Bath & Body Works Inc (BBWI) — Q2 2017 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to L Brands' second quarter earnings conference call for the period ending Saturday, July 29, 2017. As you know, we released detailed commentary last night, which is available on our website. 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 second quarter earnings release, additional commentary and earnings presentation are available on our website, lb.com. Stuart Burgdoerfer, EVP and CFO; Nick Coe, CEO of Bath & Body Works; and Martin Waters, CEO of International, are all joining us today. Additionally, we have the Victoria's Secret brand leaders joining us for the first time on the call today: Denise Landman, CEO of PINK, who is joining us from another location; Jan Singer, CEO of Lingerie; and Greg Unis, CEO of Beauty. As a reminder, all results that we discuss on the call today are adjusted results and exclude the 2016 special items outlined in our press release. Thanks, and now I'll turn the call over to Stuart.

Thanks, Amie, and good morning, everyone. Second quarter earnings per share decreased 31% to $0.48 per share, exceeding our initial guidance of $0.40 to $0.45. The earnings upside was delivered through expense control and nonoperating income gains. The comp decline of 8% was below our initial forecast for a mid-single-digit decline. Looking forward to the remainder of 2017, we expect continued solid performance at PINK and Bath & Body Works and continued improvement versus our first half results at Victoria's Secret Lingerie and Beauty. Given our below expectation second quarter sales result, our comp forecast for the third quarter is a more conservative low single-digit decline versus our previous view of up low single digits. We have strong brands that lead their categories with post connections to our customers. While store traffic, particularly at Victoria's Secret, has been challenging, we believe a large part of the decline is related to the exit of Swim and a pullback in promotional activity versus last year. Our online businesses continued to be strong with 11% growth in go-forward categories at Victoria's Secret and 16% growth at Bath & Body Works. Our stores have high sales productivity and 99% of our stores are cash flow positive. We have confidence in our upcoming product launches, and we will continue to leverage our speed and agility capabilities to read, react, and fix. We will also continue to manage inventory, expenses and capital spending with discipline. With that, I'll turn the discussion over to Denise.

Good morning. My name is Denise Landman, I'm the CEO of PINK, and I've had the privilege of leading this brand since 2002. This morning, I have some brief comments regarding our recent performance. Building off of a successful spring '17, led by bra and panty performance, the PINK brand management is currently focused on delivering a world-class experience, both online and in stores, for all of our back-to-campus shoppers. Back to campus, one of PINK's perennial milestones as a brand, really exists for multiple reasons. Number one, it's an opportunity to build an on-trend wardrobe of intimates, lounge and accessories for collegiate girls across America. It's a critical brand engagement opportunity, fortifying our customer's affinity for the brand. We leverage our agility and read and react, which is a core competency of PINK, enabling us to assess based on current performance those opportunities that are scalable and mitigate any risk. This is of particular importance as we look forward to the holiday season. I would assert that we remain enthusiastic about the brand's relevancy and its forward performance potential. Those are my comments this morning. And I'd like to turn it over to Jan Singer, CEO of Victoria's Secret Lingerie.

