Description
Limited Brands, Inc. Director MICHAEL G MORRIS bought 10,110 shares on 5-19-2012 at $ 49.43
BUSINESS OVERVIEW
General
We operate in the highly competitive specialty retail business. Founded in 1963 in Columbus, Ohio, we have evolved from an apparel-based specialty retailer to a segment leader focused on women’s intimate and other apparel, personal care and beauty categories that make customers feel sexy, sophisticated and forever young. We sell our merchandise through specialty retail stores in the United States (“U.S.”) and Canada, which are primarily mall-based, and through websites, catalogue and international franchise, license and wholesale partners. We are committed to building a family of the world’s best fashion retail brands, offering captivating customer experiences that drive long-term loyalty.
Victoria’s Secret
Victoria’s Secret, including Victoria’s Secret Pink, is the leading specialty retailer of women’s intimate and other apparel with fashion-inspired collections, prestige fragrances and cosmetics, celebrated supermodels and world-famous runway shows. We sell our Victoria’s Secret products at more than 1,000 Victoria’s Secret stores in the U.S. and Canada, through the Victoria’s Secret catalogue and online at www.VictoriasSecret.com . Additionally, Victoria’s Secret brand products are also available in Victoria's Secret Beauty and Accessories stores operated by partners under a franchise or wholesale model throughout the world.
Bath & Body Works
Bath & Body Works is one of the leading specialty retailers of home fragrance and personal care products including shower gels, lotions and antibacterial soaps. We sell our Bath & Body Works products at more than 1,600 Bath & Body Works stores in the U.S. and Canada and online at www.BathandBodyWorks.com . Additionally, Bath & Body Works brand products are available through franchise locations in the Middle East.
Other Brands
La Senza is a specialty retailer of women’s intimate apparel. We sell our La Senza products at more than 200 La Senza stores in Canada and online at www.LaSenza.com . Additionally, La Senza has approximately 300 stores in 30 countries operating under franchise and licensing arrangements.
Henri Bendel sells upscale accessory products through our New York flagship and 18 other stores, as well as online at www.HenriBendel.com .
Acquisitions and Divestitures
La Senza
In January 2007, we completed our acquisition of La Senza. The results of La Senza are included in the Other segment.
Express
In July 2007, we completed the divestiture of 75% of our ownership interest in Express to affiliates of Golden Gate Capital. From May 2010 through July 2011, we sold 10.4 million shares of Express common stock and contributed our remaining 7.2 million shares of common stock to The Limited Brands Foundation.
Limited Stores
In August 2007, we completed the divestiture of 75% of our ownership interest in Limited Stores to affiliates of Sun Capital. In June 2010, we completed the divestiture of our remaining 25% ownership interest in Limited Stores.
Third-party Apparel Sourcing Business
On October 31, 2011, we divested 51% of our ownership interest in our third-party apparel sourcing business to affiliates of Sycamore Partners. We continue to retain a 49% interest which we account for as an equity method investee.
Fiscal Year
Our fiscal year ends on the Saturday nearest to January 31. As used herein, “ 2011 ”, “ 2010 ”, “ 2009 ”, “ 2008 ” and “ 2007 ” refer to the 52 week periods ending January 28, 2012 , January 29, 2011 , January 30, 2010 , January 31, 2009 and February 2, 2008 , respectively. “2012” refers to the 53 week period ended February 2, 2013.
Real Estate
Company-owned Retail Stores
Our company-owned retail stores are located in shopping malls, lifestyle centers and street locations in the U.S. and Canada. As a result of our strong brand and established retail presence, we have been able to acquire high-traffic locations in most retail centers in which we operate. Substantially all of our stores were profitable in 2011.
In-Store Experience and Store Operations
We view the customers' in-store experience as an important vehicle for communicating the image of each brand. We utilize visual presentation of merchandise, in-store marketing, music and our sales associates to reinforce the image represented by the brands.
Our in-store marketing is designed to convey the principal elements and personality of each brand. The store design, furniture, fixtures and music are all carefully planned and coordinated to create a unique shopping experience. Every brand displays merchandise uniformly to ensure a consistent store experience, regardless of location. Store managers receive detailed plans designating fixture and merchandise placement to ensure coordinated execution of the company-wide merchandising strategy.
Our sales associates and managers are a central element in creating the atmosphere of the stores by providing a high level of customer service.
Product Development, Sourcing and Logistics
We believe a large part of our success comes from frequent and innovative product launches, which include bra launches at Victoria’s Secret and La Senza and new fragrance launches at Bath & Body Works. Our merchant, design and sourcing teams have a long history of bringing innovative products to our customers. Additionally, we believe that our sourcing function (Mast Global) has a long and deep presence in the key sourcing markets including those in the United States and Asia, which helps us partner with the best manufacturers and get high quality products quickly.
Experienced and Committed Management Team
We were founded in 1963 and have been led since inception by Leslie H. Wexner. Our senior management team has a wealth of retail and business experience at Limited Brands and other companies such as Neiman Marcus, Target, The Gap, Inc., The Home Depot, Carlson Companies, Land's End, Levi Strauss and Yum Brands. We believe that we have one of the most experienced management teams in retail.
Additional Information
Merchandise Suppliers
During 2011, we purchased merchandise from approximately 1,000 suppliers located throughout the world. No supplier provided 10% or more of our merchandise purchases.
Distribution and Merchandise Inventory
Most of the merchandise and related materials for our stores are shipped to our distribution centers in the Columbus, Ohio area. We use a variety of shipping terms that result in the transfer of title to the merchandise at either the point of origin or point of destination.
Our policy is to maintain sufficient quantities of inventories on hand in our retail stores and distribution centers to enable us to offer customers an appropriate selection of current merchandise. We emphasize rapid turnover and take markdowns as required to keep merchandise fresh and current.
Information Systems
Our management information systems consist of a full range of retail, financial and merchandising systems. The systems include applications related to point-of-sale, e-commerce, merchandising, planning, sourcing, logistics, inventory management and support systems including human resources and finance. We continue to invest in technology to upgrade core systems to continue to improve our efficiency and accuracy in the production and delivery of merchandise to our stores.
Seasonal Business
Our operations are seasonal in nature and consist of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). The fourth quarter, including the holiday season, accounted for approximately one-third of our net sales for 2011 , 2010 and 2009 and is typically our most profitable quarter. Accordingly, cash requirements are highest in the third quarter as our inventories build in advance of the holiday season.
Working Capital
We fund our business operations through a combination of available cash and cash equivalents and cash flows generated from operations. In addition, our revolving credit facility is available for additional working capital needs and investment opportunities.
Regulation
We and our products are subject to regulation by various federal, state, local and foreign regulatory authorities. We are subject to a variety of customs regulations and international trade arrangements.
