Good morning. My name is Natalia, and I will be your conference operator today. At this time, I would like to welcome everyone to the L Brands' Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer of L Brands. You may begin.

Thanks, Natalia, and good morning, everyone. Welcome to L Brands' Fourth Quarter Earnings Conference Call for the period ending Saturday, February 2, 2019. 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 statements found in our SEC filings. Our fourth quarter earnings release, additional commentary and the earnings presentation are all available on our website, lb.com. All the results discussed on the call today are adjusted results and exclude the significant items described in our press release. Stuart Burgdoerfer, EVP and CFO, is joining me on the call today. Thanks. And now I'll turn the call over to Stuart.

Thanks, Amie, and good morning, everyone. After reducing guidance in the middle of 2018, we beat those reduced forecast in both the third and fourth quarters on an adjusted basis. That said, we have not met our own expectations for overall performance, and we are intensely focused on improving results. We have set guidance for 2019 that is pretty well-balanced for external purposes that reflects current trends early in the year and assume improvement as we move through the year at Victoria's Secret Lingerie and PINK. In addition to the ongoing running of the business, I would want to highlight important decisions and events, including the closure of Henri Bendel; the sale of La Senza; reducing our regular dividend by half to normalize the payout and free up funds to reduce our near-term debt levels; the appointment of Amy Hauk to run PINK and the hiring of John Mehas to lead Victoria's Secret Lingerie; the continued proactive and disciplined management of inventory, expenses, real estate and capital structure; a heightened focus on the customer and our merchandise assortment at Victoria's Secret Lingerie and PINK; and finally, an ongoing mindset of everything is on the table for review and change. Thanks. And over to you, Amie.

Thanks, Stuart. That concludes our prepared comments. And at this time, we'd be happy to take any of your questions. [Operator Instructions] And now I'll turn it back over to Natalia.

[Operator Instructions] Your first question comes from the line of Susan Anderson with B. Riley FBR.

I was wondering if you can maybe just give some thoughts on the industry. Obviously, in terms of the intimate category, it's obviously been tough for some time not only in your business, but we've seen that department stores struggled with their intimates departments. I guess I'm more curious on are you seeing pricing pressure with new players popping up and I think being more price competitive? And then also we've seen -- and a lot of online players pop up and -- maybe not individually. Are they taking market share? But when you kind of add them all up, is it kind of making an impact on the industry and making it more difficult, I guess, to gain market share and maybe adding some pricing pressure?

Thanks for the question, Susan. Our thoughts on the intimate apparel category are that it's a great category. I think the one observation reflection I would have on others entering the category is they're doing so because it's an attractive category. It's got the opportunity for differentiation. It inherently -- when it's intimate apparel versus underwear has emotional content. And from that, a lot of economic value can be created for companies, participants in the category. So we think it's a great category. In terms of recent developments, pricing pressure, commoditization, I mean, at the end of the day, it comes back to the merchandise. If the merchandise is special, unique, reflects fashion, has newness, has technical benefit, there are terrific opportunities in the category. So we feel very good about the category. And again, I would characterize the entrance of new participants, frankly, as a sign of that and that it's an attractive category. So with that said, are we meeting our expectations right now in the category? We're not. And we're obviously very focused on improving the trend of our business, and John Mehas and Amie, particularly, most focused on improving the merchandise. So overall, we think it's a great category. Thank you.

Your next question is from the line of Mark Altschwager with Baird.

Stuart, last quarter, in the prepared remarks, it really discussed everything, that you're looking at everything at VS. And today, you've announced the plan, the 3% reduction in VS square footage, speaking up to basically about the improved assortments later in the year. Just curious if there's any additional actions being contemplated or bigger-picture changes on the brand positioning, marketing plans, cost structure that you can speak to today just to give us a bit more perspective on the change that's happening within the brand. And then as a follow-up, specifically on the assortment, I'm wondering if you can help us contextualize what will be changing later in the year.

