks.
Super Thanks Super helpful. Thank you Yep. Thanks, Kimberly next question. Please.
Your next question is from the line of Paul Nice way with Citi Research. Please go ahead.
Hey, thanks.
Stuart can you maybe just talk about how swim performed during the spring season as a whole on now that you kind of brought that category back to some extent any update on what that category might look like in the spring of 2000, and then just go back to Victoria's secret for a second I just want to understand a little bit about the inventory pickup Victoria's secret where are you investing and I just want to tie that back to I believe you said, you've got some hopes to be less promotional and some of the prepared materials that were sent around just maybe square that away for us. Thanks.
Sure. So Paul is as you're asking about we reentered the swim business. This year and we made that decision relatively late in 2018 into early 2019. So.
Our reentry into that business happened in the latter part of March as I recall. It. So we missed a little bit of the natural season for swim.
Uh huh.
It generated in round numbers of about $30 million of volume $40 million of volume versus.
What it had been in the past we do believe that there is a substantial additional growth opportunity and swim.
Our focus as Weve conveyed previously is to pursue that business online and generally with the more elevated assortment than what we had offered a in the past and consumer reaction to that while there was a little bit of.
Commentary out there about price points overall, the reaction to what we.
Put in front of customers was positive. So it was a good start, particularly given the timing of our decision there is meaningful additional growth opportunity in that category again, I'm repeating but I'm trying to make sure I'm being clear we intend to pursue that at this time online and not in stores.
With respect to.
Lingerie inventory the first thing Paul I'd want to register and you know this having followed us for a long long time.
Is that we're working very hard to maintain a lot as much flexibility as possible, particularly for the fourth quarter and through our.
Our focus on reducing lead times and ordering frequently and adjusting regularly John me Haas and his team are working the assortment literally almost every week in terms of adjusting the on order.
We are making important investments in the new.
Parts of the assortment and with that said, we've got a lot of flexibility.
In particular for the fourth quarter to read and react to the overall trend and to adjust the on order obviously to maximize.
You know our chase in pursuit of the items that are doing best into two.
Cancel or or or adjust out of items that aren't doing as well, so we're making important investments.
Again optimistic.
In terms of the reaction to the new offerings certainly in total and we got a lot of flexibility.
Was there that are a good part of this Paul's question.
Good Paul.
Yes. Thanks.
Yep.
All right. Thanks, Paul next question please.
Your next question is from the line of Alex <unk> with Goldman Sachs. Please go ahead.
Good morning. Thanks, so much for taking the question I wanted to pick up on.
Some comments you made in response to a prior question on marketing you mentioned in the prepared materials marketing the Victoria's secret business was down year over year could you give us a sense of where marketing as a percentage of sales in that business. And then you also talked to some changes planned for the back half of the year can you talk a little bit more about what you mean by that is that an increase in the level of marketing is there any change plan to that the tone on nature of the marketing message.
Thank you.
Youre welcome as to the numerical question in rough round sense Victorias marketing as a percent of its sales.
It's about 5% historically.
And that's an all in definition, including GW peas, and all forms of marketing. The most important thing I would want to register about marketing and Weve been pretty consistent in this mindset now for for as long as maybe 12 months certainly six to nine months is that everything is on the table and what's meant by that is we're taking a fresh look at almost every material aspect of our business.
And the reason you're asking about marketing for Victoria's is an important part of that business.
So in terms of the messaging the imagery the photography or the words the pricing promotional aspects of that.
The medium of communication on the integration of marketing between stores and digital and social channels, John is getting more and more involved in it.
Hi, He spent his initial focus on the merchandise because that is the longest lead time item in the business and he's done substantial work in that space frankly extraordinary amounts of work in terms of change.
In a short period of time since he joined US and he is now shifting his time not to the exclusion of merchandising. That's a core ongoing responsibility, obviously, but he is getting more and more involved in marketing you've read that weve had changes in senior leadership in marketing.
And I expect that there will be a.
Meaningful and hopefully thoughtful change in our marketing approach as we move through fall and into 2020, John will comment further on that I would expect when we're together in September .
Thanks, Alison Yep next question please.
Your next question is from the line of Mark Altschwager with Baird. Please go ahead.
Good morning, Thanks for taking my question.
I wanted to ask about BBW, just first with the 4% store comp can you give us a sense of how the track what the traffic levels.
