Bath & Body Works Inc (BBWI) — Q4 2015 Earnings Call Transcript

Thank you. Good morning, everyone, and welcome to L Brands' fourth quarter earnings conference call for the period ending Saturday, January 30, 2016. As a matter of formality, I need to remind you that any forward-looking statements we may make today are subject to our safe harbor statement found in our SEC filings. Our fourth quarter earnings release and related financial information, including any non-GAAP or adjusted financial reconciliation tables, are available on our website, lb.com. Also available on our website is an investor presentation, which we will be referring to during this call. This call is being taped and can be replayed by dialing 1-866-NEWS-LTD. You can also listen to an audio replay from our website. Stuart Burgdoerfer, EVP and CFO; Nick Coe, CEO, Bath & Body Works; and Martin Waters, President, International, are all joining us today. After our prepared comments, we will be available to take your questions for as long as time permits. All results that we discuss on the call today are adjusted results and exclude the first quarter 2015 pretax gain of $78.1 million or $0.23 per share related to the sale of our remaining interest in the third-party apparel sourcing business. Thanks. And now I'll turn the call over to Stuart.

Thanks, Amie, and good morning, everyone. In an environment where a lot of retailers struggled, we delivered a record year and fourth quarter across all key metrics: Sales, operating income, operating income rate and earnings per share. These results are a testament to the strength of our brands and our differentiation, and a result of solid execution within our business and a focus on the fundamentals. While we manage the business conservatively, we utilize speed to chase back into what was working and maximize our opportunities. We improved our full year operating margin by 90 basis points to 18% and we grew operating income dollars by 12%. We also continue to return substantial value to shareholders. We increased our annual dividend by 20% to $2.40 per share. We declared a special dividend of $2 per share and authorized a new $500 million share repurchase program. Looking ahead to 2016, we're optimistic and confident in our opportunities for growth. As you know, we manage the business conservatively with respect to inventory and expenses to protect against any potential downside. Reflecting this mindset, the high end of our full year guidance implies a conservative view at mid-single-digit percentage growth in operating income dollars and a decline in the operating income rate. We would not be satisfied with that outcome, and we will continue to leverage speed to chase back into what's working and deliver upside to our forecast. We remain committed to our goal of 10% or better annual growth and operating income dollars and an operating income rate in the high teens. Looking at the fourth quarter performance in more detail, as described on Page 4 of the presentation. Net sales for the quarter increased 8% to $4.395 billion and comps increased 6% on top of 6% last year. The gross margin rate increased 50 basis points to 45.6%, driven by an increase in the merchandise margin rate and buying and occupancy expense leverage. SG&A expense leveraged by 60 basis points. The operating income rate increased by 100 basis points to 24.5% and operating income dollars increased 13% to $1.078 billion. The tax rate in the quarter of 35.2% provided $0.08 of upside to our initial guidance. Earnings per share increased 14% to $2.15 versus $1.89 last year. Foreign currency had a negative impact of about $0.05 to 2015 fourth quarter EPS. Turning to our full year results on Page 5. Adjusted earnings per share increased 14% to $3.99 versus $3.50 last year. FX negatively impacted full year 2015 results by about $0.13. Net sales increased 6% to $12.154 billion and comps increased 5% on top of 4% last year. The gross margin rate increased 80 basis points to 42.8%, primarily driven by an increase in the merchandise margin rate. The SG&A rate leveraged by 10 basis points. Page 7 details our full year operating income results. Our full year operating income rate was 18%, up 90 basis points to last year. Operating income dollars increased $238.4 million or 12%, driven by growth in all three business segments. Turning to the balance sheet on Page 8. Retail inventories per square foot at cost ended the quarter up 4% versus last year, down 6% on a two-year basis. Inventories are clean and well positioned. We expect to end the first quarter with inventory per square foot up in the mid-single-digit range. Operating cash flow in 2015 was $1.869 billion, free cash flow was $1.142 billion and capital expenditures were $727 million. We repurchased 5.5 million shares of stock in 2015 for $483 million. Our 2016 forecast, as detailed on Page 11, reflects actions we are taking to grow our business. Growth in Victoria's Secret, in Bath & Body Works real estate, including a new Victoria's Secret flagship store on Fifth Avenue. Increased store selling payroll driven by our efforts to improve the customer experience and investments in international expansion. It also reflects an estimated negative impact resulting from foreign currency exchange rates, incremental interest expense related to last October's note issuance and a higher tax rate. Our first quarter earnings forecast reflects a 2% to 4% comp increase, including an updated February comp of up mid-single digits at Victoria's Secret and Bath & Body Works. To be clear, the store-only comp is expected to be up mid-single digits at both Victoria's Secret and Bath & Body Works. The earlier Easter this year will negatively impact March comps and positively impact April. As noted in our press release, beginning with our February sales release, we will include direct sales with reported comps consistent with industry practice. We expect the first quarter gross margin rate to be down to last year driven by some decline in the merchandise margin rate, primarily driven by foreign exchange and buying and occupancy deleverage. We expect some deleverage in the SG&A rate driven primarily by an increase in store selling costs. We expect interest and other non-operating expense in the first quarter to be about $100 million. We expect earnings per share between $0.50 and $0.55 in the first quarter against last year's $0.61 result. This forecast includes a total negative impact of about $0.08 related to foreign currency, incremental interest expense and preopening cost for the flagship Fifth Avenue Victoria's Secret store. For the full year, we are projecting positive low single-digit comps. Total sales growth will be about 1 to 2 points higher than comps due to growth in square footage. Foreign currency translation is expected to have a slight negative impact on total sales growth. We expect our full year gross margin rate to be down to last year, driven by a decline in the merchandise margin rate and buying and occupancy deleverage. The merchandise margin rate decline