Trademarks and Patents
Our trademarks and patents, which constitute our primary intellectual property, have been registered or are the subject of pending applications in the United States Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law. We believe our products are identified by our intellectual property and, thus, our intellectual property is of significant value. Accordingly, we intend to maintain our intellectual property and related registrations and vigorously protect our intellectual property assets against infringement.
Segment Information
We have two reportable segments: Victoria’s Secret and Bath & Body Works. Prior to the fourth quarter of 2011, the Victoria’s Secret reportable segment consisted of the Victoria’s Secret and La Senza operating segments which were aggregated in accordance with the authoritative guidance included in Accounting Standards Codification Topic 280, Segment Reporting . In the fourth quarter of 2011, we ceased aggregating La Senza with Victoria's Secret. While this reporting change did not impact our consolidated results, segment data for previous years has been recast to be consistent with the current year presentation throughout the Form 10-K. For additional information, see Note 21 to the Consolidated Financial Statements included in Item 8 . Financial Statements and Supplementary Data.
Other Information
For additional information about our business, including our net sales and profits for the last three years and selling square footage, see Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operation. For the financial results of our reportable segments, see Note 21 to the Consolidated Financial Statements included in Item 8 . Financial Statements and Supplementary Data.
Competition
The sale of women’s intimate and other apparel, personal care and beauty products and accessories through retail stores is a highly competitive business with numerous competitors, including individual and chain specialty stores, department stores and discount retailers. Brand image, marketing, design, price, service, assortment and quality are the principal competitive factors in retail store sales. Our direct response businesses compete with numerous national and regional direct response merchandisers. Image presentation, fulfillment and the factors affecting retail store sales discussed above are the principal competitive factors in direct response sales.
Associate Relations
As of January 28, 2012 , we employed approximately 97,000 associates, 79,000 of whom were part-time. In addition, temporary associates are hired during peak periods, such as the holiday season.
Executive Officers of Registrant
Set forth below is certain information regarding our executive officers.
Leslie H. Wexner, 74 , has been our Chairman of the Board of Directors for more than thirty years and our Chief Executive Officer since our founding in 1963.
Martyn R. Redgrave, 59 , has been our Executive Vice President and Chief Administrative Officer since March 2005.
Stuart B. Burgdoerfer, 48 , has been our Executive Vice President and Chief Financial Officer since April 2007.
Sharen J. Turney, 55 , has been our Chief Executive Officer and President of Victoria’s Secret since July 2006.
Nicholas P. M. Coe, 49 , has been our Chief Executive Officer and President of Bath & Body Works since August 2011.
Charles C. McGuigan, 55, has been our Chief Executive Officer and President of Mast Global since February 2011.
Jane L. Ramsey, 54 , has been our Executive Vice President, Human Resources, since April 2006.
All of the above officers serve at the discretion of our Board of Directors and are members of our Executive Committee.
Available Information
We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the U.S. Securities and Exchange Commission ("SEC"). Copies of these reports, proxy statements and other information can be read and copied at:
SEC Public Reference Room
100 F Street NE
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330 . The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC's website at www.sec.gov . Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available, free of charge, on our website www . LimitedBrands.com .
Our net sales, profit results and cash flow are sensitive to, and may be adversely affected by, general economic conditions, consumer confidence, spending patterns and market disruptions.
Our net sales, profit, cash flows and future growth may be adversely affected by negative local, regional, national or international political or economic trends or developments that reduce the consumers’ ability or willingness to spend, including the effects of national and international security concerns such as war, terrorism or the threat thereof. In addition, market disruptions due to severe weather conditions, natural disasters, health hazards or other major events or the prospect of these events could also impact consumer spending and confidence levels. In particular, our operating results are impacted by factors in the U.S. and Canadian economies. Purchases of women’s intimate and other apparel, beauty and personal care products and accessories often decline during periods when economic or market conditions are unsettled or weak. In such circumstances, we may increase the number of promotional sales, which could have a material adverse effect on our results of operations, financial condition and cash flows.
Our net sales, operating income and inventory levels fluctuate on a seasonal basis.
We experience major seasonal fluctuations in our net sales and operating income, with a significant portion of our operating income typically realized during the fourth quarter holiday season. Any decrease in sales or margins during this period could have a material adverse effect on our results of operations, financial condition and cash flows.
Seasonal fluctuations also affect our inventory levels, since we usually order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases. We must carry a significant amount of inventory, especially before the holiday season selling period. If we are not successful in selling inventory, we may have to sell the inventory at significantly reduced prices or may not be able to sell the inventory at all, which could have a material adverse effect on our results of operations, financial condition and cash flows.
Our net sales depend on a volume of traffic to our stores and the availability of suitable lease space.
Most of our stores are located in retail shopping areas including malls and other types of retail centers. Sales at these stores are derived, in part, from the volume of traffic in those retail areas. Our stores benefit from the ability of the retail center and other attractions in an area, including “destination” retail stores, to generate consumer traffic in the vicinity of our stores. Sales volume and retail traffic may be adversely affected by economic downturns in a particular area, competition from other retail and non-retail attractions and other retail areas where we do not have stores.
Part of our future growth is significantly dependent on our ability to operate stores in desirable locations with capital investment and lease costs providing the opportunity to earn a reasonable return. We cannot be sure as to when or whether such desirable locations will become available at reasonable costs.
These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
Our ability to grow depends in part on new store openings and existing store remodels and expansions.
Our continued growth and success will depend in part on our ability to open and operate new stores and expand and remodel existing stores on a timely and profitable basis. Accomplishing our new and existing store expansion goals will depend upon a number of factors, including the ability to partner with developers and landlords to obtain suitable sites for new and expanded stores at acceptable costs, the hiring and training of qualified personnel, particularly at the store management level, and the integration of new stores into existing operations. There can be no assurance we will be able to achieve our store expansion goals, manage our growth effectively, successfully integrate the planned new stores into our operations or operate our new, remodeled and expanded stores profitably. These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
Our plans for international expansion include risks that could adversely impact our results and reputation.
We intend to further expand into international markets through license and franchise agreements and/or company-owned stores. The risks associated with our expansion into international markets include difficulties in attracting customers due to a lack of customer familiarity with our brands, our lack of familiarity with local customer preferences and seasonal differences in the market. Further, entry into other markets may bring us into competition with new competitors or with existing competitors with an established market presence. Other risks include general economic conditions in specific countries or markets, disruptions or delays in shipments, changes in diplomatic and trade relationships, political instability and foreign governmental regulation.
We also have risks related to identifying suitable partners as licensees, franchisees or in a similar capacity. In addition, certain aspects of these arrangements are not directly within our control, such as the ability of these third parties to meet their projections regarding store openings and sales. We cannot ensure the profitability or success of our expansion into international markets.
