Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome, everyone to the L Brands Second Quarter 2014 Earnings Call. [Operator Instructions] I will now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer for L Brands. Please go ahead.

Thanks, Stephanie. Good morning, everyone, and welcome to L Brands' second quarter earnings conference call for the period ending Saturday, August 2, 2014. 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 and related financial information are available on our website, lb.com. Also available on the website is an investor presentation, which we will be referring to during this call. This call be is being taped and can be replayed by dialing (1) 866-NEWSLTD. You can also listen to an audio replay from our website. Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO, Victoria's Secret, who is joining us remotely this morning; Nick Coe, CEO, Bath & Body Works; and Martin Waters, President of International, are all joining us today. After our prepared comments, we'll be available to take your questions for as long as time permits. [Operator Instructions] Thanks, and now I'll the turn the call over to Stuart.

Thanks, Amie, and good morning, everyone. Our second quarter results were at the high end of our guidance. Total sales increased 6%, comps increased 3% on top of a 2% increase last year, and operating income dollars increased 5%. Earnings per share were $0.63 versus $0.61 last year. We continued to reduce inventories, ending the quarter at down 9% per square foot after beginning the quarter at up 6%. The gross margin rate declined by 30 basis points to 39%, driven by a decline in the merchandise margin rate, primarily at La Senza and Victoria's Secret direct. Strong assortments and the effective management of pricing and promotions resulted in healthy merchandise margin rates in our 2 biggest businesses, Victoria's Secret stores and Bath & Body Works. The SG&A rate improved by 10 basis points to 25%. As we reported in our July sales release, SG&A expense included severance charges of about $0.02 per share. These charges, which were not part of our original guidance, resulted from home-office headcount reductions in the quarter related to our ongoing commitment to increase efficiency and simplify the business in noncustomer-facing functions. Operating income dollars increased by 5%, driven by growth in all 3 of our major business segments. And our operating income rate declined by 10 basis points to 14.1%. Earnings per share increased 3% to $0.63. Turning to the balance sheet on Page 8. Retail inventories per square foot at cost ended the quarter down 9% versus last year, and we're very comfortable with our inventory position. They are clean and in good shape. Turning to Page 11 of the presentation. We feel very good about our assortments and the momentum in our business going into fall. Our forecast includes a negative impact of about $0.10 to $0.12 from the previously announced exit of certain apparel merchandise and makeup, and about $0.05 of incremental nonoperating expense, primarily interest, for a total of $0.15 to $0.17 of pressure, about $0.06 in the third quarter. For the third quarter, we expect earnings per share between $0.26 and $0.31 against last year's $0.31 result. Our third quarter earnings forecast reflects a low single-digit comp increase. We expect the third quarter gross margin and SG&A rates to be about flat to last year. We expect to end the third quarter with inventory per square foot down in the mid to high single-digit range to last year. For the full year, we are projecting positive low-single digit comps. Total sales growth will be about 2 points higher than comps, due to growth in square footage in our international business. We expect our full year gross margin rate and the SG&A rate to be about flat to last year. Nonoperating expenses for the year are projected to be about $315 million, consisting principally of interest expense. Before any discrete items, our tax rate will be approximately 38%. We are forecasting weighted average shares of about 298 million in the third quarter and 297 million for the full year. Assuming all these inputs, we expect earnings per share for the full year 2014 to be between $3.03 and $3.18 per share. We are projecting 2014 capital spending of about $750 million -- 2014 CapEx of $750 million. 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 12 of the presentation, Victoria's Secret's square footage in North America will increase by just over 5% this year, driven by expansions of existing VS stores and the opening of 33 new PINK stores and 20 new VS stores. Total company square footage will increase by about 3.5%. Turning to liquidity. We expect 2014 operating cash flow of $1.35 billion to $1.45 billion, and free cash flow of about $600 million to $700 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, results in very strong liquidity, which is more than sufficient to fund our working capital, capital expenditures, dividends and any other foreseeable needs. Thanks. And now I'll turn the discussion over to Sharen.