Or that you're seeing and what does the back half outlook for BBW and that from a traffic perspective.
More broadly.
With the remodel program I think 840 stores in the new concept are planned by year end can you give us a sense for what percent of those you would say are in a malls.
Or off mall locations.
And then looking forward given the continued pressure on mall traffic has the number of BBW stores that would meet an ROI threshold changed much disclosure with respect to the remodel just wondering how that refresh program evolved as we look to the second half of the fleet. Thanks.
Sure. So a number of questions in there if I didnt catch them all Emil remind me of what I missed so in terms of the traffic at Bath and body works in the second quarter. It was about flat store level trap flat year on year.
And the growth in the business came through.
No transaction increases driven by conversion.
With respect to the refresh program as we've commented on consistently and updated in our script. We're very pleased with the results of it you know the refresh activity has not been limited to a malls, but has also happened in other mall tiers.
We are seeing strong results.
In almost every situation whether its in a or a b mall or a C mall or an outlet center. We're seeing strong results of broad based very very few exceptions to that.
And we'll keep pursuing the program obviously as we move down into the fleet will continue to watch the ROI is but again they have been good so far and we're very optimistic about continuing to pursue this program over the next several years.
With respect to the the ROI on the program and just the unit level economics for Bath and body works frankly, they are just.
Outstanding they're very solid.
That said as you can see in our information that we share externally.
The fleet is actively manage so even at Bath and body works, we close a few stores every year and we're also opening stores as well, we're expanding square footage modestly I think carefully, but but the fleets in great shape and the most important thing about that.
Remodel program is in addition to the financial profile almost immediately being strong it really sets the business up very well for the next seven to 10 years with a very current store design that consumers respond well to so we won't be in what would some retailers can get into which is a kind of a deferred capex situation. So it's a very good outcome for the business.
Thanks, Thank you typically get everything there.
I think you did thanks Ari.
Next question please.
Your next question is from the line of Lorraine Hutchinson with Bank of America. Please go ahead.
Thank you good morning, I wanted to follow up on the strategy at pain.
To rebalance the good better best can you just talk a little bit about.
Go forward implications on sales and margin that you expect from the strategy.
Sure. We're just we're trying to have good balance among price tiers as in any business you've got to.
Balance.
Unit volume growth and transaction volume growth with pricing.
As Amy came into the business and she will comment on this further when we're together in September sheep assessed a lot of things as you would expect that she would and based on that assessment. She believed that there was opportunity.
To drive engagement in terms of transactions and unit volume.
In lower price points, she's been careful to not go we're working hard to not not to go ditch to ditch on that but she is just trying to make sure that she's got what we would call a balanced assortment pyramid or assortment architecture.
Between good better and best and felt that the business had gotten a little tilted towards a higher price points. So she's made adjustment there.
Including in areas like the broad business, where she is delivering a lot of volume growth and in getting to a margin profile now that's starting to look very solid so that's the mindset.
Thanks. Thanks Raimo next question please.
Your next question comes from the line of Ike Boruchow with Wells Fargo. Please go ahead.
Hi, good morning enemy and Stuart.
Two quick ones on the marketing I know you can't go into it much now and hopefully we'll hear more at the analyst day, but I guess the quick question is will there be time to change the more the marketing message in a in a meaningful way.
Ahead of holiday, meaning should there be some some benefits or potential impact on your on your Q4 performance at vs off from a change in the marketing strategy and then on the international business. It sounds like based on the commentary that the operating losses, and China are getting a little bit better can you kind of give us an update on where we stand.
From an operating income or loss perspective in China, and what the thought processes into next year and beyond in terms of when that business could potentially turn off turn profit.
Yes.
So like on the first question with respect to.
Is there the opportunity to make meaningful change in the marketing approach and message for the fourth quarter.
I believe that there is.
John is engaged in it.
The wild marketing is complex and needs to be.
Migrated in a careful way.
The inherent lead times as I commented on earlier not nearly as long.
As will be the case to design and develop and have manufactured.
New.
Product into the assortment. So simple answer to question is there an opportunity to make.
Meaningful change in our marketing message and approach for the fourth quarter. The answer is yes.
With respect to.
China.
It's a multiyear situation like.
We we do have some flagship stores there that play an important role in marketing the business.
But you know they are generating some losses on and I. Our view at this point would be it's a three year four year journey.
In China to get to the to a profit profile in that business for your for your journey.
Thanks.