Thanks, Denise. Hi. It's Jan Singer, CEO of Victoria's Secret. It's really great to be on the call today. Coming into L Brands and to Victoria's Secret with 15 years in beauty, over 10 years in sports, and most recently in intimates, I'm really excited to bring Victoria's Secret Lingerie, my passion for the consumer and the customers that we have, the insights that they bring, understanding of innovative, aspirational product creation and their really close understanding of supply chain and agility. In addition to that, brand programs that are authentic and engaging and will continue to build loyalty and conversion for our existing and new customers into the business. The vision going forward is that there are many ways to run this offense, and I am on the offense to mine for long-term sustainable growth with four clear filters. Number one and always first is knowing her. Putting the consumer at the center, deeply knowing her today, what she expects from products and experiences that speak sexy to her, not just to him. Number two, solving her sexy, which means really strengthening the core of our business with bras that are our best at in design, innovation, fit, and finishing. Bras with the benefits and key adjacent categories that also bring fashion and fantasy for her are the focus. Thirdly, serving her, where she wants to shop, when she wants to shop in an elevating, engaging, brand-accretive way, all powered by building a high-performing team and culture of diversity and inclusion. That culture is what breeds innovation. Innovation is what helps us build the best at bras and when we do, we get paid for that work. My focus right now and for this past year has been on the deep consumer connection, literally beginning the experience with working in stores and being in the market every week since day 1. The consumer connection we have with millions of women is a competitive advantage every day. From that, we build product in the most excellent, innovative form, resetting how we, as a team, optimize our merchandising, design, planning, and supply chain teams for speed, relevance, and innovation is a new way of working and one that I'm excited to bring and lead the team on. And with the team, we are on the offense of building world-class high-performing talent. We have a balance of undeniable internal experience from L Brands and a balance of new team members that bring a lens of innovative thinking to the mix. That chemistry and competency is job one in building a high-performing team. This quarter, it begins with bras. The #1 job was balancing the assortment, making sure that we have choices of sexy for her. We have a cornerstone in the business of the push-up bra, and we went into the bralette business and now we're finding a lot of sexy in the middle. Balancing that assortment and bringing sexy solutions as well as fantasy and fashion in constructed bras is the way to go for us going forward. We're also resetting the panty architecture for the mix business, when she just wants cheap and cheerful, fast fashion as well as disruptive single-ticket pinnacle product. In addition to the time this quarter, we are obsessing holiday. Holiday is an everyday conversation for us, and we plan on coming into the quarter with holiday plans dialed. Transitioning the team has been our focus this quarter and also, learning from last Retail 101 so that we can write the future together. I'm most excited to see the deep, deep consumer engagement that we have as a team, given the access to the customers. I'm excited to see the reset and return of the right level of loyalty. We have an incredibly loyal customer today, and building new loyals is a mission for us, and reactivating our existing customers has also been a focus. I'm excited for the future ahead, and it's a pleasure and an honor to be at the brand at this time. I'm now going to turn it over to Greg Unis.

Good morning, everyone. I'm glad to be here with you this morning. It's been a little over a year since I joined Victoria's Secret, and I'd like to begin this morning with sharing a few thoughts about what we've been focused on in Beauty. So last fall, we began a journey to create a clear point of view for our brand and for our customer, most importantly, about what we stand for as a beauty business. We narrowed our assortment offering by 40%, and we saw significant increase in our productivity. That decision allowed us to focus on fewer, more powerful launches within our prestige fragrance business and to create fashion and newness in categories where we can leverage our speed model through the Beauty Park. So moving on to Spring 2017. We were focused on laying the foundation for healthier businesses across all product lines. Within Q2, by focusing the assortment, we made big bigger and best-selling fragrances are up year-over-year in both stores and digital. We layered in fashion and newness in our mist collection, lip and accessories businesses, which the customer is responding to. We reduced lead times and continued to get faster. Overall, I'm confident we are headed in the right direction with positive sequential growth. So looking forward to fall, to this coming fall, we will continue all key strategies, continue to lay the foundation of a healthy business to set up for growth in the future. We will build upon what's working, making big bigger, leveraging our speed model to infuse fashion and newness and testing and learning new ideas. Thank you for joining this morning. I will now hand it over to Nick Coe to share his opening thoughts.

Thanks, Greg, and good morning. I want to add a few thoughts to the written remarks we shared, highlighting our continued business growth and operating income improvement over a strong last year. First and foremost, our brand remains our most valuable asset. In the past six months, our strategic focus has been critical in advancing our business. While not explicitly mentioned in the script, we've made significant investments in two key areas that support both our top and bottom lines, enabling us to grow the business simultaneously. Over the last six months and particularly over the last couple of quarters, we've boosted the introduction of new products and categories, marking a notable shift from recent trends. This isn't just about seasonal fragrance updates; we're introducing substantial new offerings in stores. This has been invaluable, providing critical insights that will help us maintain brand relevance and category leadership. Additionally, we’ve maintained a disciplined investment approach in our stores, ensuring they are updated, exciting, and engaging for customers. By the end of the year, we will have about 420 stores, with continued investment expected moving forward. As we often emphasize, enhancing the customer experience in stores is crucial, directly impacting sales. Both of these initiatives greatly contribute to strengthening our brand health, which remains our most valuable asset and positions us for future success. In summary, we've made significant progress on these two initiatives, achieving improvements in both our top and bottom lines concurrently. Now, I’ll hand it over to Martin.