In addition, our results of operations and financial condition may be adversely affected by fluctuations in currency exchange rates. More specifically, an increase in the value of the U.S. dollar relative to other currencies could have an adverse effect on our earnings and our financial condition.
These risks could have a material adverse effect on our brand image and reputation as well as our results of operations, financial condition and cash flows.
Our licensees and franchisees could take actions that could harm our business or brand images.
We have global representation through independently owned stores operated by licensees and franchisees (“partners”). Although we have criteria to evaluate and select prospective partners, the level of control we can exercise over our partners is limited and the quality and success of their operations may be diminished by any number of factors beyond our control. Our partners may not have the business acumen or financial resources necessary to successfully operate stores in a manner consistent with our standards and may not hire and train qualified store managers and other personnel. Our brand image and reputation may suffer materially and our sales could decline if our partners do not operate successfully. These risks could have an adverse effect on our results of operations, financial condition and cash flows.
Our direct channel business includes risks that could have an adverse effect on our results.
Our direct operations are subject to numerous risks that could have a material adverse effect on our results. Risks include, but are not limited to, the (a) diversion of sales from our stores, which may impact comparable store sales figures, (b) difficulty in recreating the in-store experience through our direct channels, (c) domestic or international resellers purchasing merchandise and reselling it overseas outside our control, (d) the failure of and risks related to the systems that operate the websites and their related support systems, including computer viruses, theft of customer information, privacy concerns, telecommunication failures and electronic break-ins and similar disruptions, and (e) risks related to the fulfillment of direct-to-consumer orders. Any of these events could have a material adverse effect on our results of operations, financial condition and cash flows.
Our failure to protect our reputation could have a material adverse effect on our brand images.
Our ability to maintain our reputation is critical to our brand images. Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and integrity. Any negative publicity about these types of concerns may reduce demand for our merchandise. Failure to comply with ethical, social, product, labor and environmental standards, or related political considerations, could also jeopardize our reputation and potentially lead to various adverse consumer actions, including boycotts. Failure to comply with local laws and regulations, to maintain an effective system of internal controls or to provide accurate and timely financial statement information could also hurt our reputation. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations, financial condition and cash flows, as well as require additional resources to rebuild our reputation.
Our failure to adequately protect our trade names, trademarks and patents could have a negative impact on our brand images and limit our ability to penetrate new markets.
We believe that our trade names, trademarks and patents are an essential element of our strategy. We have obtained or applied for federal registration of these trade names, trademarks and patents and have applied for or obtained registrations in many foreign countries. There can be no assurance that we will obtain such registrations or that the registrations we obtain will prevent the imitation of our products or infringement of our intellectual property rights by others. If any third-party copies our products in a manner that projects lesser quality or carries a negative connotation, it could have a material adverse effect on our brand image and reputation as well as our results of operations, financial condition and cash flows.
Our inability to compete favorably in our highly competitive segment of the retail industry could negatively impact our results.
The sale of women’s intimate and other apparel, personal care products and accessories is highly competitive. We compete for sales with a broad range of other retailers, including individual and chain specialty stores, department stores and discount retailers. In addition to the traditional store-based retailers, we also compete with direct marketers or retailers that sell similar lines of merchandise and who target customers through direct response channels. Brand image, marketing, design, price, service, quality, image presentation and fulfillment are all competitive factors in both the store-based and direct response channels.
CEO BACKGROUND
James L. Heskett Director since 2002 Age 79
Mr. Heskett is a Baker Foundation Professor Emeritus at the Harvard University Graduate School of Business Administration, where he has served on the faculty and administration since 1965. Mr. Heskett served as a member of the Board of Directors of Office Depot, Inc. through 2006 and as a member of the Board of Directors of Intelliseek through 2005. Mr. Heskett’s nomination is supported by his broad expertise with respect to a range of management and organizational matters, including logistics, customer relationship management, service management and entrepreneurship.
Allan R. Tessler Director since 1987 Age 75
Mr. Tessler has been Chairman of the Board and Chief Executive Officer of International Financial Group, Inc., an international merchant banking firm, since 1987. He has been Chairman of the Board of Epoch Investment Partners, Inc., an investment management company and formerly J Net Enterprises, since 2004. He was Chief Executive Officer and Chairman of the Board of J Net Enterprises from 2000 to 2004. Mr. Tessler was Chairman of the Board of InterWorld Corporation from 2001 to 2004. Mr. Tessler was Chairman of Checker Holdings Corp. IV from 1997 to 2009. Mr. Tessler has served as a director of TD Ameritrade, a securities brokerage company, since November 2006. Mr. Tessler serves on TD Ameritrade’s Audit Committee. He has served as a director of Steel Partners Holding GP, Inc., a general partner of a global diversified holding company, since 2010, and currently serves as Chairman of the Board of both Teton Financial Services, a financial services company, and Rocky Mountain Bank, a Wyoming bank. Mr. Tessler’s nomination is supported by his broad business experience and financial expertise, together with his involvement in various public policy issues.
Abigail S. Wexner Director since 1997 Age 50
Mrs. Wexner is Chair of the Boards of Directors of Nationwide Children’s Hospital Inc. and Nationwide Children’s Hospital; Founder and Chair of the Boards of The Center for Family Safety & Healing (f/k/a Columbus Coalition Against Family Violence), KidsOhio.org and the Center for Child and Family Advocacy; Vice Chair of the Board of KIPP Journey Academy; and a Trustee of The Wexner Center Foundation and the United States Equestrian Team Foundation. Mrs. Wexner is the wife of Leslie H. Wexner. Mrs. Wexner’s nomination is supported by her executive and legal experience, as well as her expertise with respect to a wide range of diversity, philanthropic and public policy issues.
Directors Whose Terms Continue until the 2013 Annual Meeting
Dennis S. Hersch Director since 2006 Age 65
Mr. Hersch is President of N.A. Property, Inc., through which he acts as a business advisor to Mr. and Mrs. Wexner, and has done so since February 2008. He also serves as a trustee of several trusts established by Mr. and Mrs. Wexner. He was a Managing Director of JPMorgan Securities Inc., an investment bank, from December 2005 through January 2008, where he served as the Global Chairman of its Mergers & Acquisitions Department. Mr. Hersch was a partner of Davis Polk & Wardwell LLP, a New York law firm, from 1978 until December 2005. Mr. Hersch has been a director of Clearwire Corporation, a wireless, high-speed Internet service provider, since November 2008 and a director at Sprout Foods, Inc., a producer of organic baby food, since 2009. Mr. Hersch’s nomination was supported by his legal and financial expertise, as well as his considerable experience with corporate governance matters, strategic issues and corporate transactions.