Well, in terms of the changed agenda at Victoria's Secret, as you I think are recognizing in the form of your question in our prepared remarks, the most important thing in our view is the merchandise. And again, that's where John and Amie are spending -- and Greg, the substantial majority of their time as they should, the merchandise and that deep understanding of the customer. With that said, we've -- we have and will continue to review all significant aspects of the Victoria's Secret business, whether that's how we market, how we sell online and in stores, the experience customers have in stores and online, the cost structure of the business, the real estate footprint and format of the business. And we've embarked on detailed review of all those things. Specifically on real estate, our store closure plans are heightened in 2018. And we pulled back on investing in new and remodeling -- new stores and the remodeling of stores substantially over the last several years. But truly, everything is on the table. Amy's been in seat just since October and John's just a couple of weeks in. So you can appreciate that they want to make sure that they have a full appreciation of the situation before they make major changes. But with that said, they're very intensely engaged in the business and again, most focused on the merchandise. But truly, everything is on the table. And for example, we did a deep review of all of our real estate in the fourth quarter, which solidified and gave rise to our plans about capital activity, spending activity in 2019 and again, a more active closure plan for 2019 than we've seen in prior years. But truly, everything is on the table with the dominant focus on the customer and on the merchandise. Thanks.

Your next question is from the line of Ike Burochow with Wells Fargo.

This is Lauren Frasch on for Ike. Wanting to ask how you're thinking about promotions this year. What's the plan as of today? And how you're thinking about AUR versus last year? And how we should think about your inventory positioning in 2019 at VS versus 12 months ago?

Sure. Well, I'll start with a discussion of promotions at Bath & Body Works. So with -- a nice business. It's part of L Brands, as you know. I'm sorry, I tend to have a little bit of humor here. But that important part of our business was actually able to reduce promotional activity in 2018 and particularly in the fourth quarter. So what really drives that promotional level in these businesses is the quality of the merchandise and the quality of running the business in a disciplined manner. And when we get that right, compelling, fresh merchandise, promotional levels come down, AURs go up, margins are healthy, inventory turns are strong; and Bath & Body has a strong record of that and had incremental progress in 2018 in terms of reducing promotion. With respect to Victoria's Secret, the mindset or the thinking is the same, which is when you get the merchandise more right than wrong, you're able to reduce promotion. As you can appreciate, substantial change in the assortment will occur more in the back half of 2019 than in the front half of 2019. So we have been more promotional than we would like over the last several years through improvement in the merchandise assortment. With ongoing disciplined management of inventory, we would expect that we'll be able to reduce promotional levels as we move forward. But it's going to take a little bit of time. Hopefully, that answers your questions. Thanks.

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

My question's on Lingerie. I'm wondering if you can sort of look back over the last 1.5 years. Lingerie seemed to be gaining some momentum from new launches in the back half of '17. And other than lapping the bralette business in the second half of '17 and the first half of '18, it seemed like it had a little bit of momentum driven largely by some of those new product introductions. And then in the back half of '18, it seemed to backslide a little bit. Now I'm wondering -- Stuart, if you can correct my understanding if I'm not recapping it correctly. And I'm wondering if you've had time to look back and dig a little deeper into exactly what happened so that you can have at least some starting points for how to repair that business.

Yes. Thanks, Kimberly. Thanks for the question. I think the thing that I would add to your framing of what occurred and you're asking for more insight, obviously, is some of our core franchises and particularly Body by Victoria had a deceleration in trend, a year-on-year pressure that's gotten more significant as we moved through 2018, Kimberly. And that pressure in those core franchises, again, not limited to, but principally Body by Victoria, is really what drove the further pressure as we moved through 2018. And what that comes back to is innovation. Everything's got a life cycle. And as one gets later in life cycles, you got to innovate and update and create differentiation. And we got a bit behind on that in some of these core bra franchises. And you can be sure that John and the team there are intensely focused on that very question and that big opportunity, frankly. And that's going to be a big -- is a big priority as we move to 2019. But in terms of what drove the change in performance, it is that deceleration and some big books of business that were, what I'd call, core sub-brands that have existed for a long time that weren't sufficiently updated with fashion or innovation to continue their strength.

Your next question is from the line of Kate Fitzsimons with RBC Capital Markets.