Thanks, Nick. Good morning, everyone. In the international business, we experienced similar overall trends as those that we saw in the first quarter, including softness in Beauty, difficult market conditions in the Middle East, some pressure in the U.K. market, and of course, we continue to make investments in China. We did see some improvements in our Victoria's Secret franchise and travel retail businesses, as well as continued strength in the Bath & Body Works International business. We continue to be pleased with the first two full assortment of Victoria's Secret stores in Mainland China, and we successfully transitioned to the Tmall domestic digital platform with in-country fulfillment back in July. We continue to be very bullish about our growth opportunities in China and around the world. And 2017 will be an exciting year for us as we continue to establish our business in China and build on our footprint in other geographies globally.

Thanks, Martin. That wraps up our prepared comments this morning. We are now open to any questions you may have. Thank you, and I'll hand it back to the operator.

I was wondering if you can maybe just give some more color on the lowered guide for the year. It sounds like it's pretty much all traffic related and just lower expectation for sales in the back half. But then also, it sounds like you feel that the Swim exit did impact traffic in second quarter. So maybe just your thoughts on how you see traffic playing out in the back half. And then also, on the merch margin front, do you expect it to improve in third quarter from second quarter?

Thanks, Susan. It's Stuart. Regarding the guidance, we've adjusted our sales forecasts downward compared to what we anticipated earlier in the year, and that’s the main reason for the change. Our team will be working diligently to make the most of the upcoming opportunities this fall. As you know, we manage the business with a conservative approach concerning inventory, expenses, and capital spending. We are careful with our sales assumptions as we manage these areas, and that cautious mindset is reflected in our guidance. We exceeded our Q1 guidance and are aligned with our Q2 guidance as well. However, the downward adjustment is fundamentally related to sales. Thank you.

And just on the merch margin front, do you expect it to sequentially improve from second quarter to third quarter? Or do you feel like you'll have to promote more to drive the traffic?

We had some merchandise margin rate improvement in Q2, as we reported, and we would expect to have some improvement in Q3 and Q4 as well.

Stuart, and I'm not sure if anyone at Victoria's Secret wants to address this as well. But traffic, obviously, seems to be the #1 kind of key ingredient that's missing to drive the go-forward business. You mentioned that you're increasing marketing selectively in the third quarter. I'm wondering if you can talk about the goal of driving traffic is your new targeted direct mail, pointing you in the right direction. And are there any other levers that you've got at your disposal to try to drive traffic as we go through the back half of this year and into 2018?

Kimberly, it's Jan Singer. Thanks for the question. I think that when we use the marketing strategically in a brand-accretive way, we have the opportunity to engage existing customers and make her aware of the new product that's coming. In addition, we have the opportunity to engage new customers that we believe would really have a great experience with the brand. So the idea is to make sure that what we're doing is brand accretive, inspiring and drives traffic and conversion. So yes, that's a strategy for us.

And then I would add from a PINK perspective that we enter into a season with a very holistic point of view regarding how we're going to reach out, inform and touch the customer through all relevant digital platforms in addition to pieces that we might mail. I think above and beyond just trend-right product in the moment, our event strategy, our movable bus tour, which visits college campuses, continues to drive interest in the brand and traffic into the store.

Thanks, Denise. Kimberly, did that do it for you?

I'm curious about the response to your targeted direct mail efforts. Is it effective in attracting more customers to the stores in those test markets?

Short answer is yes. We're getting good results. We've learned a lot, Kimberly, as we've talked about over the last 6 to 12 months, and we're seeing pretty strong response to the direct mail activity that we've been pursuing. Thanks.

Is there any more detail you can give in the comp breakdown between Victoria's Secret and Bath & Body Works embedded in your third quarter and fourth quarter guidance? So just how you think about each from a transaction versus ticket perspective that's built into the second half.

Thanks, Paul. So we'll go to Stuart for that question.

Yes, Paul. As you know, we don't get too granular about guidance by segment because there's variability even at the company level and obviously, further variability as you break it down into parts. With that said, as we think about it and trying to be somewhat responsive to your question, we would expect stronger results in the businesses that have had stronger recent trends. So that might be an extremely obvious point. But we would expect a continuation and further improvement in all of our businesses. But in terms of absolute traffic and comp results, the businesses are in different places, as described. We're expecting improvement through the fall season across the Victoria's businesses and a continued strong performance at Bath & Body Works. So that'd really be the color. But in terms of getting details about traffic for PINK versus Beauty and all that, it just gets so granular. I'm not sure that it's helpful. We plan the business conservatively. We're optimistic about the fall. Bath & Body Works had a strong spring season. PINK had a strong spring season. And Lingerie and Beauty made a lot of progress as well, and we believe we've got improvement opportunity across the portfolio. Thanks.