David T. Kollat Director since 1976 Age 73
Dr. Kollat has been Chairman of 22, Inc., a management consulting firm, since 1987. He has also served as director of Big Lots, Inc., a retailer, since 1990; Select Comfort Corporation, a designer, manufacturer and retailer of premium beds and bedding accessories, since 1994; and Wolverine World Wide, Inc., a global footwear, athletic apparel and accessories designer, manufacturer and retailer, since 1992. In addition to his broad business experience (including service on several boards of directors) and marketing expertise, Dr. Kollat’s nomination was supported by his particular experience in the retail, apparel and other related industries, both at the management and board levels.
William R. Loomis, Jr. Director since 2005 Age 64
Mr. Loomis serves as Senior Advisor to China International Capital Corporation, an investment bank, and to Lazard LLC, an investment bank. He has also been an independent financial advisor since January 2009. Mr. Loomis served as a director (and member of the Audit Committee) of Pacific Capital Bancorp, a banking and financial services firm, from 2010 to 2012. Mr. Loomis was a General Partner or Managing Director of Lazard Freres & Co., an investment bank, from 1984 to 2002. After the formation of Lazard LLC in 2000, he became the Chief Executive Officer of the new entity. Mr. Loomis became a Limited Managing Director of Lazard LLC in 2002 and resigned from that position in March 2004. Until 2007, Mr. Loomis was a member of the Board of Directors of Alcan, Inc., an aluminum and packaging company. Mr. Loomis’s nomination was supported by his executive experience, financial expertise and substantial history as a senior strategic advisor to complex businesses and multiple executives.
Leslie H. Wexner Director since 1963 Age 74
Mr. Wexner has been Chief Executive Officer of Limited Brands since he founded the Company in 1963, and Chairman of the Board for more than forty years. Mr. Wexner is the husband of Abigail S. Wexner. Mr. Wexner’s nomination was supported by his leadership of the Company since its inception, demonstrated by its substantial growth.
Donna A. James Director since 2003 Age 54
In April 2006, Ms. James established Lardon & Associates LLC, a business and executive advisory services firm, where she is Managing Director. Ms. James served as the President of Nationwide Strategic Investments, a division of Nationwide Mutual Insurance Company (“Nationwide”), from 2003 through March 31, 2006. Ms. James served as Executive Vice President and Chief Administrative Officer of Nationwide and National Financial Services from 2000 until 2003. Ms. James served as Chairman of Financial Settlement Services Agency, Inc. from 2005 through 2006. She is a director of Coca-Cola Enterprises Inc., a nonalcoholic beverages company; Time Warner Cable Inc., a provider of video, data and voice services; and Marathon Petroleum Corp., a transportation fuels refiner. Ms. James serves on the Audit Committees of Coca-Cola Enterprises Inc. and Time Warner Cable Inc. Ms. James’ service as a director and member of the Audit Committee of Coca-Cola Enterprises will end in May 2012. Effective May 2012, Ms. James will join the Audit Committee of Marathon Petroleum Corp. and become the Chairperson of the Audit Committee at Time Warner Cable Inc. Ms. James’s nomination was supported by her executive experience, financial expertise, service on several boards of directors and experience with respect to corporate diversity and related issues.
Jeffrey H. Miro Director since 2006 Age 69
Mr. Miro has been a senior partner of the Honigman Miller Schwartz and Cohn LLP law firm since November 2004. He was a partner and Chairman of the law firm of Miro Weiner & Kramer from 1981 until November 2004. He is an Adjunct Professor of Law at The University of Michigan Law School, teaching courses in taxation and corporate governance. Mr. Miro is a director of M/I Homes, Inc., a national home building company, and was a director of Sotheby’s Holdings, Inc., an auctioneer of art, jewelry, and collectibles, until May 2006. Mr. Miro’s nomination was supported by his legal expertise, particularly with respect to corporate governance and real estate, which are matters of considerable importance to the Company.
Raymond Zimmerman Director since 1984 Age 79
Mr. Zimmerman is the Chief Executive Officer of Service Merchandise LLC, a retail company. Mr. Zimmerman was Chairman of the Board and Chief Executive Officer of 99¢ Stuff, LLC from 1999 to 2003 and the Chairman of the Board and Chief Executive Officer of 99¢ Stuff, Inc. from 2003 to 2008. In January 2007, 99¢ Stuff, Inc. filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code, and in October 2007, 99¢ Stuff, Inc. emerged from bankruptcy. Mr. Zimmerman’s nomination was supported by his financial expertise and broad business experience, particularly in the retail sector.
MANAGEMENT DISCUSSION FROM LATEST 10K
Executive Overview
Strategy
Our strategy supports our mission to build a family of the world’s best fashion retail brands offering captivating customer experiences that drive long-term loyalty.
To execute our strategy, we are focused on these key strategic imperatives:
•
Grow and maximize profitability of our core brands in current channels and geographies;
•
Extend our core brands into new channels and geographies;
•
Incubate and grow new brands in current channels;
•
Build enabling infrastructure and capabilities;
•
Become the top destination for talent; and
•
Optimize our capital structure.
The following is a discussion of certain of these key strategic imperatives:
Grow and maximize profitability of our core brands in current channels and geographies
The core of Victoria’s Secret is bras and panties. We see clear opportunities for substantial growth in these categories by focusing on product newness and innovation and expanding into under-penetrated market and price segments. In our direct channel, we have the infrastructure in place to support growth well into the future. We believe our direct channel is an important form of brand advertising given the ubiquitous nature of the internet and our large customer file.
The core of Bath & Body Works is its home fragrance and personal care product lines including shower gels, lotions and antibacterial soaps which together make up the majority of sales and profits for the business. Additionally, www.BathandBodyWorks.com continues to exhibit year-over-year growth.
We have a multi-year goal to substantially increase operating margins for our brands through increased sales productivity, merchandise margin expansion and expense control. With regard to merchandise margin expansion, we actively manage our inventory to minimize the level of promotional activity and we will continue to work with our merchandise vendors on innovation, quality, speed and cost. Additionally, we have made a concerted effort to manage home office headcount and overhead expenses. Finally, we have and will continue to optimize our marketing expense by concentrating our expenditures on efficient and return-generating programs. In 2011 , we made significant progress towards improving our operating income rate.
Extend our core brands into new channels and geographies
We began our international expansion with the acquisition of La Senza at the beginning of 2007. Since 2008, we have opened 69 Bath & Body Works stores, 11 Victoria’s Secret full assortment stores and 8 Victoria’s Secret Pink stores in Canada. Based on the success we have experienced in Canada, we plan to open an additional 3 Bath & Body Works stores, 5 Victoria’s Secret stores and 2 Victoria’s Secret Pink stores in Canada in 2012 .