I was wondering if we can dig in a bit more into the marketing side of the equation at VS. Could you just speak to any of the work you were doing to reexamine how you're communicating with the customer on the brand position? What were some of the learnings last year as you have evolved the positioning to more of a self-empowerment me-day versus V-day angle, for example? And what's the view on how that's evolving this year? And how do you see the fashion show fitting into all of that?

Sure. Well, as we've tried to be clear about, we are taking a fresh hard look at everything in the business. So that would be the first point to register. The second thing I would just articulate is that the dominant focus is understanding the customer and making significant improvement to the merchandise assortment. And we've taken a fresh look at all of the marketing. We don't have any specific announcements about the fashion show. We don't typically make announcements about the fashion show at this time of year, but we're looking at all aspects of the marketing of the business. And John's heavily involved in that as our other leaders in the business. And we're spending a lot of time taking a fresh hard look at all those things. And there'll be more to report as we move through 2019, but we don't normally comment on the fashion show at this time of year. But we're taking a fresh hard look at everything.

Great. And then if I could just follow up with one quick question on the first quarter guidance, negative low single digits. Could you speak to February trends, thus far? And I guess how should we contextualize that with the thought that swim is launching next month and also inventories are clean?

Yes. So February has been a little choppy because of what we believe to be some effect from tax refund timing. I think that's well understood and being written about, otherwise. But we're not going to comment specifically on February as -- beyond that. As we highlighted in our circulated commentary, we are going to move to a quarterly reporting of sales and results based on feedback from shareholders, trying to minimize the noise and often misinterpretation of results based on calendar shifts and holidays and year-on-year promotional changes. And we've -- we laid out the key assumptions for our Q1 results. So -- but February has been a little choppy because of the timing of tax refunds. Thank you.

Your next question is from the line of Jamie Merriman with Bernstein.

Just two quick ones from me. The first one is can you just talk a little bit about your process for identifying the stores to close? What do you expect the financial impact of those closures to be? And this is just the first wave in terms of what you would expect over the next few years. And then second is I think in the past, you talked about relaunching digital for Victoria's Secret this year. Is that still on track? And when would that happen?

What's the last part of your question?

Relaunching digital.

Yes. Okay. So on store closures, like how do we go about it and so on. You asked is this the first wave, and I'd -- I'm saying this was a little bit of intended humor. It's an important subject you're asking about. I actually would assert that this is about our 50th wave. And what I mean by that is we close stores every year. So that's an ongoing part of running the business. How we go about it is we look at current and projected performance, sales, profit, cash flow. We look at trade area dynamics and how store openings and closings affect nearby stores and, to a lesser extent, our online business. And based on those historic and projected results not just for the store in question but for nearby stores, we make judgments about what the projected sales profit cash flow results would be also in relation to what it may cost to exit a store. And based on those criteria, we close stores. And in fact, we close stores every year at Bath & Body Works and at Victoria's. And we also open stores every year. We are closing more stores in -- we did in 2018 and expected in 2019 based on the overall performance of the Victoria's Secret business not meeting our expectations or having year-on-year declines. But that's how we go about it. It's detailed. It's rigorous. It's fact-based. And again, the result is we're closing more stores at Victoria's than we have over the last few years. But again, I wouldn't want you to think that we do it in waves. It's an ongoing part of a good multiunit business. Whether it's a restaurant business or a retail business, it's a good ongoing part of the running of the business. We have a lot of flexibility in our real estate terms. So for those malls that are the most vulnerable malls, we have a lot of opportunity to exit those situations with no -- at no cost or with very little cost. So we've got a lot of flexibility. And on an overall basis, our real estate portfolio is in pretty good shape. Do we have some opportunities? We do. We recognized an impairment cost in our results this year. But on an overall basis, our real estate is in good shape. And that's because it is very actively managed as an ongoing part of the running of the business. With respect to relaunching the Victoria's website, I think that was your question. We have been working on that over the last several years. The project is in good shape. We are currently doing testing of the new online platform, a live testing, and expect to go live broadly on that conversion in probably April. But again, it will be a function of testing, which, at this point, is going well, but likely to do the cutover roundly in the April time frame. And we will have the ability to revert back to the legacy system if we have any challenges as we cutover. But that project's in good shape and will create capability for us -- capabilities for us to do a lot of things that we're very enthused about doing over the next year or 2 in terms of consumer-facing -- customer-facing things that many others do today that -- than we will be able to do. Thanks.