We had a question related to panty sales below expectation. Could you clarify what happened here? Was it an interplay with some of the bra launch performance there? And on that topic of targeted direct mailing and returning to that, what was your framework for thinking about that decision? And what will be different about the program in terms of being brand appropriate in a brand-accretive way this time versus in the past?

Thanks, Oliver. So we'll go to Jan.

Thank you for the question. Regarding panties, there are several factors at play. First, we have transitioned from a highly promotional free panty strategy to redefining our product line and structure, ensuring we present our content at various levels. For our entry price point, the 5-for business, we need to have our content precisely aligned, which calls for a fast fashion approach. Luckily, we are well-positioned to do this. Resetting this strategy while leveraging our existing speed model is our primary focus. Secondly, we have seen some success that we must build upon in what we refer to as single ticket and more upscale panties, where we challenge the market. Our aim is to innovate and introduce new, attractive silhouettes, and when we do this successfully, customers respond positively. Therefore, we are revisiting this opportunity, which we believe is key for the future growth of our panty sales. Additionally, there is indeed a connection with bra sales as well. As we introduce new products and establish a logical balance in that segment, we expect to see an increase in panty sales. I am optimistic about our future approach, incorporating both the fast fashion model and elevated offerings. I believe this will lead to a more robust panty business with increased customer loyalty going forward. Regarding targeted direct mailing, our brand-accretive offers create a chance for customers to try our products in a way we take pride in, leading to repeat purchases. We aim to connect with our customers in a tailored manner, demonstrating that we understand their needs and showcasing new products that resonate with them. When we achieve this personal touch, customers are more inclined to engage with our brand. This is the foundation we are building upon with our brand-accretive product marketing.

Jan, I was just hoping to get some clarification on the panty price architecture. So are you saying that you'll be taking opening price point for panties lower? And if that's the case, how are you thinking about overall AUR for panties going forward? What kind of impact that might have on the business? Would you expect for the panty category to flatten out in coming quarters? Or is this a category that's likely to be a drag as this transition takes shape?

No, let me clarify. Thanks for the question. We did not discuss lowering the price point on panties at all. In fact, we believe there is more opportunity for growth rather than decline. The 5-for business remains unchanged, and we are committed to maintaining a strong value proposition. The opportunity I’m referring to involves ensuring that our team is as quick as possible in producing content and that our conversations with customers through the design of those panties are relevant. We are implementing several initiatives to enhance the value of our panties without reducing prices. Additionally, what I... Sorry. Yes, go ahead.

I was going to ask if there will be any changes to the way you promote panties, such as offering free or discounted panties. Do you anticipate further promotional discounts on panties, either on their own or included in a larger lingerie package promotion? Also, will there be any adjustments to the pricing of your entry-level panties that could affect the average unit cost? Should we expect the overall merchandise margin for panties to remain stable or possibly increase?

I think that when we talk about panties and promotions, it's a balance and we have to be selective. Do I want new customers to know what we have? Yes. Is there a brand-accretive way to do that without giving away panties to everybody that walks in the store? I do believe so. So for me, panties are our business. They're not just a marketing tool. And we'll be continuing to build that business and getting paid for that work. And we'll balance that with trial when we think that we can get a conversion from that conversation.

Just a follow-up on the conversation we're already having. Can you be a bit more specific on thoughts around units versus AUR in lingerie in the third and the fourth quarter and what the drivers are of that growth given what the comparisons are from a year ago? And then also, just a bit more detail on Bath & Body Works. Obviously, a good overall quarter, but certainly a slowdown at the end of the period. Just dig a little bit deeper into what exactly happened in July and what we should expect as we move into August in the second half of the year.

It's Jan Singer. So I would say, on your first question, as we go to balance out the assortment, especially on bras, from a bralette predominant conversation, we expect to see AURs go up, of course, because constructed bras are bras with benefits and we get paid for that work. So in terms of that AUR conversation, that's our intention.

Great. And we'll go over to Nick for the Bath & Body Works question.