Yep.
Thanks Ike next question please.
Your next question is from Susan Anderson with B. Riley.
Please go ahead.
Hi, Good morning. Thanks for taking my question I was wondering if you could maybe give us an update from what you're doing on a digital perspective. It looks like online continues to outperform story. So maybe if you could provide some color on what you're doing from a technology perspective to continue to drive that online business and improve the omni channel aspect.
For the cleanly.
Yep. Thanks, Susan So I think as you would know, but it's important just to reiterate.
The most important thing we've done in the digital business is a project that we went live with.
In the last few months, which was a re platforming full re platforming.
Victoria's secret Dotcom it had been running on.
Systems and hardware that were more than 25 years old.
And and it served the buzz that legacy system.
Home grown system by the way serve the business very very well for a long time.
But it was time to upgrade that platform, which is a big deal obviously in terms of getting that right and doing it well.
And again the business that met the domestic business has been running on that new platform now for a couple of months.
So thats the most important thing it will enable us to pursue a number of customer facing.
Benefits that we're now.
Moving forward to and those would be things like buy online pickup in store.
Another foundational element that we're working on now before we roll with buy online pickup in store another.
Similar things.
It is we want to make sure that we have appropriate accuracy in our inventory and and obviously, we have that for financial statement purposes, but I'm talking about at the item level at a specific location on a particular day.
And with a very broad assortment with so many choices in the broad business, particularly at Victoria's that inventory accuracy is critical.
Which is why were in 2019 pursuing an RF I'd initiative and rolling out and RF idea initiative for Victoria's secret So with the foundation of the new domestic what we call the domestic order management system.
And.
Accurate inventories that are sufficient to.
Make reasonable promises to customers.
We will be able to do a lot of things that.
Many other retailers can do today.
One of the other things that the new system allows us to do is to have.
A broader distribution network for Victoria's in the United States, which will allow us to add capacity and have more flexibility with capacity. So thats another benefit that we're getting now.
So thats the biggest thing that that those are the biggest things I should say that we've been working on Bath and body as you know it wasn't implicit in your question has a terrific.
Online business. In addition to the Victoria is growing at a very healthy rate.
And they are regularly looking at ways to to upgrade the customer experience in that part of the business as well.
Thanks.
Great very helpful. Thanks.
Thanks, Susan next question please.
Your next question is from the line of William Reuter with Bank of America. Please go ahead.
Good morning.
I was wondering if you could talk a little bit about list for terrorists at 10%.
I think most of your products were included on the list for.
But what's the impact of this of this would be either on a dollar basis for 2000.
19, or how we should think about it on an annual basis going forward.
Yes. So the list for effect is included in our guidance, we considered in our guidance we are working to offset.
Some of that impact through various migration of production to different countries and discussions with our supplier partners. We havent given out a number but again it's included in our guidance importantly, its materiality. This situations materiality to our company is not as great as many other retailers the United States is our number one country of production.
Given the importance of personal care and beauty in our business.
And our in terms of our total.
Sourcing activity.
China represents less than 20% of our total sourcing activity and has moved down.
Almost 10 percentage points over the last three or four years.
Based on very deliberate efforts by.
This is sourcing and production teams and our business to make sure that we have a continue to have a well diversified.
Basis supply. So we've got it covered in the guidance and again importantly, not as material to us as it is to many other retailers. Thanks.
Thanks, Phil next question please.
Your next question is from Roxanne Meyer with UBS.
Okay and partners. Please go ahead.
Great. Good morning, and thank you for taking my question.
My question is on BBW, it's been a healthy and consistent source of comp and operating income growth for you.
Im just wondering from a rate perspective, how you think about BBW over the next few years as you think about the various puts and takes to the business Sina, whether it's the impact of supply chain and sourcing cost a shift to direct which is growing at a very healthy rate, but then on the flip side the benefits from scale and expense leverage that you may be getting.
Yes so.
I understand the importance of your question, but as you would imagine the first thing that that we're focused on is dollar growth.
You know as soon as we say around here you take dollars to the bank you don't take percentages to the bank with that said your questions. A serious question and Bath and body has demonstrated over a very long period of time to its ability to effectively.
Balance dollar growth.
And long term health of the business with with profit rate.
All that said do I see that there is a little bit of downside risk a little bit of downside risk to the business are down downside pressure to the business.