is driven primarily by the negative impact of foreign currency. Excluding this, we expect the merchandise margin rate to be about flat. We expect the full year SG&A rate to be about flat to last year. Non-operating expenses, consisting principally of interest expense, are projected to be about $390 million, about $0.12 a share higher than last year. Before any discrete items, we estimate our tax rate will be approximately 37% versus 36.2% in 2015. The higher projected tax rate in 2016 will negatively impact EPS by about $0.05. We are forecasting weighted average shares of about 292 million in the first quarter and the full year. The lower share count will benefit earnings per share year-over-year by about $0.08. Assuming all of these inputs, we expect earnings per share for the full year 2016 to be between $3.90 and $4.10. This estimate includes an estimated negative impact from foreign exchange of about $0.10. We're projecting 2016 CapEx between $900 million and $1 billion. As you know, about 70% of our CapEx budget is for real estate and stores. The remainder relates to investments in technology, logistics and facilities. As detailed on Page 13 in the presentation, Victoria's Secret square footage in North America will increase by about 4% this year, driven by expansions of existing Victoria's Secret stores and 13 net new openings. Bath & Body Works square footage in North America will increase by about 5%, driven by 27 net new openings and 145 remodels. Total company square footage will increase by about 4%. Our increased investment in real estate will result in a high single-digit percentage increase in buying and occupancy expense in 2016, about 3 points higher than growth in 2015. The Victoria's Secret Fifth Avenue store will drive incremental expense related to pre-opening cost of about $30 million. Bath & Body Works will also see more pressure from buying and occupancy cost as a result of our investment in Bath & Body Works and White Barn remodels. Turning to liquidity. We expect 2016 free cash flow of about $700 million to $800 million. We remain committed to returning excess cash to shareholders through a combination of share repurchases and dividends. Our free cash flow and cash position, along with the additional availability under our revolving credit facility, result in very strong liquidity, which is more than sufficient under our working capital, capital expenditures, dividend and any other foreseeable needs. Turning to Victoria's Secret. I'd like to express our appreciation to Sharen for her leadership and all that she accomplished in her 16 years with the business. Victoria's Secret is well positioned for growth. We have a strong brand, great momentum and a highly talented team that is capable of leading the brand to continued success. Now turning to results. The Victoria's Secret segment had a strong fourth quarter, growing both sales and earnings to record levels. Total sales increased 9% to $2.6 billion and comps increased 5% on top of 4% last year. Operating income increased $84 million or 17% to $593.6 million, and our operating income rate increased 150 basis points to 22.7%. Our focus on reading and reacting with speed and agility positioned us to get back into trends more quickly and drove mid-teen growth in bras, high single-digit growth in panties and low 20s growth in PINK loungewear. Specific to the key holiday time period in the quarter, we delivered record results both Black Friday weekend and Cyber Monday. We continue to reposition our beauty category to be more consistent with the Victoria's Secret brand. Results for the business were down to last year as expected. Merchandise margin dollars for the segment increased versus last year driven by strength in both stores and direct. The rate was about flat to last year. We finished the quarter with inventory levels up to last year in line with expectations, driven by planned investments in PINK and additional beauty inventory to support the Fantasies restage. Now let's turn to the specific channel performance starting with stores. We are pleased with our fourth quarter performance as sales and operating income increased to record levels on top of record levels last year. Sales for the quarter increased 7% to $2 billion and comps increased 5% on top of 4% last year. We were pleased with the customer response to our holiday storytelling, which linked a consistent theme across all our customer touch points. We also added an incremental bra launch in December, which was successful in driving newness and holiday right product for gifting and self-purchase. As a result, we had strong sales growth across our key businesses, bras, panties, sleepwear, and PINK loungewear. Merchandise margin dollars also increased versus last year. Merchandise margin rate was about flat, as full-price selling strength in PINK was offset by a planned sport event in January, declines in beauty as we reposition this category, and an unfavorable FX impact in our Canadian business. Both buying and occupancy and SG&A rates leveraged in the quarter as we remain focused on disciplined expense management. For the quarter, operating income dollars and rate both increased. Now turning to the direct channel. Strong performance during the holiday period drove record sales and operating income results in the direct channel. Fourth quarter sales increased 15% to $567 million, driven by strength across the assortment. Bras, panties, sleep, PINK and sport all experienced double-digit growth to last year. We fully anniversary-ed last year's exit from apparel during the fourth quarter. The merchandise margin rate in dollars was up to last year during the quarter as we continued to focus on the core. Operating income dollars and rate increased significantly driven by the sales increase, margin rate expansion and expense leverage. Turning to our full year results. Total Victoria's Secret segment sales increased 6% to $7.7 billion. Operating income increased by $119 million to $1.4 billion. And the operating income rate improved by 50 basis points to 18.1%. In the store channel, comps increased 5% with total store channel sales up 7%. Merchandise margin dollars increased versus last year with rate about flat. Total expenses leveraged versus last year. As a result, operating income dollars increased versus last year and the rate was about flat. In the direct channel, sales increased 3% as 16% growth in go-forward categories more than offset the exit of non-go-forward apparel sales last year. The merchandise margin rate increased driven by the category mix benefit from the apparel exit and expenses leveraged. As a result, operating income rate in dollars were up significantly. Looking ahead to 2016. We will plan the business conservatively while focusing on driving growth in our core categories and leveraging speed to read and react. We will continue to invest in real estate, store selling, and digital enhancements to create an even better shopping experience for our customers. Thanks. And now I'll turn the discussion over to Nick.