I think July for us was really about a transitional month. I talked earlier on a lot about the amount of change, the amount of product testing that we've put in, the amount of differentiated assortment. I mean, July is pretty transitional anyway as we exit sales and start thinking about being in the fall season. So I really look at that slower slowdown in performance pretty much through the lens of it was transitional and it was about a lot of changes and some very interesting changes under the covers in terms of mix, assortments, et cetera. Thanks.

I guess, my question, first, for Jan. I guess, this T-Shirt Bra launch last month was your first big launch, I think, since you've been at the company. So curious about any learnings you had there. And as we look into the fall season, how should we be thinking about any big launches at any timing for VS launches versus last year? And then maybe Stuart can talk about the inventory guidance at the end of this quarter. Is that a bullish viewpoint about the holiday season? Or is that more about timing versus last year's inventory position?

Okay. So let's start with Jan, T-Shirt Bra.

Thank you for the question and the opportunity to discuss this. We reduced the assortment in that collection by 30% and aligned our plans with last year's two different collections using one assortment, which included a selection of a few bras, a refresh, and three new styles. Our product met our delivery goals, which was very satisfying. The most exciting aspect was that we attracted new customers in a fresh way through new silhouettes rather than relying on the existing ones. I was very pleased with the execution of that launch and the positive results. Importantly, the engagement with customers was encouraging. We also saw strong engagement on social media regarding the bra, which indicates that when we connect with her and provide products that fit and feel good, she will respond positively. This marks just the beginning of our journey.

Great. And Stuart, on inventory?

Yes, Brian. With respect to inventory, you've been following us for a long time, you know what our commitment is, which is to grow inventory in line with sales. We've done that very consistently for a long period of time. There's nothing that's changed about that point of view. With that said, we want to make sure that we're in stock and appropriately positioned to have a good fall. In terms of the guidance about the third quarter, I would describe it as consistent with that thinking. It is up a little bit but not significantly, and there's a little bit of timing involved. But our commitment to manage inventory in line with sales was as strong as ever. Some of this is what we're lapping and cycling. But again, it's a pretty conservative position. We ended the spring season very clean. We've got a lot of agility, which is great. And we'll manage inventory in line with the sales trend. Thanks.

Question on the August guide. Should we still expect comps to be down low to mid-single digits this month? And as we think about 3Q guide for flat to down low singles, maybe talk about which month do you expect to see the biggest improvement to reach that level. And then, secondly, just priorities for cash. I think you bought back a bit more stock during the quarter. Maybe talk about opportunity for a bigger buyback, especially given the stock at these levels.

Anna, it's Stuart. Regarding the August comp guidance, we initially indicated a decline in the low to mid-range. We don't have any new updates to share at this time. The back-to-school period for PINK is crucial, and they performed well, but we aren't providing further comments for August. We report every month, but there's no significant change to disclose. In terms of cash, as we progress through the quarter, the major change will be the decreasing effect of the non-go-forward exit, which will lessen as we move into the fall season, including each month in the third quarter. That's the additional detail I can share on the comp. Regarding cash, we have a strong track record and commitment to returning excess cash to shareholders, which we've discussed extensively. As you're aware, we are actively executing our share repurchase authorization and paying a healthy regular dividend, especially in light of our recent earnings results, which have a high payout ratio and appealing yield for shareholders. We remain dedicated to returning excess cash through regular dividends, repurchase programs, and occasionally special dividends, while consulting with our board on these matters. We will continue to proceed with our authorized programs. That's the update from us. Thank you.

I thought I'd try to get Martin involved. I guess, for the back half of the year, I think you guys commented that comps ex China were down in Q2. What's kind of baked into the back half assumptions in the top line for the international business? And then maybe any update on the operating loss you expect this year from China, given all the investments and how you expect that to scale maybe as you move into next year.

Great. Thanks, Ike. We'll obviously go to Martin.