Thank you, Stuart, and good morning, everyone. Our second quarter results are detailed on Page 14 of your presentation materials. The Victoria's Secret segment grew both sales and operating income on top of a record performance last year. Total sales increased 5% and comp sales increased 3%, with operating income increasing $17.6 million or 6%. Merchandise margin dollars and rate for the segment increased in the second quarter, with the strength in the store channel offsetting the impact of non-go-forward apparel merchandise in the direct channel. We also finished the quarter with inventories in great shape, down double-digit to last year. Now let me give you a recap of each channel, starting with the stores. In the stores channel, second quarter sales increased 6% and comps were up 3%. Operating income increased 12%. Sales growth was driven across all businesses, and customers responded well to our assortments. We were very focused on our core categories and, therefore, drove growth in bras and panties, in both lingerie, PINK, and Sport, as well as growth in PINK loungewear and fragrance. Merchandise margin rates increased during the quarter, reflecting the strength of our assortment. We continue to focus on the fundamentals of expense management and well-controlled inventory. As a result, SG&A leveraged and inventory is down double digits year-over-year. Operating income dollars and rate increased during the quarter, as higher merchandise margin and leverage in SG&A more than offset growth in buying and occupancy from our investments in real estate. Now turning to the direct channel. Second quarter sales were flat to last year. Go-forward core category sales increased in the mid single-digit range, driven by the same merchandise categories that drove the strength in the store channel, offset by the exit of non-go-forward apparel merchandise. The merchandise margin rate and dollars were down to last year, primarily due to the impact of exiting non-go-forward apparel. Operating income dollars and rate declined due to primarily to the decline in the merchandise margin. As we transition to the third quarter, we will continue to focus on newness and are excited about our upcoming bra launches. We have momentum in our core chair categories of bras, panties, fragrance and PINK loungewear, and entering the season with lean inventory, positioning us to be agile and respond with speed. We will also continue to -- we also continue to be pleased with the results of our real estate and other investments that are improving the customer experience, both in stores and on our website. In summary, while the results in spring were good, we recognize we can get better. And therefore, we are now focused on what's in front of us and delivering the back half of the year. Thanks. And now I'll turn the discussion over to Nick.

Thanks, Sharen, and good morning, everyone. At Bath & Body Works, we were able to grow sales and earnings versus our record performance last year. We were pleased with the results, and we remain committed and focused on the fundamentals we do well. We recognize that we must keep getting better in order to win. Comps increased 3% on top of 3% last year. The overall assortments and shop activity was able to drive sales growth in a highly promotional retail environment. Traffic levels were down slightly during the period, but we were able to increase conversion rates above record levels last year, while also growing average transaction size. We continue to be pleased with the customer acceptance of product newness across our 3 key businesses: our Signature Collection product line, the soap and sanitizer business, and our home fragrance assortment. Performance was below our expectations in June, driven by semiannual sale performance. However, we leveraged our read-and-react capabilities and rebounded with our July floor set delivering strong growth. Total sales for the quarter were $705 million, up 6% or $37 million to last year. Operating income was $115 million, up 8% from last year. Operating margin was 16% in the quarter and was up 40 basis points to last year, driven by expense leverage. We finished the quarter with inventory levels about flat to last year and in line with our expectations. We were pleased with the performance of our BBW Direct channel during the quarter. Total sales were up 17% and operating income grew significantly versus last year. Looking ahead to the third quarter, we continued to flow newness across the 3 key businesses and we'll maintain our robust testing agenda. We began July in our first summer theme and in August, transitioned into our artisanal market theme, featuring new and seasonal fragrances. We're excited about our assortment but also recognize we are competing in a challenging retail environment. We remain focused on improving performance by leveraging our read-and-react capabilities and by providing customers with world-class in-store experience. Our inventories are well positioned heading into fall and flexible enough to read and react to customers' preferences. Expenses are well managed, but we will continue to make appropriate investments to drive growth in the business. With that, I'll turn the discussion over to Martin Waters.

Thanks, Nick, and good morning, everyone. Turning to our international segment. We continue to be very pleased with our results and progress. Sales increased by 71% to $79.3 million, and operating income more than doubled to $16.9 million. The operating income rate increased to 21.3%. You'll recall that results in this segment include both our wholly owned U.K. business and our franchise models in other geographies. Sales and operating income growth was achieved across all of our formats. At Victoria's Secret International, we continue to be pleased with performance of our full assortment stores. In the U.K., our London flagship store on Bond Street continues its exceptional performance, and we've begun construction to expand the store. Our 6 mall locations are also doing well. And we'll be opening another 3 stores this calendar year in the U.K., with one store having slipped from our prior forecast to spring 2015. Elsewhere in the world, we opened another 2 stores in the quarter under our partnership with Alshaya, bringing the total to 8. These stores continue to do very well, and we'll be opening another 5 to 7 this year across the Middle East and Turkey. Our Victoria's Secret Beauty and Accessories business continues to progress well, and we ended the quarter with 230 stores open. And we're on schedule for around 300 stores by the end of the year. We're on track to open 9 VSBA stores in China at the end of this year. As reminder, all of our VSBA stores are franchised. In Bath & Body Works International, we opened 7 stores in the quarter and are now up to 66 stores outside of North America, again, all franchised. We continue to be very pleased with the performance of this business and will open another 10 to 20 stores this year. So that's an update on international. And with that, I'll say thank you and turn it back over to Amie.