Thanks, Stuart, and good morning, everyone. At Bath & Body Works, we were pleased with our record results during the quarter, building on record fourth quarter last year. We were able to drive solid growth in sales while improving margin rates and managing inventory levels down. Total sales for the quarter were $1.5 billion, up 8% or $116 million to last year. Comps increased 6% and our direct channel sales grew by 24%. Sales were strong across the quarter, and we were able to drive growth in each of our three key businesses: our Signature Collection product line, the soap and sanitizer business and bathroom fragrance assortment. Our concept of the Perfect Christmas resonated well with our customers, and we were pleased with the acceptance of our holiday assortment, the visual appeal of the stores and the in-store execution of our plans. The momentum from holiday continued with a solid semiannual sale performance that builds on last year's strong sales results. Promotional activity for the quarter was relatively flat to last year, and we were able to execute a plan that included fewer, but more impactful activities that generated a strong response from our customers. For the quarter, operating income was $487 million, up 8% versus last year. Our operating income rate improved by 10 basis points to 32.1%, driven mainly by an improvement in the merchandise margin rate, somewhat offset by an increase in buying and occupancy expense as we continue our store investment program. Operating income for the quarter was negatively impacted by continued unfavorable foreign exchange pressure in our Canadian business. We continue to see strong performance in our Bath & Body Works Direct channel. Fourth quarter operating income grew significantly versus last year, and annual sales were over $360 million. For fiscal 2015, total sales grew by 7% versus last year and comps increased 5%. Operating income was $858 million, up 16% versus last year. Our operating income rate improved by 190 basis points to 23.9%, driven by an improvement in the merchandise margin rate and expense leverage. Looking ahead to the first quarter of 2016. As you would expect, we will continue to monitor customer preferences and leverage the strength of our read-and-react capabilities, allowing us to put the right product for full-price selling in front of our customers at the right time. We will flow newness throughout the quarter beginning this month with our Let's Go to Italy theme that features new and seasonal fragrances in our three key businesses. Our inventories are well positioned heading into the new year and are flexible enough to react to customer's preferences. We remain focused on making the appropriate investments in our business, including the necessary increases in occupancy costs in order to continue our White Barn and Bath & Body Works remodel and expansion program. We've been pleased with the results to date of our White Barn format. We ended 2015 with 67 of our stores in the format containing White Barn. Of the 27 net openings and 145 remodels that Stuart mentioned in his remarks, all will contain our White Barn concept either in the side-by-side or a shop-in-shop format. And with that, I'll turn the discussion over to Martin.