Yes. Thanks, Ike. Thanks for bringing me in. I appreciate it. So yes, the driver of negative comp really in the international business is really all coming out of the U.K. where we're seeing a couple of things happening. One is the same patterns of business that we see in North America, particularly around the exit of Swim and Apparel and also, the lower AUR in bras. That said, we have seen significantly, I mean really significantly higher unit sales of bras in the U.K. So we are winning share of drawer, which is obviously a positive. I think the other thing in the U.K. that we're seeing is just generally somewhat of a malaise, and most retailers are reporting that traffic is down, not helped by the terrible incidents around tourism and so on and so forth. So that's really the big story in Victoria's Secret International. There is some softness in Beauty, but nothing that I would see as being particularly significant. And as we head into Q3 and Q4, we certainly expect to get back into positive comp territory. So feeling optimistic about that. The area where we have seen positive comps in Victoria is in China. And I think what you should expect to see is that we grow stores in the third and fourth quarter. We have two full assortment stores open now. We have four more in production. Those are a good and a bad thing, in that we have preopening costs associated with them, which means we have to live with more loss. But of course, getting them open gets us to trade. We then have 10 to 12 more full assortment stores coming in 2018. In terms of how the loss will be impacted, Q3 and Q4, you should expect to see somewhat of an increase in losses year-over-year in both of those quarters. But the scale of that increase will moderate and will moderate significantly as we get into Q1 '18.

I wanted to follow up on a comment that Jan made about reactivating some Victoria's Secret customers. Could you discuss what you believe are the reasons for the deactivation of some of those customers and what strategies you have in place to re-engage them?

Thanks, Omar. Jan?

Yes. So I think that I wasn't here more than a year ago, but my understanding getting here was that we had a dramatic shift in our marketing programs, and we needed to do that for a very good reason, so we could reset to get to the right customers at the right level. So perhaps that pause had a conversation with our engagement. No matter where we are now is really understanding who's in our file and how to reach her best. So we have had almost as much as 40% engagement with customers that we haven't talked to in quite some time. And that's a very positive reconnection for us and an important one to make.

This is for Jan. Jan, as you think of the progress of the new bra launches, how is it developing in your mind and where do you see the penetration of the lower AUR bralettes and sports bras going to or stabilizing at? And then as you think of the new product, store environment, do you see that at all changing in terms of either look or brand?

Thanks, Dana, for your question. I’ll start with a broad overview and then dive into specifics. The development of our structured bras is a crucial aspect of our product mix. Offering options like sexy bralettes is important, but we need to maintain a balance with constructed bras that provide different silhouettes. It's essential to recognize that while bralettes and unconstructed bras have their place in our assortment, their popularity fluctuates. Our primary focus is on creating bras that are well-made and beneficial for customers, as we are also a fashion business. When bralettes are trending, we will include them, as we currently do. It's all about offering choices and maintaining that balance. As we launch new products, such as our T-Shirt bra, we see positive responses from customers. Regarding our stores, I’m passionate about maintaining an effective selling strategy that aligns with customer preferences. We have a strong digital presence, but bra fittings must occur in person. Having spent significant time in stores as a certified bra fit specialist, I believe our fitting rooms provide a transformative experience that is essential. The in-store atmosphere needs to be aspirational and fit the brand, which attracts customers. Therefore, with quality products, engaging store experiences, and knowledgeable staff, we have opportunities to foster customer engagement.

On the margin front, can you just help quantify the level of gross margin decrease and SG&A increase in the third quarter? Help us to think about some of the puts and takes for the fourth quarter. And then just larger picture, as we move to next year, what revenue growth do you need to leverage SG&A? And is it reasonable to think about SG&A expense leverage next year?

So it's Stuart. I'll address the second part of that question first. Generally, low to mid-single-digit comparable sales growth, which corresponds to mid-single-digit revenue growth, usually provides us with slight leverage in our business during typical periods. However, as you noted, the years 2016 and 2017 have not been typical due to volume declines associated with category exits and the China investments you are aware of. Therefore, we think about achieving slight leverage with a 3% to 5% comparable sales growth and mid-single-digit revenue growth. Regarding the latter half of the year, compared to the first half, we are making significant investments in real estate, though we have scaled back, as mentioned in our updated remarks. We recently lowered our CapEx guidance by an additional $50 million, now at $800 million instead of $850 million. Nonetheless, we believe we are making important and successful investments, particularly in Bath & Body Works and other real estate endeavors, which is impacting our occupancy costs. The primary difference between the second half and the first half is that we anticipate volume increases and dollar volume growth in the latter half, contrasting with the declines witnessed in the earlier half. Therefore, on a dollar basis, we will incur more variable expenses in the second half, driven by that volume growth, along with increased expenses percentages, including some pressure from CapEx and occupancy costs. Thank you.