Due to the factors that you mentioned there is some but again, we believe that the growth potential in that business remains very high and its ability to deliver.
Very healthy.
Growth in profit dollars EBIT or operating income dollars, we're very confident in its ability to do that.
Given the categories it's in.
The the very strong and capable leadership team that runs that business.
The assets that it has including very strong store design.
Compelling merchandise Assortments short lead times highly capable.
Highly enthused dedicated loyal.
Selling force in stores, a very strong online business just a lot of assets that that business has so is there a little bit a downside.
On the on the rate yes.
Is there lots of opportunity on dollar growth, absolutely and I think that business has well demonstrated that are demonstrated that well.
For a long long period of time thanks.
Thanks, Ross Sandler.
Next question please.
Your next question is from Dana Telsey with Telsey Advisory Group. Please go ahead.
Good morning, everyone. As you think about Victoria's secret beauty any more color in terms of what you're seeing there what happened with the July launch and what you're seeing in the emerging businesses of Pink beauty and then on the breakdown of Capex I believe the store investments is going to 55% of Capex from 75%. How do you see that moving forward in the business and is technology investment or direct investment, making up whats being removed from store investment. Thank you.
Thanks, Dana So Victoria's secret beauty remains a very good business.
As you know Dan as they are in the fine fragrance business.
As we would refer to it and then they got a significant fragrance missed business.
You know over the last year year, and a half as a general point they've had very strong results in the mis business and just.
Again speaking about the last year year, and a half and okay results in the fine fragrance business.
You know as we with that said as we look at very recent results. They just had their most successful what they would call sister launch in fine fragrance over the last few weeks, so Greg and his team recognize the opportunity in the fine fragrance business as you followed us a long time as you know we've got three or four of the top 20 fine fragrances literally in the industry.
Which is a terrific place to be.
In addition to.
Continued work.
On the assortment itself Gregs very focused and team very focused on improving the selling within our stores and so we've got a number of things going on that we think will move the business in a favorable way.
And it should represent a lot of upside and what is already a very sound business with respect to the Capex you recognize it in the formation of your question. We have pulled back on Capex for Victor store related Capex real estate related Capex.
For.
Victoria's secret and international.
And as was mentioned in.
An earlier question, we continue to invest in technology.
Particularly pointed towards the online or digital part of our business.
And we're also investing some in distribution and fulfillment assets as well and so thats tilting the mix a bit from what it had typically then again, representing some pullback in store related driven by Victoria as an international just based on already.
Current trend results performance.
But we're trying to maintain if not increase our investment in the online digital part of our business and again, some some work in distribution logistics as well thanks.
Thank you.
Thanks, Dana next question please.
Your next question comes from Kate Fitzsimmons with RBC capital markets. Please go ahead.
Yes, Hi, good morning. My question is on sourcing just with more volatility in the wake of the trade tensions and it sounds like you're making some changes on the supplier side can you speak to how your ability to chase product on the pain can be upside is evolving into the back half just furthering your need for airfreight or or just how should we think about the flexibility. There and also just looking ahead to the fourth quarter can you just speak to you open to buys for holiday. Thank you.
Sure.
So the last part of that question were essentially almost fully open for the fourth quarter in terms of opening.
So.
Take that part of it first and then with respect to speed and agility in the supply chain. It's been it's a lot. It's a legacy part of our business in a positive way, it's something that less focused on you know as long ago as.
The late seventies, and early eighties and we.
Renewed our work in that area, beginning now seven or eight years ago. Both on the the apparel the intimate apparel side of the business and in the personal care and beauty side of the business. So it's something we.
Have had renewed our capabilities and today, we would judge our capabilities in that area in terms of speed and agility in our supply chain as among the best in retailing based on what we know.
With respect to the use of airfreight frankly substantially everything that we have.
Have produced outside the United States is on an airplane other than some gift and accessory business and it's because the value in our judgment of speed and agility. The question, you're asking about the economic value of that far outstrips.
The incremental cost of moving stuff.
On a boat and as we like to say around here you can't sell it if it's on a boat by the way so our agility is good.
And our standard model, if you will with respect to things that are produced outside the United States is in fact to to move up buyer. So the speed part of the businesses.
A fundamental as we see it and we're in good shape.
Great. Okay. Thanks, Katy next question please.
Your next question is from Omar Saad with Evercore ISI. Please go ahead.
Thanks for taking my question Stuart I wanted to ask you about the more targeted promos that yes. This fall holiday.