We continue to expand our presence outside of North America. In 2011 , we accomplished the following:
•
Victoria's Secret Beauty and Accessories Stores (formerly Victoria's Secret Travel and Tourism Stores) —Our partners opened 40 additional Victoria’s Secret Beauty and Accessories stores bringing the total to 57 . These stores are principally located in airports and tourist destinations. These stores are focused on Victoria’s Secret branded beauty and accessory products and are operated by partners under a franchise or wholesale model. Our partners plan to open an additional 75 Victoria’s Secret Beauty and Accessories stores in 2012 .
•
Bath & Body Works Franchise Stores —Our partners opened 12 Bath & Body Works stores in the Middle East in 2011 bringing the total to 18 . Our partners plan to open approximately 32 additional stores in 2012 .
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Victoria’s Secret Full Assortment Stores —We announced plans to open a company-owned Victoria’s Secret full assortment store on the corner of New Bond Street and Brook Street in London in 2012 as well as a company-owned mall-based store in London. Additionally, a partner plans to open a total of 3 stores in Dubai and Kuwait City in 2012 .
•
La Senza Franchise Stores —Our partners opened 49 additional La Senza stores and plan to open a total of approximately 45 new La Senza stores globally in 2012 .
Bath & Body Works
For 2011 , the gross profit increase was driven by higher merchandise margin dollars related to the increase in net sales. The increase in merchandise margin dollars was partially offset by an increase in buying and occupancy expenses driven by higher occupancy costs related to the increase in net sales and store related activity. The gross profit rate was flat driven by a decrease in the merchandise margin rate offset by leverage on buying and occupancy expense.
Other
For 2011 , the gross profit increase was primarily driven by net sales increases in our Canadian Victoria's Secret and Bath & Body Works stores, increases in Mast Global sales as well as revenue increases from our international wholesale and franchise business. These increases were partially offset by decline in gross profit at La Senza driven by promotional activities and restructuring charges. The gross profit rate increased due to the divestiture of our third-party apparel sourcing business.
General, Administrative and Store Operating Expenses
For 2011 , our general, administrative and store operating expenses increased $357 million to $2.698 billion primarily driven by $163 million of expense associated with the charitable contribution to The Limited Brands Foundation. Additionally, store selling and marketing expenses increased related to the increase in net sales, partially offset by a decrease in incentive compensation.
The general, administrative and store operating expense rate increased to 26.0% from 24.4% due to the charitable contribution to The Limited Brands Foundation.
Impairment of Goodwill and Other Intangible Assets
In the fourth quarter of 2011, we recognized charges totaling $232 million related to the impairment of goodwill, trade name, and a lease-related intangible asset at La Senza. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2011 Consolidated Statement of Income. For additional information, see Critical Accounting Policies and Estimates and Note 8 to the Consolidated Financial Statements included in Item 8 . Financial Statements and Supplemental Data.
In the fourth quarter of 2010, we recognized charges totaling $6 million related to the impairment of a sub-brand trade name at Victoria’s Secret. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2010 Consolidated Statement of Income. For additional information, see Critical Accounting Policies and Estimates and Note 8 to the Consolidated Financial Statements included in Item 8 . Financial Statements and Supplemental Data.
Divestiture of Third-party Apparel Sourcing Business
In the fourth quarter of 2011, we recognized a pre-tax gain of $111 million associated with the divestiture of 51% of our ownership interest in our third-party apparel sourcing business for pre-tax cash proceeds of $124 million . The proceeds are included in Proceeds from Divestiture of Third-party Apparel Sourcing Business within the Investing Activities section on the 2011 Consolidated Statement of Cash Flows. The pre-tax gain is included in Gain on Divestiture of Third-party Apparel Sourcing Business on the 2011 Consolidated Statement of Income. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8 . Financial Statements and Supplemental Data.
Bath & Body Works
For the fourth quarter of 2011 , net sales increased $46 million to $1.127 billion and comparable store sales increased 3% . From a merchandise category perspective, net sales were driven by growth in the Signature Collection, home fragrance and antibacterial categories which all incorporated newness and innovation, partially offset by a decline in our giftset business. The increase in comparable store sales was driven by an increase in total transactions partially offset by our slightly lower average dollar sales.
Other
For the fourth quarter of 2011 , net sales decreased $181 million to $298 million primarily related to the divestiture of the third-party apparel sourcing business in the fourth quarter of 2011. This decrease was partially offset by new Victoria's Secret and Bath & Body Works stores in Canada and revenue from our international wholesale and franchise business.
Gross Profit
For the fourth quarter of 2011 , our gross profit increased $83 million to $1.528 billion and our gross profit rate (expressed as a percentage of net sales) increased to 43.5% from 41.8% primarily as a result of:
Victoria’s Secret
For the fourth quarter of 2011 , gross profit increased primarily driven by:
•
At Victoria's Secret Stores, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses driven by higher net sales and store related activity; and
•
At Victoria's Secret Direct, gross profit was flat as the decrease in merchandise margin dollars driven by increased product costs and promotional activity was offset by a decrease in buying and occupancy expense.
The gross profit rate was flat driven primarily by leverage on buying and occupancy expenses from the increase in net sales offset by a decrease in the merchandise margin rate from increased product costs and promotional activity.
Bath & Body Works
For the fourth quarter of 2011 , the gross profit increase was driven by higher merchandise margin dollars related to the increase in net sales.
The gross profit rate decreased driven by a decrease in the merchandise margin rate related to increased product costs and promotional activity partially offset by a decrease in buying and occupancy expense rate due to leverage associated with higher sales.
Other
For the fourth quarter of 2011 , the gross profit decrease was primarily driven by the restructuring charges at La Senza and the divestiture of the third-party apparel sourcing business partially offset by net sales increases in our Canadian Victoria's Secret and Bath & Body Works stores as well as revenue increases from our international wholesale and franchise business. The gross profit rate increased due to the divestiture of the third-party apparel sourcing business in the fourth quarter of 2011 which removed lower margin sales.
General, Administrative and Store Operating Expenses
For the fourth quarter of 2011 , our general, administrative and store operating expenses increased $ 40 million to $765 million primarily driven by an increase in store selling expenses and $7 million in restructuring charges related to our La Senza business.
The general, administrative and store operating expense rate increased to 21.8% from 21.0% due to the factors cited above.
Impairment of Goodwill and Other Intangible Assets
In the fourth quarter of 2011, we recognized charges totaling $232 million related to the impairment of goodwill, the trade name and a lease-related intangible asset at La Senza. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2011 Consolidated Statement of Income. For additional information, see Critical Accounting Policies and Estimates and Note 8 to the Consolidated Financial Statements included in Item 8 . Financial Statements and Supplemental Data.