Thanks, Martin. That concludes our prepared comments. And at this time, we'd be happy to take your questions. [Operator Instructions] Thanks, and I'll turn it back over to Stephanie.

[Operator Instructions] Our first question comes from the line of Neely Tamminga with Piper Jaffray.

Stuart, could you give us a sense -- a little bit more color on the technology CapEx spend? Like what specifically you're spending on? And if each of the brand leaders could actually talk -- I mean, specifically around their mobile initiatives that are on the dockets, that would be really helpful for us.

Thanks, Neely. We'll start with Stuart.

So Neely, the technology CapEx is a relatively -- in the context of the total CapEx, as we talked about before and you know, about 70% of our CapEx is going into our real estate in [ph] our stores. Now with that said, and Sharen and Nick can comment on it more specifically, we're investing in some technology initiatives to support our international business. And we're investing in technology to support our direct businesses as well. And maybe Sharen and Nick want to add to them.

Sharen, you want to start?

Love to. Our mobile is such a big initiative for us, and we are seeing our mobile continue to grow at a very, very rapid rate. And obviously, I think it's a big part of our future. We're encouraged to see how -- what percent of our business is going through mobile today. We have robust agendas in terms of how to simplify it, the mobile experience, and really be able to have all the full-fledged experience that you get on mobile -- or that you get today on your desktop or your iPad on mobile as well. Very encouraged, very excited about where we're going.

Thanks, Sharen. Nick?

Neely, we will continue to invest in mobile. Obviously, it's an important part of us, mostly because it helps us understand open rate and, especially, in different venues, as the customer is not always -- obviously, the customer is not always at home and how we leverage that with social media. So yes, it's important and we'll continue to invest in it.

Great. Thanks, guys. Thanks, Neely.

Our next question comes from the line of Omar Saad with ISI Group.

Wanted to ask about La Senza. It seems like the store closures are accelerating there a little bit. Love to kind of have you paint the mosaic and how the strategy has been shifting there. And what's changed and what your thought process is on the brand going forward, especially with some of the international franchise closures. Is there kind of room opening up for maybe more of the Victoria's Secret model full-assortment stores?

Thanks, Omar. We'll go to Martin.

Yes, thanks, Omar. Not much has changed in La Senza, to be honest. Our Canadian fleet is the biggest part of the business. And that's pretty steady at about 150, 155 stores. We don't anticipate much change in that portfolio going forward. Internationally, the fleet is also pretty steady, with one exception, which you're probably picking up in the numbers, which is the U.K. business. You might recall that we acquired the brand rights to La Senza in the U.K. and Western Europe about 2 years ago. Alshaya stepped in to try and rescue that business that was in a distressed state, and we came to the conclusion early this year that it will be better to retire that business. So what you're seeing in the store closures is the impact of that single activity in the U.K., which, while disappointed for the people involved, we think it's the right thing for the business. So pretty much steady as you go in La Senza. We continue to be optimistic about the brand. We enter the fall season with our inventories clean and in good shape. And we think there's significant global potential for this brand going forward.

Is there any correlation the U.K. with the rise of Victoria's Secret? You have a number of stores there now and the change in strategy in -- around La Senza in the U.K. or are they...

No, not connected at all. What we see in malls around the world -- and we have several geographies where we have La Senza and Victoria in the same mall, is that both brands compete well. The customer enjoys both of the brands at the same time, and we don't see a material impact to La Senza from Victoria.

Thanks, Omar.

Our next question comes from the line of Paul Lejuez with Wells Fargo.

Can you maybe give some color around what sort of increases you're seeing on the VSBA side, as well as with your franchise partners? I'm just wondering, you don't give a specific international comp. But if you could give some direction in terms of how much of that business is being driven by new store openings versus what the comp would be if you had to give one.

Sure. We don't report other people's businesses. So remember, this is a franchise model. It's not our retail sales to report on. But I would tell you, we track it very closely. I regularly look at the data cut by vintage of opening, size of opening, geography, every which way you can cut it. And I would tell you that all of the indications are positive. That business grows from its core. It's growing, both in terms of new stores and growth in existing portfolio as well. So pretty exciting business. We'll get to 300 stores by the end of this year, and we'll keep growing it into next year.