Thanks, Nick, and good morning, everyone. We continue to be very confident about our opportunity for growth internationally. Our brands are well received wherever we open around the world, and our execution has been excellent. Our foundation is very solid. We saw a strong growth in retail sales on a constant currency basis across all of our formats in the fourth quarter. However, not all of this growth translated into recognized revenue. Fourth quarter recognized revenue in the international segment increased by 6% and operating income declined by $1.4 million to $28 million. Foreign currency had about a 5 point impact on our recorded revenue growth and about a $3 million negative impact on operating income. We had very solid growth in both recognized revenue and operating income in our company-owned stores in the U.K., in our franchise full assortment stores and in our Bath & Body Works stores. However, the VSBA business experienced a significant decline in both revenue and operating income in the fourth quarter. This decline was primarily the result of foreign currency translation, softness in travel retail and tourism generally and a decline in shipments of beauty products in anticipation of the new Victoria's Secret Fantasies collection being launched in the spring. In the full year 2015, the international segment revenue increased by 15% to $385.2 million and operating income increased by 13% to $87.9 million. Foreign exchange negatively impacted 2015 operating income by about $15 million. So absent the FX impact, operating income would have increased 32% and the rates would have increased by 200 basis points to 25.2%. We opened 144 new stores in 2015 to end the year with 531 stores in the international segment, and we plan to open about 175 stores in 2016. At Victoria's Secret International, we are pleased with the performance of our full assortment stores. Our London flagship store on Bond Street as well as our 13 mall stores are operating very well, and we'll open another 5 stores in the U.K. this year. In the Middle East, we now have 16 Victoria's Secret full assortment stores and 3 PINK stores open under our partnership with Alshaya. These stores continue to do well and will open another 12 or so full assortment stores this year, including in new geographies such as China, Mexico, Singapore and earlier this month in Russia. We'll also open about 5 more PINK stores. In the VSBA business, we ended the year with 373 locations, about one-third of which are in airports. We'll open another 90 or so across the globe in 2016. In Bath & Body Works, we now have 125 BBW stores under our franchise partnerships, and we continue to be very pleased with the performance of these stores and expect to open another 65 or so BBW stores in the year ahead. So in summary, despite headwinds from foreign exchange, we made significant progress internationally in 2015, and we remain focused on the fundamentals, which is great execution of our brands wherever we go.

Thanks, Martin. That concludes our prepared comments. And at this time, we'd be happy to take your questions.

Stuart, my question is on the Q1 guidance and just looking out to 2016, can you just talk a little bit more if you have some direction on the amount of gross margin deleverage? How much of that is coming from pre-opening rent? And is the big change in preopening rent in 2016 primarily related to the Fifth Avenue store? Or are there other sort of chunky stores that are going to be working their way into the expense base throughout the year?

In Q1, the decline in gross margin is primarily due to a more significant deleverage in buying and occupancy compared to the merchandise margin decline. The merchandise margin drop is mostly due to foreign currency factors, but the bigger issue is the B&O deleverage, largely driven by the preopening costs associated with the Fifth Avenue store. While this situation does put some short-term pressure on our financials, we believe these investments, including the remodeling of Bath & Body Works and incorporating White Barn elements, are positive. The development of a global flagship on Fifth Avenue is advantageous for our long-term strategy, even if it affects our P&L in the near term. Overall, the remodeling opportunities for Bath & Body Works and White Barn are beneficial, but they do create some immediate financial strain.

Wondering if the pressure is in full force in Q1 already or does the preopening expense sort of escalate through the year?

It doesn't escalate through the year. And we expect that store to open in November, the Fifth Avenue store.

Stuart, I wanted to ask, you opened the call by talking about how you plan the business. You're planning the business for mid-single-digit underlying profit growth, but you wouldn't be satisfied with it. You look for 10% plus, you're committed to it. I was curious what the drivers of meeting those targets this year would be in light of some of the incremental expenses. Is it you have to do better on comps than you've planned? Or are there other tools in your toolkit?