In the fourth quarter of 2010, we recognized charges totaling $6 million related to the impairment of a sub-brand trade name at Victoria’s Secret. This impairment charge is included in Impairment of Goodwill and Other Intangible Assets on the 2010 Consolidated Statement of Income. For additional information, see Critical Accounting Policies and Estimates and Note 8 to the Consolidated Financial Statements included in Item 8 . Financial Statements and Supplemental Data.
Gain on Divestiture of Third-party Apparel Sourcing Business
In the fourth quarter of 2011, we recognized a pre-tax gain of $111 million associated with the divestiture of 51% of our ownership interest in our third-party apparel sourcing business for pre-tax cash proceeds of $124 million . The proceeds are included in Proceeds from Divestiture of Third-party Apparel Sourcing Business within the Investing Activities section on the 2011 Consolidated Statement of Cash Flows. The pre-tax gain is included in Gain on Divestiture of Third-party Apparel Sourcing Business on the 2011 Consolidated Statement of Income. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8 . Financial Statements and Supplemental Data.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Executive Overview
We had strong performance in the second quarter of 2012. Our operating income increased $111 million to $305 million and our operating income rate improved to 12.7% from 7.9% . Our second quarter 2012 operating income included $4 million of expense associated with the store closure initiative at La Senza. Our 2011 operating income included $113 million of expense associated with the charitable contribution of all of our remaining shares of Express common stock to The Limited Brands Foundation. Comparable store sales increased 8% , and net sales were $2.399 billion compared to $2.458 billion last year. Second quarter 2011 sales included $217 million attributable to the third-party apparel sourcing business which was sold in November 2011. At Victoria's Secret, sales increased 8% and operating income increased 8% . At Bath & Body Works, sales increased 8% and operating income increased 25% . For additional information related to our second quarter 2012 financial performance, see “Results of Operations.”
The global retail sector and our business continue to face an uncertain environment and, as a result, we continue to take a conservative stance with respect to the financial management of our business. We will continue to manage our business carefully and we will focus on the execution of the retail fundamentals.
At the same time, we are aggressively focusing on bringing compelling merchandise assortments and marketing, store and online experiences to our customers. We will look for, and capitalize on, those opportunities available to us in this uncertain environment. We believe that our brands, which lead their categories and offer high emotional content to customers at accessible prices, are well positioned.
Bath & Body Works
For the second quarter of 2012 , the gross profit increase was driven by higher merchandise margin dollars related to the increase in net sales. The increase in merchandise margin dollars was partially offset by an increase in buying and occupancy expenses driven by higher occupancy costs related to the increase in net sales and store related activity. The gross profit rate increased driven primarily by a slight increase in the merchandise margin rate due to less promotional activities offset by increased costs and a decrease in buying and occupancy expense rate due to leverage associated with higher sales.
Other
For the second quarter of 2012 , the gross profit decrease was primarily driven by the divestiture of the third-party apparel sourcing business, lower merchandise margin dollars related to net sales decreases at La Senza and $3 million in store closure restructuring charges related to our La Senza business. The decrease was partially offset by higher merchandise margin dollars at Mast Global related to net sales increases to our internal brands and higher merchandise margin dollars related to net sales increases in our Canadian Bath & Body Works stores and Henri Bendel stores. The gross profit rate increased significantly primarily driven by the divestiture of the third-party apparel sourcing business in the fourth quarter of 2011 which removed lower margin sales.
Bath & Body Works
For year-to-date 2012 , net sales increased $71 million to $1.114 billion and comparable store sales increased 7% . From a merchandise category perspective, net sales were driven by growth in the home fragrance, Signature Collection, and antibacterial categories which all incorporated newness and innovation. The increase in comparable store sales was driven by higher average dollar sales.
Other
For year-to-date 2012 , net sales decreased $428 million to $392 million primarily related to the divestiture of the third-party sourcing business in the fourth quarter of 2011 and a decrease in sales at La Senza due to store closures. This decrease was partially offset by growth in Victoria's Secret and Bath & Body Works sales in Canada and Henri Bendel sales.
Gross Profit
For year-to-date 2012 , our gross profit increased $100 million to $1.844 billion and our gross profit rate (expressed as a percentage of net sales) increased to 40.5% from 37.3% , primarily driven by the following:
Victoria's Secret
For year-to-date 2012 , the gross profit increase was primarily driven by the following:
•
At Victoria's Secret Stores, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses due to an increase in occupancy expense driven by higher net sales and store related activity; and
•
At Victoria's Secret Direct, gross profit increased primarily due to higher merchandise margin dollars as a result of the increase in net sales.
The gross profit rate decrease was driven by a decrease in the merchandise margin rate due to increased promotional activity partially offset by a decrease in buying and occupancy expense rate due to leverage associated with higher sales.
Bath & Body Works
For year-to-date 2012 , the gross profit increase was driven by higher merchandise margin dollars related to the increase in net sales. The increase in merchandise margin dollars was partially offset by an increase in buying and occupancy expenses driven by higher occupancy costs related to the increase in net sales and store related activity. The gross profit rate was roughly flat driven primarily by a decrease in the buying and occupancy expense rate due to leverage associated with higher sales, partially offset by a decrease in the merchandise margin rate due to increased costs and promotional activities.
Other
For year-to-date 2012 , the gross profit decrease was primarily driven by the divestiture of the third-party apparel sourcing business, lower merchandise margin dollars related to net sales decreases at La Senza and $3 million in store closure restructuring charges related to our La Senza business. The decrease was partially offset by higher merchandise margin dollars at Mast Global related to net sales increases to our internal brands and higher merchandise margin dollars related to net sales increases in our Canadian Bath & Body Works and Victoria's Secret stores and Henri Bendel stores. The gross profit rate increased significantly primarily driven by the divestiture of the third-party apparel sourcing business in the fourth quarter of 2011 which removed lower margin sales.
Other Income
For year-to-date 2012 , our other income decreased $233 million to $1 million primarily driven by an $147 million gain related to the charitable contribution of our remaining shares of Express to The Limited Brands Foundation in the second quarter of 2011 and an $86 million gain related to the sale of a portion of our shares of Express, Inc. common stock in the first quarter of 2011.
Provision for Income Taxes
For year-to-date 2012 , our effective tax rate was 39.4% as compared to 24.5% in 2011 . The 2012 rate was higher than our combined estimated federal and state rate of 39.0% primarily due to losses related to certain foreign subsidiaries. The 2011 rate was lower than our combined estimated federal and state rate primarily due to tax benefits associated with the charitable contribution of Express shares to The Limited Brands Foundation.