Thanks a lot, Paul.

Our next question comes from the line of Marni Shapiro with The Retail Tracker.

If you could talk a little bit of Victoria's Secret direct. As you've unwound some of the nonprofitable apparel, have you seen the balance of the business pick up? Or has there been any kind of impact to the rest of the assortment there? And have you seen some of that business -- like Swim, for instance, you have it in a bigger assortment in stores. Have you seen some of the shift into the stores?

Marni, it's Sharen. Basically, our goal is -- and we are seeing the fruits of our labor, is that as we focus on more of the shared product, whether it's your core bra business, your PINK bra business, your Sport bra business, we're seeing very high growth in those categories. The future of what we believe will happen in direct is that we will offset that volume because we are more focused within these shared categories. We have not seen a deterioration of Swim by expanding it into the store. And in fact, it's really been a 1 plus 1 equals 2 or 2.5, being able to use the direct channel as advertising, the -- we don't have a lot of real estate in our stores, so that cannot carry the full assortment, being able to service the customer through our direct channel. So I think our strategy is -- I don't think, I know our strategy's going to pay off for us in terms of exiting these new noncore apparel categories and really focusing on the shared categories, which I think will benefit the customer, as well as the simplicity as we go forward with our strategies.

Thanks, Marni. And thanks, Sharen.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

Given this slight shift in the gross margin guidance to flat this year from slightly down before, what are the key drivers behind that and -- relating to each of the divisions? And lastly, as you think about the marketing plans for holiday, how will they be different in type or cost this year versus last year?

Great. Thanks, Dana. So we're going -- for the gross margin question and the guidance, we'll go to Stuart first, and then we'll go to Sharen and Nick for holiday.

Dana, on the change in gross margin guidance for the year, it's reflecting the actual result in Q2, which was a little better than we expected. So that's the shift in full year view, again, reflecting the beat, if you will, in Q2. Thanks.

Thanks. Sharen?

Thank you, Dana. Basically, as we think about our margins, it's particularly been strong because of our fashion hits, as we've been so much more agile with the inventories being so controlled that we're being able to test and really chase even more effectively than we have in the past. And as you know, speed is something that we have continued to focus on. And it's really paying off for us, as we've kind of honed in on that muscle. As I think about holiday this year, there's nothing indicating to me that it won't -- that it's going to be any different than any of the years that we've had in the past. And I think that what Victoria's Secret and PINK have done is really focused on what are all the different scenarios that could happen so that we could be prepared for anything. But I think the most important is that, if we have to turn on the promotional game, we're really being much more focused and to make big, bigger versus peanut butter spreading in terms of the promotional activity that we did last year. So I think this year, we are -- been very thoughtful about it and that we're prepared, hopefully, to win this holiday.

Great, Sharen. Nick?

Dana, so I would echo Sharen. So we'd anticipate it, obviously, being a promotional marketplace as we go into holiday. I'm not sure why it would be different. But we got terrific learnings last year in terms of some of the things that we put in place that we tested, knowing how difficult it was last year, what might we want to do. We've also run an awful lot tests earlier this year on some very big ideas that would differentiate us and feel very different to the customer, that she hasn't experienced before. So we'll focus on those and really those -- we have them planned. We have backups behind them. And then, I think it's a case of really us leveraging our read-and-react capabilities and our speed model to make sure we can adjust our plans into those tough periods.

Great. Thanks, Dana.

Our next question comes from the line of Janet Kloppenburg with JJK Research.

Sharen, I was wondering if you could talk about 2 categories, both Beauty and Sport. Beauty, it feels like that business is firming up, and I'd love to hear you discuss some of the drivers of that. And also, on Sport, can you talk about the penetration across the store base and what we should look forward to as holiday approaches in terms of wider distribution. And for Nick, I was just wondering if you could talk about ideas for the semiannual sale in January and how you might create some newness around it.

Great, Janet. Sharen, do you want to start?