I feel like you guys, maybe did some of that a couple of years ago with mixed results would be talking about the strategy. There and is it important to kind of getting to that point, we have less promos in the back half, but stronger comps is the targeted promos a key part of that.
And then did you mention the trends through the quarter I don't know if there was a big difference between the months and the vs comp. Thanks.
Yes.
So in terms of targeted versus broad based.
Promos Omar.
We continue to to pursue the right balance between those two things.
And the considerations in that as if you have a very broad based promo then you're you're essentially discounting the whole assortment. If you will if it's very broad based I'm exaggerating a little bit to make a point, whereas if you have targeted promos obviously.
You are not.
Discounting large portions of the entire assortment and you can get more full price selling.
On on the particularly strong choices within the assortment and the balance point, which you recognize and the question is that it tends to be that the broader based promotions drive more consumer response in more traffic in an overall sense. So we're trying to strike that balance the.
The variable that different from a year or two ago and this is what makes the business interesting and fun, particularly when you when you largely figure it out is that the assortments different. So you can look at our promotional strategy and isolation and say hey didn't they tried as a few years ago and it didnt work. So like what are they thinking right again trying to make a point, but but the dynamic has to include an evaluation of the strength of the assortment. It all starts with that.
And with the work that Amy and John have been doing.
We're optimistic that we can.
Get reasonable result, without having to do.
A substantial number of.
Broad based promotions all that said, we've got a lot of flexibility there and we will continue to test.
And learn.
And make trade offs, and and will will will be reevaluating the promotional strategy as we move through the fall season to get to the right customer response get the right traffic at the right margin dollars.
To work hard to deliver the results results that are embedded in the forecast.
The second part of the question was about trends within the month. So June was the strongest of the months as I recall and.
July was the weakest of the months Omar in the quarter second quarter. Thanks for Victoria's Yep.
Thanks, I think we have time for a couple more questions.
Next question please.
Your next question is from the line of Jamie Merriman with Bernstein. Please go ahead.
Thanks very much.
You talked earlier about the rebalancing of the price points, the Emmys doing within Pink and I was wondering if there is any similar plans for Victoria's secret lingerie.
As John spoke to the assortment there.
And then second one is just Steve.
Everything on the table.
Are there any cost opportunities that you've identified to that could help drive an improvement in profitability apart from the assortment and and revenue initiatives that you're pursuing thanks.
Yes, so with respect to an evaluation of good better best pricing and opportunities in the lingerie part of Victorias. It's from one of the most fundamental things that any merchant leader in any retail.
Leadership team would evaluate and so John has.
Made that assessment.
For Victoria's secret lingerie and the number of offerings at the.
Better and best price points for Victoria's Secret lingerie is up meaningfully versus what it had been and that's based on if you've seen the merchandise online or in stores, you would see more sophisticated merchandise.
Merchandise was a lot more we believe emotional content and as we talked about at the start of the call initial response from consumers to those new offerings has been good.
The other aspect of.
What John and Amy have done.
Is to have a clearer demarcation between the Victoria's secret lingerie and pink businesses again pink is targeted towards.
A college age customer and lingerie more typically.
Somebody would that would be post college and at higher price points and with a greater degree of sophistication. So thats another aspect of the the good better best pricing work that both both leaders have done.
To properly segment and position the respective businesses.
Cost opportunity.
There are always in a big business like ours cost opportunities.
With that said they come with trade offs and.
The company has worked hard to.
Be efficient.
Over its long history, and including at our and our record results in 2015, when we had an overall company, 18% operating income rate.
That that.
One of the contributors to that was was a highly efficient business.
With that said we've had a lot of.
Sales pressure and margin rate pressure in the business, we have taken what I'd call it targeted actions.
To reduce expenses in connection with a lot of the change of Victoria's secret.
In 2016 and 2017, we have.
We took substantial home office.
Cost reductions and in more recent periods over the last year to 18 months, we've taken a lot of.
Expense out of the business in terms of.
Variable expenses and selling certain selling areas and in marketing as examples.
But there is always more that you can do but it comes with trade offs and you've got to be thoughtful about not getting into.
On an ongoing cost cutting exercise.
That that can hurt the near term and longer term prospects for the business. So we're trying to strike the right balance.
And we will continue to monitor that as as time progresses, if if.
Retail selling trends don't improve margin trends don't improve at Victoria's secret you would expect us to.