FINANCIAL CONDITION
Liquidity and Capital Resources
Liquidity, or access to cash, is an important factor in determining our financial stability. We are committed to maintaining adequate liquidity. Cash generated from our operating activities provides the primary resources to support current operations, growth initiatives, seasonal funding requirements and capital expenditures. Our cash provided from operations is impacted by our net income and working capital changes. Our net income is impacted by, among other things, sales volume, seasonal sales patterns, success of new product introductions and profit margins. Historically, sales are higher during the fourth quarter of the fiscal year due to seasonal and holiday-related sales patterns. Generally, our need for working capital peaks during the summer and fall months as inventory builds in anticipation of the holiday period.
Our total cash and cash equivalents held by foreign subsidiaries were $550 million as of July 28, 2012 . Under current tax laws and regulations, if cash and cash equivalents held outside the U.S. are repatriated to the U.S., in certain circumstances we may be subject to additional U.S. income taxes and foreign withholding taxes.
Issuance of Notes
In February 2012, we issued $1 billion of 5.625% notes due in February 2022 utilizing an existing shelf registration under which debt securities, common and preferred stock and other securities can be issued. The 2022 Notes are jointly and severally guaranteed on a full and unconditional basis by the Guarantors. The proceeds from the issuance were $985 million , which were net of issuance costs of $15 million .
In March 2011, we issued $1 billion of 6.625% notes due in April 2021 utilizing an existing shelf registration under which debt securities, common and preferred stock and other securities can be issued. The 2021 Notes are jointly and severally guaranteed on a full and unconditional basis by the Guarantors. The proceeds from the issuance were $981 million , which were net of issuance costs of $19 million .
Revolving Facility
On July 15, 2011, we entered into an amendment and restatement (“Amendment”) of our secured revolving credit facility (“Revolving Facility”). The Amendment increased the aggregate amount of the commitments of the lenders under the Revolving Facility from $800 million to $1 billion and extended the termination date from August 1, 2014 to July 15, 2016. In addition, the Amendment reduced fees payable under the Revolving Facility which are based on our long-term credit ratings. The fees related to committed and unutilized amounts per year were reduced from 0.50% to 0.325% per annum and the fees related to outstanding letters of credit were reduced from 3.00% to 1.75% per annum. In addition, the interest rate on outstanding borrowings was reduced from the London Interbank Offered Rate (“LIBOR”) plus 3.00% to LIBOR plus 1.75% .
We incurred fees related to the Amendment of the Revolving Facility of $7 million , which were capitalized and are being amortized over the remaining term of the Revolving Facility.
The Revolving Facility contains fixed charge coverage and debt to EBITDA financial covenants. We are required to maintain a fixed charge coverage ratio of not less than 1.75 to 1.00 and a consolidated debt to consolidated EBITDA ratio not exceeding 4.00 to 1.00 for the most recent four-quarter period. In addition, the Revolving Facility provides that investments outside of the Guarantors and restricted payments may be made, without limitation on amount, if (a) at the time of and after giving effect to such investment or restricted payment the ratio of consolidated debt to consolidated EBITDA for the most recent four-quarter period is less than 3.00 to 1.00 and (b) no default or event of default exists. As of July 28, 2012 , we were in compliance with both of our financial covenants and the ratio of consolidated debt to consolidated EBITDA was less than 3.00 to 1.00 .
CONF CALL
Amie Preston
Thanks, Tracy. Good morning, everyone, and welcome to Limited Brands second quarter earnings call for the period ended Saturday, July 28, 2012.
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, including any non-GAAP or adjusted financial reconciliation tables, are available on our website, limitedbrands.com. Also available on our website is an investor presentation, which we will be referring to during this call. This call is being taped and can be replayed by dialing 1 (866) NEWS-LTD . You can also listen to an audio replay from our website.
Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO, Victoria's Secret; Nick Coe, CEO, Bath & Body Works; and Martin Waters, President of International, are all joining us today. After our prepared comments, we will be available to take your questions for as long as time permits. [Operator Instructions] Also, just a reminder that all of the results discussed on this call are adjusted results and exclude the onetime items that are described in our press release.
Thanks, and now I'll turn the call over to Stuart.
Stuart B. Burgdoerfer - Chief Financial Officer, Principal Accounting Officer and Executive Vice President
Thanks, Amie, and good morning, everyone. We reported adjusted second quarter earnings per share of $0.50 against last year's $0.48 per share or $0.46 per share excluding the earnings related to the sold third-party sourcing business. This year's result was negatively impacted by about $0.04 related to La Senza transition costs, investments in Victoria's Secret U.K. and the timing shift of a Victoria's Secret marketing campaign. Operating income in our 2 core businesses, Victoria's Secret and Bath & Body Works, increased 12%.
To take you through the second quarter results, as detailed on Page 4 of the presentation. Comps increased 8% against 9% last year. Adjusting for the impact of the sourcing business sale, the gross margin rate decreased by about 30 basis points as leverage in buying and occupancy costs did not fully offset the decline in the merchandise margin rate. The SG&A expense rate was about flat.
Turning to the balance sheet on Page 8. Retail inventories per square foot at cost ended the quarter up 3% versus last year. Our inventories are clean and well positioned as we head into fall. We continue to be committed to returning free cash flow to shareholders. We repurchased 5.1 million shares of stock in the second quarter for $202.9 million. At quarter end, we had 60.5 million remaining under our current $500 million repurchase program. Additionally, as previously announced, we will pay a special dividend of $1 per share, along with our regular quarterly dividend of $0.25 per share on September 7 to shareholders of record on August 23.
Turning to Page 11 of the presentation for our forecast for 2012. We expect earnings per share between $0.15 and $0.20 in the third quarter against last year's adjusted $0.25 result or $0.22 excluding the result of the sold third-party apparel sourcing business. While we expect operating income growth in our 2 core businesses, we will continue to see an impact from our international business as we work to turn around La Senza and continue to invest to support future growth.
We will also have a negative impact of about $0.02 from incremental interest expense in the quarter. Our third quarter earnings forecast reflects a low- to mid-single digit comp increase. We expect the third quarter gross margin rate to be up significantly as the sale of the sourcing business will benefit our gross margin rate by approximately 400 basis points. Absent this impact, we expect the gross margin rate to be down, driven by a decline in the merchandise margin rate.
The merchandise margin rate decline is primarily driven by a mix shift within the business as a result of an increase in massed sales to our international partners. We expect the merchandise margin rates at Victoria's Secret and Bath & Body Works to be about flat.
We expect the third quarter SG&A rate to increase significantly, driven by a negative impact related to the sourcing business sale of about 370 basis points. Excluding this impact, the SG&A rate would increase as a result of investments in store selling, costs related to store openings and remodels and marketing. These investments are supporting growth in our business. As a reminder, it is more difficult to leverage expenses in our lowest-volume quarter.