Sure. Let me see if I can get all those questions. Okay. So first thing for Beauty. We've been very encouraged by all of our new fragrance launches. And as you know, what I'm really excited about this fall season is we've always had a strategy to really tie our fragrance launches into our bra launches, because the power of those 2 together are very strong. And so our next 2 launches that are going to be coming up, whether it's Fearless and Scandalous, all are tied together, same names of bras, same names of fragrance, which really puts power on power. The third piece, the other -- the third leg in store for us in Beauty that we are really seeing emerging is the accessory business. And we were always underpenetrated compared to our sisters in the VSBA space. And so that is a category that we're also going after as we're going to the holiday time frame. So putting fragrances with the power of the bra launches, as well as growing the accessory category, I think will position us well for Beauty as we go into holiday. The Sport, I'm very excited about Sport. I don't know if you all have been able to have a chance to see the new Sport book that just came out. Sport is in all stores. The full assortment will be in -- go from 118 to, I believe, about 180 stores this year. So we are very excited. As you know, this week, the launching are incredible. Zip-front bra, it was our #1 bra in back closure. We actually put it into front closure. We have come off of another strong introduction of the Knockout bra, which is the zip and click, which is patent. And so then, all of the technology that we have going into our Sport bras are very, very important. We are performance based. Everything we do is performance based and in all the innovation, as we go forward as well, really looking at owning that from a patent perspective. Excited about the growth opportunity that we have in Sport, both in the store and the direct channel.

Great, Sharen. And Nick, semiannual sale question?

Thanks, Janet. Yes, it's really interesting. So we had a tough sale. And if I look at the background behind that, as we flowed more newness and more fashion on a more regular basis, I think the customers' just begun to expect that and is now expecting that in sale as well. And as we had that in sale, we just didn't have it deep enough. So obviously, we'll fix that as we go forward. And I think what really happened as we transitioned July was, as we flowed significant newness, we saw our business really jump back. So our opportunity is -- a big opportunity, as we go into next year and then, obviously, as we begin to fix this is, we look at the holiday sale as well. So it's just a real case of meeting her expectations during a sale period. As you know, we're not really a markdown brand. We don't have a lot of markdowns on the floor. And so I think she just wants to [indiscernible] newness as we go into the sale period.

Great. Thanks.

Our next question comes from the line of Simeon Siegel with Nomura.

So Martin, you have the U.K. and the Australia full-assortment stores. Can you talk to any opportunity to bring the full assortment to other regions that are benefiting from VSBA now?

Yes, we see a ton of opportunity in the regions that we're already in, to be honest. So with the Alshaya business across the whole of the Middle East and Turkey, we see potential over the next few years to get to 40 or 50 stores. So again, rather than look at other geographies, I'd rather build out where we are right now. The same would be true in the U.K., where we own the stores. With that said, we get some incredibly positive responses from the VSBA business around the world that indicate that there will be great business for us in the full assortment. So the 2 areas that I'm thinking about in the years ahead, one would be China, obviously, as we open the VSBA business later this year. I think that bodes well for full assortment in '15 or '16. Similarly, in Western Europe, this year, we'll open our first off-airport VSBA stores in Western Europe. And that could well be a lead indicator for the full assortment business in the future.

Great. Thanks, Simeon.

Your next question comes from the line of Kimberly Greenberger with Morgan Stanley.

This is Lauren Cassel on for Kimberly. Sharen, I think some of the reasoning behind the exit of the direct apparel and makeup businesses was making a more seamless customer experience online and in store, which would ultimately allow you guys to roll e-commerce internationally. If you have any updated thoughts there or timing on that, that'd be really helpful.

We have really been working -- and you're absolutely right, is to try to streamline those assortments to make it easier for us to rollout. And we are doing some updates right now to our website in terms of just taking all the international currencies. As we think about when our priority would be, and looking for some time in 2015.

Thanks, Sharen.

The next question comes from the line of Jeff Stein with Northcoast Research.

A question for Stuart. Stuart, I'm wondering if you could just maybe parse out a little bit where the revenue growth is coming from in your international business. I know it's still small and growing rapidly, but it's very challenging to model. And I'm wondering if you could possibly break out how much -- roughly what percent is coming from company-owned stores, what percent royalties and what percent wholesale.

Well, as you can appreciate, that is a mixed model. One thing I'd want to register is that when we have our annual update meeting later this year, we'll provide some additional visibility into the key growth drivers over the next several years in international. But the revenue growth is really coming from all the portions or models of the business that you described. We don't get into the specific guidance, if you will, in those different channels. But if you think about the company-owned business in the U.K. and then the royalties that are coming off of the VSBA business and the full assortment business, again, each of those models are significant and are driving revenue growth. But we really haven't gotten into the detail of the composition of each of those 3. As we look to provide an update in October, we'll try to give more visibility to that on a multiyear basis.

Stuart, can you tell us what, if any effect, royalty income is having on the tax rate? And as we go forward and look into next year, some of these countries, I suspect, are low taxpaying. Will the tax rate begin to come down for limited?

It's not significant at this point, Jeff. But over time, as you point out, as our business becomes more international, over time, there certainly are opportunities for the tax rate to come down. But I wouldn't describe it as a significant effect certainly, in '14 or likely in '15.