My question is for Jan. I want to know how many new bra launches do you have kind of scheduled for the next, for the back half of this year versus last year? And then the penetration of bralettes in the third quarter, or actually, the back half this year versus last year and whether you're seeing the AUR lift? And then, Stuart, for you, can you just talk about rent reduction opportunities? What percent of your leases come up for action in the next 3 years, and then your longer-term view of the number of stores you should have at each brand?

Thanks, Adrienne. It's Jan. So in terms of launches, I mean, the edict, I think, if you're in this business, is constant newness. So we will continue to flow constant newness faster than most due to our speed model. So there's a difference between newness in launches, and I recognize that. We will have the appropriate amount of launches that bring bras that have the right build in them. And when you cadence those correctly, I think that we can create spikes that matter for the business. In terms of the mix, it's less than 5% of bralettes as we go forward. Again, I think anybody can make a bralette, and that was a moment that will come and go and it will come again. But for us, we make constructed bras the best. And when we do, even in our bralette business, bralettes that have more construction in them, we get paid for that work.

Stuart?

Yes, Adrienne, regarding our real estate and store rent reductions, our approach has remained consistent. We regularly assess the data and take necessary actions, significantly reducing our plans for 2017 several times. To emphasize our philosophy, the in-store experience is crucial for our brands, whether it’s fragrance at Bath & Body Works, bra fittings at Victoria's Secret Lingerie, or Victoria's Secret PINK, as well as fragrance at Victoria's Secret Beauty. The in-store environment is vital to our customer experience and is inherent in our business categories. Additionally, our sales productivity and financial metrics for our store fleet are strong, with over $800 in productivity per foot, and 99% of our stores generating positive cash flow. We open and close stores annually based on performance and customer experience, actively managing our real estate portfolio. The number of stores we operate will ultimately be performance-driven. We believe that having physical stores is essential for our major brands, and we see potential for expanding our footprint in North America and significantly internationally. We have flexibility regarding capital expenditures and our positioning in lower-tier malls, with advantageous lease terms allowing us to close stores when necessary. It's important to clarify that rent reductions are not central to our real estate strategy. The most critical aspect is securing prime locations that enhance customer experiences and drive sales. We prioritize partnerships with developers to achieve these goals. Our experienced real estate team ensures we do not overpay, but focusing on rent reductions is not our primary strategy. Instead, we aim to be in the right locations with appealing store designs that position us well for the present and future. I hope this addresses your question.

Just a follow-up to Adrianne's question for Jan. What do you think is going to be the bigger game changer, new bra launches or the opportunity to improve existing categories? And then I'm just wondering, obviously, there are many sub-brands within the structured bra business. I'm just wondering, what percentage of the assortment have you been able to reposition for fall? What do you think you're going to be able to touch for holiday? And then just longer term, how you think about what percent of the assortment needs to evolve?

Thank you for the question, Roxanne. It's important to recognize that we are confident in our core categories of bras and panties, where we excel. However, we also acknowledge the significance of adjacent categories that we are involved in, such as sleepwear and sexy lingerie, which have a higher turnover rate and appeal in fashion. Currently, there's a trend of wearing lingerie and pajamas as everyday apparel, and we are capturing a fair share of that market. Our approach is to optimize our speed to meet this demand, encouraging customers to return to our stores more frequently, ultimately strengthening our core offerings. We must remain focused on our core while being mindful of how to grow these adjacent categories. Regarding changes, I view it from the very beginning; it's all about team collaboration and commitment from day one. In my discussions about the product lines I influence, I aim to drive positive change quickly and efficiently. You will notice a percentage of those changes already, as I have been concentrated on innovation and product development. More noticeable changes will come as we approach the holiday season and into 2018, and I believe the momentum will start this fall.

I'm curious, Les has talked about, when things were trending downward in the bra business, that the sizes were going up and this was an indication that the customer was getting older. And as you brought bralettes back in, that starts to reverse. So I'm curious of a couple of things. Are you still seeing that trend? Are you getting your younger customer back in? And then importantly, when she's coming in, you've talked a lot about AUR and the bralettes and the active business. Is she only buying the bralettes? Is she more price sensitive than she used to be? Or is she buying around the store? And is there any pushback on the pricing of your structured bras?