Take another hard fundamental look at expenses and what we're focused on to the greatest extent right now is getting the results at retail in terms of sales and margin, but there. There are other things that we could look at but they again come with with trade offs. Thanks.
Thanks, Jamie Heidi I think this will be our last question.
Okay. Your final question comes from the line of Michael Binetti with Credit Suisse. Please go ahead.
Hey, guys. Good morning, Thanks for all the help and thanks for taking our question here.
Stuart could you I guess two questions quickly could you.
I know, we've talked about that the outlook for promotions and how you're working on the mix is targeted versus more broad based can you tell us how you thought about the expectation for the promotional environment outside of your business as we head into the fourth quarter.
I'm really I'm trying to reconcile the guidance for inventories to be up in the mid teens with.
The comp guidance you baked in for fourth quarter, and I guess, most margins plan to be down a little bit, but since I know a lot of the year a lot of the annual earnings happens in the fourth quarter I'm trying to think about how much room you might have left yourself given what we've heard so far in second quarter is a fairly.
Volatile outlook for the rest of the year as far as where where the peer group since promotional levels will be for the holiday.
Yes, so a couple of thoughts in reaction to your question in response to your questions. The first is in the in the lingerie part of Victoria's, particularly.
The the what we would call the initial markup or the inherent markup in the goods.
Is substantially greater than what it had been and so that that provides the opportunity.
For higher margin rate results and more flexibility or room, if needed to promote the business again thats not our going in plan, but as we talked about.
We need to balance volume with rate.
And again the point I'm trying to register as there's there's higher markup in the goods in terms of their initial retails and their their costs. So that gives us.
More flexibility than we've had over the last few years.
With respect to the promotional environment, there are others in the industry and our company that have been doing this longer than I have been I've been doing it for a while and going into every holiday. There was commentary about how it's going to be more promotional than ever I am aware that we're in our 10th year of an economic recovery and Theres greater discussion understandably about the potential for a recession.
But the truth is absent a dramatic change in the environment like we saw in zero eight and nine we sell relatively affordable things. They are discretionary, but they are relatively affordable and I would say as a as a.
Close to home.
Data point, we look at bats, and bodies results in what folks might say is a promotional retail environment and they're very strong results and again, what those come from is compelling brand position a compelling merchandise assortment well executed in the in the most complete sense and we think that Victoria's has that opportunity. So there's nothing about the promotional environment per se that I would say is uniquely different versus most typical years and it's really in our hands to deliver compelling assortments again, well delivered in stores and online to get to a good results and we have higher.
Inherent markup to work with thanks.
Okay. Thanks, one follow up on pink.
Sure.
Okay. Thanks, I know you up on time, but on pink students seems you seem to think some of the issues with the comps there were.
Excluding swim I guess rice slated to single category product issues and I think there's been some variability on some of the product categories quarter to quarter as I look back over the last year.
What's your what's the knowledge you have of where vicky's has been over the last few years and looking at bank. How do you isolate that this is contained to single products. So we can always try to get right next season versus any metrics that you look at to gauge the longer term health of the brand or whether there could be a longer term issue that let you feel like you know.
This is okay. This really is just this is really just category to category issue, we fix it up and we're not seeing issues at the brand that should cause a little bit more urgency here.
Well.
It's hard for me to not react.
Clearly on the last part of your question the urgency there couldnt be greater urgency on management. So that if you don't feel urgency than we're not communicating well. Okay. So we're about actually I shouldn't be that easy maybe we were about to work here or there.
Yeah, we're about as urgent as we could be.
And what the merchant leaders are focused on John and Amy is improving the merchandise offerings.
And then again executing those well in terms of all the aspects of delivering that well to consumers in stores and online we are aware of the timeframe.
Under which the Victorias segment has had year on year declines in sales that started in 2016. So this has been.
Multi year situation with that said, we think that the assets that the business has.
In terms of brand awareness brand regard footfall in stores visits online.
Sourcing and logistics capabilities strong manage it management certainly on an overall basis that theres a lot of assets that this business has that when well led and executed.
We believe we're going to make substantial progress this fall.
And that there is a lot of opportunity for this business over the next several years, so and we're pursuing all that trust me with a lot urgency. Thanks.
Thanks, Thanks, everyone and that concludes our call today. Thank you for your continuing interest in L brands.
And this concludes today's conference call you may now disconnect.