Thanks, Jeff.

Your next question comes from the line of Brian Tunick with JPMorgan.

Two questions on Victoria's Secret. One is the square footage growth in North America. Just some comments about what you're seeing in the bigger stores versus your expectations. Any learnings from the expanded assortments you can roll out to the rest of the chain? And then on PINK, I know it struggled last year in the second half. Can you maybe talk about what the opportunities are relative to intimates, apparel or licensed and how you're planning it versus your inventory comments I think that Stuart made.

Thank you. We are very excited and very pleased with our larger-square-foot format stores as we have -- just a couple of things, as where we have needed real estate and we have actually pushed PINK into a free standing space and expanded the Victoria's Secret, 1 plus 1 is equaling 3. They are highly productive. And we would continue to see this as a great investment for Victoria's Secret. And as you know, we still have a large number of stores that still do not have the full assortment, whether it's PINK or it's Victoria's Secret. The highlights of what's happening in those full real estate stores is that when you have the opportunity to have a dominant bra presentation and add your adjacent categories of Sport and Swim, with PINK as a side-by-side, it's very, very powerful for every single category of growth. So good strategy, excited about the opportunity and performing well for us. PINK did have some missteps last year in their assortments, and were a little too promotional. This year, in the all-important back-to-school time frame, we did a lot of work in terms of course correcting the fashion and getting out of the NFL and the pro sport business and really focusing on the collegiate business. And we've actually added about 100 new schools in that collegiate business, which we think will more than offset the pro sport business. Back-to-school has turned out to be very, very good for us in PINK. We think that we're well positioned as we go forward. We're hoping not to be as promotional as we were last year. I think that every indicator that we have going forward and from our back-to-school tells us that we can actually do more volume at less promotional as we go into the fall season. Very excited about the PINK business right now.

Thanks, Sharen.

Your next question comes from the line of Barbara Wyckoff with CLSA.

My question is for Sharen. Can you just specify what categories you are keeping in apparel? And what has been exactly eliminated? I mean, I know dresses, boots, things like that, but...

Barbara, yes. Any -- what I would call street wear, if it's the denim business, the woven pant business, really is going away. The 2 businesses that we're keeping are the lounge business, which are consistent to what we were doing with Supermodel Essentials. And then when we think about the all-important Swim business, which is the beach lifestyle, those categories that tie back into beach lifestyle to support the Swim business, we will also be -- will also remain in.

Thanks, guys.

Your next question comes from the line of Roxanne Meyer with UBS.

The ability to chase is a competitive advantage for you, and you've talked about your increased agility in your businesses. I'm just wondering if you can give us an update on that ability to chase at both Victoria's and BBW, maybe pointing out the key categories that are chased and your average lead times at this point. And what categories, potentially, you still have the opportunity to chase?

Sure, Roxanne. We'll start with Sharen.

We have -- when we think about our ability in chase, it does vary by category. And it is really -- we have such strong partnerships with our supply base, and they are truly partners. We've worked very hard, whether it's your raw materials partners or your manufacturing partners, to really set up something, which, I think, is a very unique proposition. We have the -- we probably have cut all of our manufacturing in lead times in half and continue to see opportunity. Panties is obviously our fastest category of growth. We've been able to get bras anywhere -- if it's a basic bra, fashion bra, down anywhere from 3 to 7 weeks. So there's always more and more opportunity as we look at the supply base, because we really try to think about it as -- Charlie McGuigan likes to say, is that as they were manufacturing right next door to us. It takes a lot of coordination between all of our merchants' planners and our supply base to be able to do this. And we really believe it is a competitive advantage for us.

Roxanne, so we're really well structured and really fully leveraging the speed and the rapid replenishment that we've put in place. And I think if you look at our business over the course of the last 6 months, we've seen our comps steadily improve all the way through into July. And I think a lot of that is as a result of our ability and our commitment to reading the business and reacting to it and leveraging speed. I think where it goes to next is really about coming back to the fundamental of making that decision about what and which concepts really do we want to put the emphasis behind, so that we've got that read-and-react capability. So it really becomes more of a merchant skill set now in terms of -- got a high belief in this, we've tested it, we like it, and we're starting to use that to decide whether we want to put the emphasis in. So we'll just continue to really leverage it and make it part of a -- really, as part of our working model.

Great. Thanks, guys. Thanks, Roxanne.

Your next question comes from the line of Ike Boruchow with Sterne Agee.