[Operator Instructions] We've got a lot of folks in the queue. So next question.

Your next question is from the line of Paul Lejuez with Citi Research.

Just -- Stuart, regarding everything being on the table. I'm curious if we've already seen the big changes, whether swim, store closures that we're talking about today. Are there still bigger things to come related to the Victoria's Secret brand in your view? And I'm curious, what are some of the big things that have already been considered and maybe shut down or shot down?

Yes. It's -- it will be dynamic, Paul, as it should be. So we'll learn more as time goes by, but we're not constrained in our thinking or in the options that could be considered or should be considered. And we're trying to make the best decisions possible in the running of the business starting with the customer mindset. Obviously, a mindset about producing the appropriate financial results for the business and for the shareholders of the business. But we aren't constrained and we're trying to use our best judgment, which certainly isn't perfect, there's no such thing, but pretty reasonable judgment. And our dominant focus has been clear through my remarks already this morning and through the script. The dominant focus is on the merchandise. With that said, we have and we will continue to take a hard look at everything. And we'll report along the way. But there are no constraints. We're not financially constrained. And we've got a lot of different things that we have and can consider. But I think it's also important to be very clear that our dominant focus, John's, Amie's, Greg's is on the customer and on the merchandise because that's what matters most. Thanks.

Right. And you're considering how to change. But have you thought about how you're definitely not going to change in any way? Like -- or you said things that have been already maybe shot down?

There are truly, Paul. And it -- we know each other pretty well. Those who are not listening to the call may not know that, but we've worked together for a while. I mean, there are no constraints, Paul. None. The only constraint is what's the right thing. There are the constraints of law, right? What's legal or not, right? But apart from what's legal or not, we're not constrained. What's relevant to a customer, that's an important consideration, obviously. But otherwise, we're not constrained.

Your next question is from the line of Alexandra Walvis with Goldman Sachs.

My question is on the comp guide for the business, the comps of low single digits. I wonder if you could give us some color on how you're expecting that to parse out between the 2 businesses. In particular, we're interested in Bath & Body Works and what's giving you the confidence that, that business can continue to comp against what are some slightly tougher compares as we go into next year.

Yes. The most important thing in the guidance is the assumed progress for Victoria's as we move through the year. That's the most important judgment or the most important assumption in the 2019 guidance. And this is summarizing. But in terms of trying to headline it, in the early part of the year, we're assuming comps and margin dollar results for Victoria's Secret Lingerie and PINK particularly that are generally in line with the most recent trends, and then we're assuming improvement as we move through the year. That's the most important assumption. Separately, you're asking about can Bath & Body lap tough numbers and to what extent. Bath & Body is a very well-led business. It's in a very strong category of retailing in terms of personal care and beauty. And we believe it's reasonable that they can continue their success. Are we expecting the same degree fully, ultimately, in our operating income the same degree of success in '19 in OI dollars as they produced in '18? No, there's a little bit of moderation in the OI dollar results. But we have confidence that, that business can continue to perform well. It's very well led. It's in a very good category of retailing. They've got good current results. So we think we've made reasonable assumptions with respect to Bath & Body Works. It won't be easy by any stretch, but it's a very well-led business and a great category retailing. And the recent results have been very good. The more fundamental assumption is the degree and rate of improvement for Lingerie and PINK. And we've tried to deal with that appropriately. But as you can appreciate, that's a hard judgment to make. Thank you.

Your next question is from the line of Dana Telsey with Telsey Advisory Group.

As you think about the International business, how are you planning investments in International and expectations for International in 2019 as compared to 2018?