Yes, it's a great question. I mean, as you outlined the question, I mean, getting a sales result better than what's inherent in the forecast is the most important thing at the end of the day. But we do have other tools in our toolkit. And while there are pressures, whether it's currency or other things, beauty at Victoria's, pressures on the merchandise margin line; we'll continue to leverage our speed tools and work to get some further improvement related to that in our big businesses. And we manage expenses in a tough-minded way. And we're clear-minded about growing expenses in aggregates lower than sales. And some of those things we can adjust more quickly than others. But we're not looking to go backwards on our operating income rate, which is what would be implied by this guidance, I realize. But starting with Les and the other leaders in the business, we're not of a mindset where we go backwards on profit rate.

Great. And just to quickly follow up. In the past, when you had reporting changes, I'm thinking specifically when Canada moved into North America and away from being a separate entity, it actually reflected some internal changes in how you thought about the business, whereas before there were a wall between the two, now they work together. At least that was my impression. Is the reporting of direct comps with store comps similarly a reflection of how you might be thinking about the businesses?

Not so much, to be honest with you, Lindsay. And this change got some good debate within the business, and you may have heard me speak previously about some of our views on it. At the end of the day, we were the clear outlier in the industry. And folks, externally, we're trying to estimate what our comps would be with direct in it as everybody else in the industry does. So that's why we made the change. There's no signaling about the trend of our business. There's no significant change organizationally or how we think about the business. We've always thought about the business from a customer-first standpoint. And this change in reporting is solely to follow the trend in the industry. We were the only one, as we could understand it, that was not including direct in comps, and that's why we made the change. There's nothing else, nothing else to interpret.

I wanted to follow up on the beauty struggles that Victoria's Secret has been having. Can you just step back and diagnose what you think the problem was? What the fix looks like? And then how quickly might we see this flowing through the top line?

Yes, beauty is an important category for us, as you appreciate, that's why you're asking about it. At the end of the day, it's a very good business. As you're aware, we've made changes to the product line that we call Fantasies, mists and body lotions and body creams. And we think we elevated the product to be more consistent with the emotional content of the Victoria's Secret brand. But there's more work to do to continue to elevate product at Victoria's Secret beauty and to ensure that we get the other elements of merchandising in line with that elevation, whether it's about how it's displayed in the store, how it's sold in the store, its pricing. We'll be looking at all those things. We are looking at all those things. And we're very confident that we'll get it sorted out. But it's going to take a little bit of time.

A question for Nick on Bath & Body Works. So you are anniversary-ing a very strong year from a comp standpoint. So looking back to 2015, I mean, in hindsight, is there anything you could have done differently? And then looking at 2016, where are the growth opportunities?

There are things we could have approached differently in 2015. While we don't want to dwell on that too much, we are pleased with how the business performed. We appreciated our ability to react dynamically to market conditions, and we were satisfied with being a bit less promotional, as well as the overall health of our business mix. Looking ahead to 2016, our focus will be on ensuring sustained growth while considering the investments in real estate from both White Barn and Bath & Body Works, which will undoubtedly exert some pressure on the business. Our strategy will involve leveraging our ongoing strengths in the home business and maintaining our fleet's appearance. Ultimately, our priority will be on ensuring strong top-line performance, allowing us to support the investments we are making.

Wanted to follow up on PINK. I think there are four new standalone stores this year. I think you did somewhere in the teens last year. Are you learning something there? Or is it shifting more to the full assortment of PINK within the Victoria's Secret stores? Help me understand what's happening with that brand, that'd be helpful.

Omar, it's Stuart. I mean, the business is performing incredibly well. So let's just start with that. I mean, the merchandising sales growth, the margin results, the momentum in that business, the strength in that business is terrific. As I think we've been relatively clear about over time, the specifics on real estate are largely a function of what's going on mall by mall. Our views about expanding square footage for PINK haven't changed at all. Meaning, we believe that there's substantial sales growth and profit growth opportunity, adding more square footage for PINK, and we'll continue to do that through a combination of remodels and freestanding PINKs. But there will be year-to-year variation in the number of freestanding PINKs versus growth through remodels. That again is a function of mall-by-mall circumstances that are in front of us. So that's how we look at it. And the 2016 PINK freestanding new stores, it looks like we're, as you point out, we're going to open four and close one for a net of three. But again, the square footage growth for PINK isn't changing in any material way. Very big growth opportunity for us.

I guess, question on the leadership transition at Victoria's Secret. Are there any other, not holes, but opportunities to focus on additional category growth or accelerate that, particularly on the VSX or on the swim side? And any thoughts on that perspective.