I guess the question is for Martin. On the VSBA side, you've been opening about 100 a year the last couple of years. I'm just curious about your appetite, given what you're seeing to maybe start to accelerate that, maybe 150, 200. And then, also, any optionality or any thought process on potentially, down the road, taking some of those VSBA franchises in-house and what's the thinking there?

Yes, sure. Thanks, Ike. Yes, I think 100 stores is a pretty good clip, 2 a week. That's what we did last year. That's what we'll do this year. I would like to think that we could get there a little faster and so I'm challenging the business to up the pace for 2015. That said, the most important thing is the quality of the real estate. So I'd rather go slower and get the right real estate than faster and be in secondary locations. So there's a constant healthy tension with our partners, who see that this business is very productive. They want to go quicker, too, but I'm only prepared to do it in the right places, so it's that constant pull/push. I think if we can keep 100 to 125 stores a year going for the next few years, that will give us pretty good rates of growth. As far as the option to bring those stores in-house, I don't want to go there. Our model is a capital-light model. We -- it's a very high-control model, and we think that if we control the IP, we control everything that the customer sees, from how the assortment is built, how the stores are created, how our associates sell, and we just leave 3 things to our partners: they bring capital, they bring real estate and they bring responsibility for local operations and leading of people. We think that's a good trade-off and a good share. And for as long as that model works, I don't see the need to change it and bring it in-house. So I wouldn't expect to see anything from us in that regard going forward.

Thanks, Martin. Thanks, Ike.

Your next question comes from the line of Jennifer Black with Jennifer Black & Associates.

I think my question is for you, Nick. I wondered if you could talk about holiday. When you look at the collection, how much are you bringing back as far as your traditional sense in merchandise? And how much will we see in newness versus last year compared to other years? If you could just talk a little bit about that, that would be great.

Jennifer, yes, sure. There are, I would say we've got a comparable level of newness that we had last year. I think the difference that we're looking at is really distorting into things that we've either got an early read on, things that did well last year that we really want to get behind from a distorted perspective. In terms of what will we repeat, the 2 big things that were important to us last year, we'll repeat again were for traditions and holiday traditions. Especially in holiday traditions, we saw a very big growth in that category as we reinvented it last year. And we've done the same again this year. And really try to emphasize in that particular area the notion of the importance of Christmas, the importance of holiday and making it as festive as possible and really using that as a critical driver as we go into it. So I'd say, in summary, about the same level of newness, but really distorted towards where do we think the big hits are, and then 2 big ideas that will come back again from a traditions perspective.

Thanks, Jennifer.

Your next question comes from the line of Anna Andreeva with Oppenheimer.

A question to Sharen. Maybe talk about some of the technology you're seeing in the bra category right now. It just looks like Europe guys are benefiting from a lot of newness at Victoria's Secret. And a question to Stuart, maybe talk about the fourth quarter opportunity you guys have ahead. Your inventories are in very good shape, and guidance really assumes very modest gross margin expansion on top of a deterioration last year.

Thanks. So Sharen, do you want to start?

Well, we just have a philosophy for us that innovation and new technologies are really endless. And what we always try to start with is -- we start with the customer, is what can we solve for the customer to have a better fitting, a more comfortable fashion bra. So as we think about some of the new technologies that we have, whether it's in the Sport bras or as we have done our T-shirt bra or the Incredible bras, we continue to look at that, first and foremost, from the customer perspective. As we go forward for the holiday time frame, I will tell you, we'll be relaunching, a little insight, one of our biggest categories of bra, which is Dream Angels. So Dream Angels will have a brand-new facelift as we go into holiday, and that's going to be very, very important for us. So it's something that we continue to focus on. We want to be the best in the world at bras. But we -- it's not just technology for technology's sakes, but it's for basically solving issues or enhancing opportunities for our customer.

Thanks, Sharen. Stuart?

Anna, with respect to the fourth quarter, I mean, for the reasons you mentioned, we're optimistic about having a good fourth quarter. So we've got momentum in the business, inventories are in good shape, a lot of positive things going, which Nick and Sharen are describing. I would remind you that the impact of the apparel exit at VSD is significant in the fourth quarter. So that will be a drag going the other way. But we're optimistic that we're set up to have a good holiday and we're going to work hard to get to the best result.

Thanks, Anna.

Your next question comes from the line of Betty Chen with Mizuho Securities.

I'm wondering if, Sharen and Nick, you can talk a little bit about AUR or transaction or conversion opportunities for your respective businesses, whether for the holiday season or looking longer term into 2015.

Great. Sharen?