We expect to end the third quarter with inventory per square foot up mid-single digits to last year. For the full year, we are projecting positive 3% to 5% comps. We expect our gross margin rate to be up significantly, again positively impacted by the sourcing business sale by about 250 basis points. Excluding this impact, our gross margin rate would still be up for the year, driven by a roughly flat merchandise margin rate and a slight improvement in the buying and occupancy expense rate.
We expect the full year SG&A expense rate to be up, negatively impacted by the sourcing business sale by about 170 basis points. Again, absent this impact, we expect the SG&A rate to be about flat. Before any discrete items, our tax rate will be approximately 38.5%. Assuming all of these inputs and others which are detailed in the presentation, we expect earnings per share for the full year 2012 to be between $2.73 and $2.88 per share. We continue to expect 2012 CapEx to be between $575 million and $625 million. The increase in CapEx versus last year is attributable to increased real estate investment at Victoria's Secret.
Turning to liquidity. We expect free cash flow in 2012 of about $700 million. We remain committed to returning excess cash to shareholders through a combination of share repurchases and dividends.
Thanks, and now I'll turn the discussion over to Sharen.
Sharen Jester Turney - Chief Executive Officer of Victoria's Secret Megabrand & Intimate Apparel and President of Victoria's Secret Megabrand & Intimate Apparel
Thank you, Stuart. Good morning, everyone. Our second quarter results are detailed on Page 15 of your presentation materials. Victoria's Secret had record sales and earned record operating profit in the second quarter with segment operating income dollars up 8%. We continue to focus on our key priorities, growing in our core categories, investing in select key growth opportunities and emphasizing speed and agility.
In the stores channel, second quarter comps were up 10% on top of the 12% increase last year driven by strength across bras and panties, swimwear, Pink lounge and fragrance. In the direct channel, second quarter sales were up 3% driven by strength in bras, panties, sleepwear, Pink, Beauty and swim, somewhat offset by softness in apparel. Our second quarter merchandise margin dollars were up, and the merchandise margin rate was down versus last year in both channels. This is the direct result of decisions we made to ensure we ended the season clean in inventory and better positioned to chase into early fall winners.
In the store channel, the merchandise margin rate decline was primarily driven by 3 things: first, an increase in clearance merchandise sell-through; second, a timing shift in our marketing strategy to support our early August bra launch; and third, continued strong response rate to our gift with purchase and direct mail offers, a trend we will expect will continue this fall. In our direct channel, the merchandise margin rate decline was driven by incremental promotion offers and lower pricing during the semiannual sale.
Looking ahead to the third quarter, we will remain focused to grow our core categories of bras, panties, loungewear and fragrance. We will continue to focus on providing our customer the best seamless experience across both channels through exceptional execution. We will also continue to make investments to make consistent growth in our business, and this includes real estate investments; this fall we'll open and remodel 40 stores, including our premier New York flagship at Herald Square; investments in customer-facing technology; store-related investments, such as an enhanced training and development programs. We believe these types of investments improve the customer experience and have contributed to our strong increase in store conversion rate.
Thanks, and now I'll turn the discussion over to Nick.
Nicholas P. M. Coe - Chief Executive Officer
Thank you, Sharen, and good morning, everyone. At Bath & Body Works, we delivered sales and operating income growth versus last year's strong performance in the second quarter. Comps increased 7% against a 4% increase last year driven by continued newness in both form and fragrance in our 3 key categories: our Signature Collection product line, our soap and sanitizer business and our home fragrance assortment.
Operating income dollars were up 25% to last year and up 190 basis points as a percent of sales driven by expense leverage and a slight merchandise margin rate improvement. Improvement in merchandise margin rate was primarily a result of less promotional activity, which offsets logistics cost increases.
We are pleased with the success of the June semiannual sale. The read-and-react nature of our business and strong customer response to the assortment throughout the spring season contributed to less clearance selling and more everyday selling during sale. Looking ahead to the third quarter, we continue to introduce newness and innovation in both form and fragrance. In August, the shop moved to the "From Paris, with Love" theme, creating a boutique shopping experience, highlighting several new Paris-inspired Signature Collection fragrances.
In addition, this month, we'll include the launch of our new Autumn in America soap collection and our new elevated White Barn inside the Lane home fragrance collections. We're excited about the assortment, and we'll continue to manage expenses and inventory conservatively while continuing to focus on getting faster and providing our customers with a world-class in-store experience.
With that, I'll turn it over to Martin.
Martin Waters - Executive Vice President of International
Thanks, Nick, and good morning, everyone. My comments this morning will focus on an update of our international businesses. We believe our opportunity for international growth is significant, given the leadership position and awareness of our brands and the success that we've seen from our early efforts.
We feel good about the strategic choices we made to be steady and purposeful, to pursue a test-and-learn philosophy that reflects the DNA of our company. We made progress in the second quarter, and as detailed on Page 14 of your presentation, we continue to be on track to open over 200 international locations this year.
In Victoria's Secret, we continue to be pleased with performance of our full assortment stores in Canada, and we’ll open 7 more stores this year. Our first full assortment store outside of North America opened on July 24 in London at the Westfield Mall adjacent to the Olympic village. We're very happy with how that store is operating so far, and we plan to open the Bond Street location in the coming weeks.
We'll also open 3 full assortment Victoria's Secret stores this fall in the Middle East under our franchise partnership with Alshaya. Our Victoria's Secret Beauty & Accessories business continues to progress well with 73 locations open at the end of the quarter, heading to about 130 by the end of the year. In Bath & Body Works, we are now up to over 90 stores outside of the USA and project to end the year with about 120 stores. We're pleased with the performance of BBW in our own stores in Canada, as well as in our franchise stores in Turkey, the Middle East and Russia.
Turning to La Senza. Our Canadian business had been slower to turn around than we would have liked. La Senza comparable store sales in Canada decreased 3% in the quarter. As you know, we closed about 40 stores in the first half of the year, and we're encouraged by how the business is benefiting from that. We have plans to close about 30 more locations during the second half in 2012.
A portion of the costs related to these closures, $3.6 million, has been excluded from our adjusted second quarter results. We also expect to incur some additional cost in the third quarter, which we intend to adjust as of reported results. Therefore, these costs are not included in our third quarter earnings guidance. We believe La Senza is now right-sized at about 160 stores in Canada. We continue to be encouraged by the repositioning work we're engaged in. We now have a distinct and compelling customer proposition that is globally appealing and highly scalable around the world. Our partners will open over 40 new La Senza stores this year.
So that's an update on international. As I know you know, we're not dependent on international for growth. Our overarching priority is the strength of our brands in North America.
Thanks, and I'll now turn it back over to Amie.
Amie Preston
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 over to Tracy.
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Fund Letters