Well, Brian, this is Stuart. As it relates to leadership at Victoria's Secret, first of all, as I mentioned in the remarks, I mean, the business is in terrific shape, as you know. I mean, it's a great brand, coming off record results. And all that comes from a very talented leadership team at Victoria's Secret on the store side of the business, on the direct side of the business. And what that team is focused on is executing fundamentals really well in 2016 to deliver yet another record result. So are there significant holes per se or opportunities? We've got a very good team.

Can you guys just give us an idea what the launch cadence looks like or the newness factor looks like this year relative to last year at both of the divisions?

Yes. Thanks, Howard. We'll start with Nick.

It's kind of comparable to last year, really, in terms of the overarching flow of how we think about how we're flowing merchandise and also probably around the level of newness that we anticipate. There's no major shifts as it relates to sell timing or launch period. There's probably an opportunity to think about how we performed in November, December Christmas time frame or the timing associated with the flow of that. But from a material change, nothing of significant magnitude.

Howard, for Victoria's Secret, the launch cadence, number of launches will be the same, very consistent as compared to a year ago. Obviously, the specifics are different. We don't comment a lot about the details of what we're doing in advance. But in terms of overall approach and number of the launches, highly consistent.

Just curious if you could share maybe your thinking, in which product category do you feel you might have the greatest pricing power, or perhaps opposite where you might need to be a little sharper on pricing. And then, just separate, Stuart, on the depreciation line, it looks like a pretty big increase in '16. Just curious if there's anything being accelerated that leads to that double-digit increase.

Thanks. So we'll start with Nick on the pricing question.

Paul, so we're constantly looking at pricing through the lens of both customer acceptance from a product perspective as well as what elasticity we think we have in both ticket prices, while there's promotional price. And as you know, over the course of the last couple of years, we've taken some ticket increases that we haven't had any barrier to. And I think our ongoing goal is always to think about how do we get paid for innovation that we put in, how do we get paid for the newness in a way that gets us to full-price selling. As it relates to whether we think we have power, I think in both our signature business as well as our home business, as we continue to see strength in it, there's obviously opportunity to look at how we are priced and is there an opportunity for either price-up or aggressive full-price selling. And that's typically part of the course in terms of how we actually think about running the business on a day-to-day basis. So price is obviously top of mind for us.

As it relates to Victoria's Secret, I think it's generally true for the company. The pricing power starts with the power of the brand and the differentiation that we provide through the brand, through the store experience, through the merchandise. And I would say the balance point, as we think about it, is always being mindful of reinvesting in the product and being thoughtful about driving transactions in units versus rate. And I think the business, including at Victoria's Secret, works hard to strike that balance and has the range of pricing evaluations, including good/better/best pricing and so on. So I think we look at pricing carefully. The particular area that we're thinking about, I imagine a number of retailers are, as it relates to foreign exchange. How does one think about pricing? I don't have any specific comment on that. But you would appreciate that we're thinking about that. But the pricing power starts with the brand and runs with newness and speed, and we try to balance velocity and rate.

And depreciation, Stuart?

Oh, sorry. Depreciation is in line with capital expenditures. We are heavily investing in the business, and we remain very positive and optimistic about it. The increases in depreciation are mainly driven by the higher levels of capital spending we have made over the past few years.

My question is about international, specifically regarding the VSBA. In the prepared remarks, you mentioned that revenue and profit were down, primarily due to currency impacts. Can you provide more detail on this? There are significantly more VSBAs compared to last year, so I'm curious about the organic growth of that business excluding currency effects. Additionally, I noticed in the guidance that you're planning to close 10 of these locations. I don't recall you ever mentioning that before. Could you elaborate on this? What specific areas are being targeted for closure? Are they mainly tourist-focused regions? I'm interested in understanding the situation with the VSBA.

Thank you for the question, Ike. To clarify how VSBA fits within our international segment, we have four businesses: Victoria's Secret owned stores in the U.K., full assortment stores in our franchise business, Bath & Body Works international operations, and franchise arrangements, along with VSBA. Three of these businesses performed strongly this year and this quarter, but the challenge we faced was in VSBA. There are three key reasons for this, which I mentioned in my prepared remarks, and they are roughly equal in impact. First, foreign exchange fluctuations affect both recognized revenue and operating income. Second, there is a general decline in travel retail, particularly from customers in Russia, China, and tourist spots linked to the Middle East, compounded by security concerns that have been widely discussed in the industry. Third, we take full responsibility for the decline in our Victoria's Secret beauty segment, especially related to the Fantasies relaunch, which impacted our global business. Regarding our confidence in the fundamentals of VSBA and the planned store closures, we feel very positive about VSBA. It remains a highly profitable venture with significant growth potential and supports our international brand presence well. We anticipate possibly closing around 10 stores, with about 5 already identified. These closures result from several factors. Sometimes we replace a VSBA with a VSFA, which means upgrading from a smaller to a larger store, which is a positive move. Additionally, since travel retail leases typically last three years, some of our stores that have been operating for five years or more will soon need renewal. In other instances, stores may be relocated. There’s nothing concerning about these closures. We maintain strong confidence in the business, and our foundation is solid.