Betty, thank you. We are always looking at opportunities in terms of driving conversion. And one of the things that -- as we continue to think about our selling organization, is how do we make sure that we're giving the [indiscernible] of appropriate training? How do we make sure that they have the opportunity to experience the product? So we've put a lot of initiatives in place to help with training and with those -- with them really being able to experience the product. So I think they're going to, hopefully, pay off for us. We continue to see conversion go up. And I think that's a great opportunity for us as we go into the holiday season.

Thanks, Sharen. Nick?

Betty, I think a lot of this will really come down to what will traffic be like and how hard will we have to fight to make sure we get our fair share of it. And obviously, that fighting will take, in some cases, a promotional side. So I could see the season is starting well and AUR is pretty healthy. Is there upside? Potentially. But then, there's -- that would be offset with any promotional activity, which could also come back in terms of how we manage speed and are we able to get back into the collections that she's liked. We took some ticket increases last year. I don't anticipate us doing that again in holiday now. I think we've got ourselves to a healthy place. And then I think it's really just a case of reading, reacting and really understanding the customer's preferences, seeing if we can make sure we get the assortment in that area.

Great. Thank you, guys. Thanks, Betty.

Your next question comes from the line of Thomas Filandro with Susquehanna Financial Advisors.

Sharen, quick question for you. Any initial reads on the commission-based, sales associate market test that you're running? And then, Stuart, can you just expand on the severance charge that was taken in the quarter? What does that actually relate to and might there be an impact from the severance charge on an operating expenses go forward, either in the second half or in 2015?

Let's start -- go ahead, Sharen.

I'm sorry. Thomas, this is something we're always experimenting with. It's just really too early for me to comment.

Thanks, Sharen. Stuart?

Tom, on the severance charge, as we've talked about pretty consistently and I mentioned in the prepared remarks, we are, on an ongoing basis, looking to minimize the home-office overhead, particularly in areas that are noncustomer facing. And so we did take some actions in the quarter to adjust our cost structure, again, in home-office, noncustomer-facing functions. In terms of the benefit of that, it is included in the guidance ranges for the back half of the year. We'll get a little bit more benefit next year. But it's really a part of an ongoing effort, Tom, to make sure that we're putting our money into those areas that are most important to the customer. Thanks.

Thanks, Stuart.

Your next question comes from the line of Lorraine Hutchinson with Bank of America.

I wanted to follow up on Janet's question around athletic. With the success of the sports bra launches, have you see that drive your athletic apparel business? And are there further opportunities in the back half to drive that further?

The Sport bra business, yes, there is some opportunity for us in the back half in terms of the -- what I would call the bottoms aspect of it or the completing the outset. So there will be some opportunity for us in the back half of the year.

Great. Thanks, Sharen. Thanks, Lorraine.

Your next question comes from the line of Oliver Chen with Citigroup.

Sharen, at VS, we've been noticing some really compelling price increases on a year-over-year basis, which have been pretty awesome to achieve. Could you just articulate the opportunity there and what you might expect for holiday? And Nick, just a quick one on gifting. What should we know about gifting this year versus last year in your pursuit of how you'll think about timing and what might be important to customers?

We haven't taken a lot of price increases. What you might have -- might be referring to, and correct me if I'm wrong, is that what we have done is we've actually add 2 layers of fashion, which we had layered in the designer collection, which is at the top tier of the price point, and then we have another, I'll just say, aspirational layer as well. So we continue to carry our good, better, best. But we're actually layering on in terms of the higher -- of the reach price points to just the designer and aspirational piece of the business.

Good question. So first of all, I'd say, one of the ways we're looking at gifting as we go into holiday is that the brand is inherently a very giftable brand. So how do we take the most important pieces that we have, whether that's a 3-wick candle or whether it's certain fragrances, and find ways to merchandise market and sell those as -- for their ultimate purpose, which is in many cases, as a giftable item. So we've put a bigger emphasis against that side of it. Then secondly, as we think about merchandising the store and try to make it fundamentally as giftable and Christmas-like and holiday-like as possible, we'll continue to take the gifting ideas, spatter them through the store so that it creates that ambience. And then we've just got an awful lot of learnings, both in terms of timing, that we don't have to be too early, as well as things we've done in the first half of this year that she's reacted well to. So I'm optimistic in terms of how do we leverage the core equity of the brand, which is very, very giftable in any case, and then how do we merchandise the rest of gifting in a way makes it pretty compelling for her as she go -- comes in at holiday.

Great. Thanks, Nick. Thanks, everyone, for your participation and your interest in L Brands.

And this concludes today's conference call. You may now disconnect.