Thank you, Marni, for the question. We are noticing that our new customers are coming in, and the average age of these customers is younger in both our existing business, such as the BBV Demi, and the new T-Shirt business. We have the demographics of this younger customer, which is very exciting for us as it allows us to attract new customers while also engaging our valuable existing ones. A bra is not a barrier for her; when the fit meets her expectations positively, she makes a purchase. My personal experience in the fitting room has reinforced this. For example, the BBV Demi, our well-established and popular bra, is still a choice for her. This is encouraging. I believe that not having a high penetration of bralettes does not mean we're missing out on new customers; in fact, it's the opposite.

And then the pricing question?

No, there is no barrier for price. What’s interesting is that while the bra has a set price, customers often add more items to their basket, resulting in a higher total. When a bra fits well and boosts confidence, there really isn't a price barrier, especially for those that are comfortable and complement the body. We've consistently observed that younger customers don't see price as a barrier when it comes to well-constructed bras.

Jan, I was just wondering, given some of the softness in panties and sleepwear and the rebuild on bras, if you expected the lingerie comp to match that of the brand, of the Victoria's Secret brand in the second half of the year or if we should expect that to continue to trail as these adjustments are made. And Nick, I was wondering if you could talk about the newness level in August, and if you felt that you had brought in enough innovation in the month so that we'd see a change from the July trend.

Thanks, Janet. We're going to go to Nick first.

I think you're really going to start to see the newness around, more specifically as we get into September, October, November. So a lot of the learnings that took place during the first half of the year has started to impact the assortment more aggressively as you get later on into the year. So I'm looking forward to September. There's an awful lot of change in newness coming in from there that builds all the way into holiday so that we're sitting in the peak period of the year with probably the most amount of change.

And Stuart?

Janet, if I understood your question right, you're asking about the relative level of sales growth for lingerie, PINK and Beauty, if I understand the question completely.

Actually not. The lingerie business missed expectations and underperformed. I think the plan for the second quarter may have impacted your overall performance. So I'm wondering how we should consider the lingerie performance in the third and fourth quarter in relation to the overall Victoria's Secret performance.

Yes, we believe that regarding the overall Victoria's Secret comparable sales, PINK will likely have the strongest performance. Beauty and Lingerie may not reach the same level in terms of absolute comparable sales but are expected to improve as we move through the fall season.

Nick, could you provide more details on the improvements observed from the store renovations? If you could share any productivity metrics, that would be helpful. What insights do we have regarding customer traffic and ticket sizes? Jan, I'd like to hear your thoughts on the Victoria's Secret marketing now that you’re more familiar with it. Have you considered any innovations in the brand positioning, including the fashion show? Overall, what is your perspective on the brand’s positioning moving forward, and should we anticipate any changes?

I have a few thoughts on that. We experience a wide range of performance from the new real estate, but overall, it continues to meet our expectations, enabling us to keep making those investments. We observe a solid return on investment that is consistent with what we've experienced over the past three years, and we're quite pleased with that. The main point is customer engagement. We see a significant number of new customers visiting the store due to a better and more exciting experience. Overall traffic in those stores has increased, which is a key factor in their success. Ultimately, the real value lies in showcasing the brand in its best and most engaging form and introducing new products effectively. In summary, we are excited about the performance, which has been consistent, and we plan to keep investing in those stores in the coming years until we learn otherwise.

John, it's Jan. Thanks for getting in under the wire. That's awesome. Number one, most of the time, as I mentioned earlier, but I want to make sure I'm really clear about it, is that the focus is deep customer connection and making great product, job one. So I've spent this year really up in the value chain, way up into innovation, product creation. Our supply chain, ensuring speed and agility as well as our merchandising assortment. So I'm deep into that space. And without that, I can't market anything. So I'm really excited about the time spent there. That said, we know the marketing space in total for the universe is changing, and it's about performance marketing and we are embracing that notion. We have the mission of attracting, engaging and converting new customers as well as engaging our existing. Our new CMO will be joining the brand in September, this fall onboarding. So that is important for the VSL business. And you mentioned the show, though I can't say too much about it, what I will say is Greg and I are deeply connected into this event to make sure that it actually ticks and ties to the business, and we're excited about what that means for our activity and traffic and conversion for holiday.

Thanks, John. That concludes our call today. Thanks, all, for joining us and for your continuing interest in L Brands.