My question is on speed at Victoria's Secret. I'm just wondering if you could give us an update as to where you are with speed. And are there certain categories which represent a disproportionate opportunity going forward?

At Victoria's Secret, PINK is currently the fastest growing segment within the business. However, speed has also been effectively utilized in the lingerie and beauty segments. To answer your question about where the biggest opportunity lies, it’s on the beauty side of the business, where we see potential for improvement in speed. We are actively working to capitalize on that opportunity. PINK is progressing quickly, and the lingerie segment has also made significant strides, although it involves more intricate designs and is slightly more complex compared to the PINK collection. Overall, we believe that the greatest opportunity for enhancing speed at Victoria's Secret is within the beauty segment.

I just had a question regarding digital sales. And a lot of retailers are able to achieve really leveraging their store network in terms of ship from store and pickup in store. There's been a real material mix this past year. So what do you think about that frontier in terms of where you may go? And is there interest from your customer? And if you could update us on how you are evolving in terms of your mobile presence. I know you've been kind of a pioneer on a long-term basis with your online business.

Thanks, Oliver. We'll go to Stuart for that.

Yes, regarding click-and-collect and shipping from stores, we are all aware of the industry trends. There is an opportunity here, but it's essential to prioritize this alongside our in-store selling initiatives. We strive to remain focused on our business, and while there's potential in click-and-collect and increasing foot traffic to stores, we also see significant opportunities in enhancing sales through more effective selling strategies. We will explore these areas over time, considering how they align with our other objectives and ensuring that we provide excellent experiences for customers in our stores. Nick, do you have anything to add from the Bath & Body perspective?

No, about the same.

And on the mobile front, was there anything on mobile that we should know about?

Terrific, terrific business. We continue to make what I'll describe as continuous improvements to the technology for customers doing business using mobile devices. And I think, as is the case in the industry, we're seeing very substantial growth in our mobile business. And we're working hard to make various improvements. We've made some. We'll continue to make some to make sure that's a great experience for customers. Great, great part of the business, that's for sure.

You've spent a lot of 2015, especially at Bath & Body Works and Victoria's Secret, adjusting your promotional pricing, and it has been successful. Looking ahead to 2016, will you keep this strategy in place? Has it contributed to an increase in the average unit retail at the stores?

Thanks, Marni. We'll start with Nick.

Yes, we are very focused on maximizing price points while also seeking margin gains. We've noticed positive results from being slightly less promotional and adjusting our price points, which has definitely helped our margins. This success has largely come from product acceptance. Our primary objective is to offer products that our customers will love and to sell them at full price. In certain areas of our business, we are seeing strong traction, with an increase in average unit retail and improving margin rates. We understand that reducing promotions is key for building brand equity.

Victoria's Secret thinks about it the same way, I mean, they really do. They've done working the space, they'll continue to do working the space, and Nick said it well, for any retail business, it starts with the quality of the product.

Could you provide an update on Victoria's Secret regarding the expansion of the full assortment in more stores? You mentioned that around 800 locations still lack the complete lingerie selection. The same applies to PINK. Can you clarify your expectations for progress this year as you increase square footage in the business?

Sure. So we're going to remodel a lot of stores. And you've got the detail of that in the analyst package in terms of the number of reconstructions. And as you would expect, when we remodel those stores, we're looking to make the highest best use of that space. And so our activity has been significant over the last three to five years in terms of remodeling stores, and we've made progress. And we'll continue to make progress in 2016 with a lot of projects. We obviously wouldn't look to have the full assortment in all stores. So we'll use our business judgment about tiering assortments based on the venue and the sales potential. But we'll continue to make good progress in 2016 given the real estate activity we've got for Victoria's Secret in North America.