Yes. So Dana, first of all, there are multiple components of the International business as you can appreciate. So in terms of how we think about investment, and I would describe this first through the combination of our own company-owned businesses and then also the franchise and partner-owned businesses, we expect to grow the store count meaningfully in the International business in 2019 roundly opening between company-owned and partner-owned stores between 100 and, say, 120 stores. So that's good growth. We'll also -- as we do in our company-owned business in North America, we'll continue to close stores either based on lease expiration or as we open full assortment stores in nearby geography. But good growth in terms of store count for International. It is skewed towards the partner-owned businesses because we're moderating our growth at this stage for China, and we're not adding stores in the U.K. But good, strong store base growth for the International business in total, again, roundly between 100 and 120 stores and an ongoing growth in the digital part of that business as well, the online part of that business. So we think a good growth profile overall with an adjustment in growth in China as we learn more about the appropriate store size and format there. But strong growth online in China as well in 2019. In the U.K. right now, the opportunity is to drive more sales through the existing store footprint that we have.

Your next question is from the line of Roxanne Meyer with MKM Partners.

My question is on Victoria's Secret Beauty. It had a pretty strong comp in the fourth quarter, mid-single digits. But you did call out that it didn't meet expectations and perhaps it was more promotional. So just looking for some hindsighting on Beauty and how you're thinking about it in 2019.

Yes. Beauty had a -- as you mentioned, Roxanne, in your question, Beauty had a solid 2018 and was so much stronger in the first part of the year than in the fourth quarter. And the opportunity for further improvement in that business is particularly focused on the prestige fragrance part of that business. And Greg is very focused on that. He and his team are very capable. And the differential growth opportunity or the hindsight from '18 that's particularly shaping the agenda for 2019 is to really -- to have more success in the pursuit of the prestige business. With that said, I think by last count, we've got 4 of the top 20 fragrances -- perfume fragrance sold, either globally or in the United States. So we're starting from a strong base. And probably most people don't know that we have 4 of the top 20. So it's a good strong business with good margin profile. But in terms of growth opportunity, we see the opportunity to accelerate growth in -- particularly in that part of the business. Thanks.

Your next question is from the line of Marni Shapiro with The Retail Tracker.

Just dovetailing actually a little bit on what Roxanne asked, but different segment, though. Could you give as an update on Victoria's Secret sport? It's been a little up and down, and you've used it as a promotional vehicle to drive traffic. I guess what's the thinking there today? And what should we expect going forward from that part of the brand?

Yes. Thanks, Marni. So in the spirit of everything is on the table, John is taking a fresh, fresh look at that part of the business, obviously, at leisure. And sport is a key category of apparel retail. And intimate apparel sport bras are an important part of that segment. But what I'm confident about is that John will take a fresh hard look at it. We don't have anything further to announce about it today, but it's an important segment. And I know John will be taking a fresh hard look at it.

I think we'll take one last question.

Your final question is from the line of Paul Trussell with Deutsche Bank.

I wanted to just maybe get a few more details around the puts and takes on margins. Stuart, you mentioned that -- continue to have incremental promotions at VS to maybe start the year, at least that's the expectation in the 1Q guide. Just help us maybe understand what you see as the opportunity to get some stabilization there or any other initiatives that will improve the rate of gross margin as the year progresses. And at the same on SG&A, what are the puts and takes here that are leading to the guidance of just an increase of low single digits?

Thanks, Paul. So the opportunity in margin rate at Victoria's, Lingerie, PINK and Beauty is a very substantial one. And we won't get all of that opportunity in 2019, but we would expect to make progress as we go through the year. But just to mention, the opportunity versus the record year of 2015, we're in the order of 5 or 6 percentage points versus 2015. So there's a very substantial opportunity. Am I, from that comment, suggesting we're going to get all of that in 2019? I am not. But through the focus on the customer and the focus on merchandise with ongoing disciplined management of inventories, there is a very substantial opportunity for margin in this business. And it starts and ends with that customer understanding and that strong management on the merchandise assortment. So that's the big-picture answer to your question or, in my view, the most important answer to your question. As we improve the merchandise assortment as we move through 2019, we would expect to see some improvement in year-on-year result on margin rate. But really, that's how I would address the question. Very substantial opportunity. Thanks, Paul.

Thanks, Paul. Thanks to all for joining us this morning, and thank you for your continuing interest in L Brands.

This concludes today's earnings call. Thank you for your participation. You may now disconnect.