In the context of VS leadership changes, can you just talk about how you're thinking about the organizational structure there? And any areas of opportunity you see to potentially drive greater speed and agility within the organization? And then separately, just a quick follow-up for Martin. Appreciate all the additional color on the drivers of international performance, just any help on how we should be thinking about the growth rates and margin profile of that segment in 2016.

So on Victoria's Secret leadership, Les has always been involved in the business. And as you would understand from our announcements, he'll be substantially more involved in the business. And as things develop in 2016, we'll be looking for ways to simplify and focus that organization. Do we have specifics? Absolutely not. Is that our mindset generally in our business? It is. But in terms of the detail of that, we've got a great leadership team. As I mentioned earlier, what we're most focused on are things that impact the customers. So merchandise and speed and doing things in stores and online well. But certainly, the business will look at ways to simplify and focus things as we move forward.

Thanks. And Martin, on ...

Yes, I think in terms of growth on international, we're pretty transparent in the analyst pack on Page 15 about where the store growth will come from. If I help to interpret that, the biggest area of growth for us in 2016 will be in the full assortment business. So we will have our biggest year of store openings ever by some distance. And the complexity of that will increase significantly as we're opening in new markets with new partners that we haven't operated with before. So as I mentioned, we have Russia that already opened earlier this month. We have Mexico coming. We have China. We have Singapore. We're actively looking at real estate in lots of other geographies as well. So I think you'll see a real ramp-up in the full assortment store participation of the business. How you model for that, I recognize it's tricky. You've got four businesses and you've got three different models: owned, royalty and wholesale. It's difficult to do. I would say, overall, you should expect our revenue growth to be below that of our store growth as the stores are skewed to smaller stores. And if it was around the 20%, I think that's where I would expect it to be.

I have a question about White Barn. If I remember correctly, around the middle of last year, you had approximately 60 locations, and the comparable sales were about 25%. Did that trend continue through the end of the fiscal year? Also, do you believe it's sustainable as you remodel over 140 locations this year?

So yes and yes. So we continue to like the trend of that business. Hence, as we mentioned, we're rolling obviously more of them out next year. Now I want to preface, obviously, that when you hear that kind of number, it's a range. We see a range of all sorts of performances on average. We very much like the performance that's happened, and they continue to be good. And so as we think about 2016, obviously, we've got more stores rolling and our number one goal is to maintain the comp in the business period and then, obviously, the comp performance that we've seen in those White Barn stores primarily because of the investment that we've made. But yes, we like the results from last year. We like the results currently. And obviously, we'll do what we do really well, which is we'll read and react, and we'll monitor it. So we won't just continue to go blindly if things change. But so far, so good.

A question about my favorite division, La Senza. You noticed or I noticed the expansion into the U.S. and wondering what's inspired the investment in La Senza and what we should look for in the U.S. in terms of product mix, differentiation from Vickie and especially the PINK business?

Thanks, Richard. We'll go to Martin for that question.

Okay. Thanks, Richard. I'm glad it's your favorite segment. Mine, too. So we continue to make really good progress in La Senza. We've had a multi-quarter roller coaster in comps. Very strong sales performance really driven by being faster to market, more fashion-right, and zeroing in on the customer with a young, sexy, obvious, value positioning. And that positioning is what really differentiates it from both PINK and from Victoria's Secret. In markets around the world where we see the three lingerie brands present, we know that they trade effectively alongside each other. They appeal to different customers. And where they appeal to the same customer in different shopping modes and different moods, it's all good. So yes, we're excited to bring La Senza to the U.S. We'll open probably five stores in the fall. Our first store is opening in November. Not particularly material in terms of the CapEx as those stores are only 2,000 square feet in space, not particularly material in terms of preopening costs, but very significant in terms of the future growth opportunity that that represents. We won't get too far ahead of ourselves in claiming victory. It's just a test, and we'll call it over the holiday period, and we'll report back in January. But certainly, very exciting progress for the brand.

So with the direct business now having inflected to the positive side, what's the best way to think about leverage points in 2016 and then beyond, both on the buying and occupancy and then on the SG&A from a fixed cost comp hurdle?

Yes, as we mentioned in our prepared remarks, occupancy will be growing at a faster rate in 2016. So as it relates to that part of our cost structure, the leverage point is higher. And then, as it relates to the direct business in terms of its overall impact on leverage points, not a significant effect. The biggest effect is our investment in real estate in 2016 and growing at a high single-digit rate above the growth rate from 2015.

Thanks, Stuart, and thanks, Matthew, and thanks to all of you for joining us today and for your continued interest in L Brands.