Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the Limited Brands third quarter 2010 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator instructions) I would now like to turn the call over to Ms. Amie Preston, Chief Investor Relations Officer. Ms. Preston, you may begin.

Thanks, Sarah. Good morning, everyone and welcome to Limited Brand's third quarter earnings conference call for the period ending Saturday, October 30, 2010. 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 third quarter earnings release and related financial information, including any non-GAAP or adjusted financial reconciliation tables, are available on our Web site, limitedbrands.com. 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 Web site. Martyn Redgrave, EVP and Chief Administrative Officer; Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO of Victoria's Secrets; and Diane Neil, CEO of Bath & Body Works are all joining us today. After our prepared comments, we will be available to take your questions for as long as time permits. So that we can speak with as many callers as possible, please limit yourself to one question. Thanks, and now I'll turn the call over to Martyn Redgrave.

Thanks, Amie, and good morning, everyone. I'd like to start by saying that we continue to be very pleased with our performance and also the progress that we've made so far this year. As you've seen, in the third quarter, our comps increased 10% and our operating income increased by 153% or 420 basis points as a percentage of sales. Our earnings per share of $0.18 exceeded our initial expectations of $0.03 to $0.08. We've also taken further actions in our ongoing program of returning cash to shareholders with our announcements of a $3 per share special dividend and a new $200 million share repurchase program. And of course, Stuart will take you through and discuss gross elements further in his remarks. This very strong performance in the quarter was the result of our intense focus on execution, staying close to our customers, and increasing speed and agility. Our entire organization is aligned and focused on these key priorities as we enter the all important holiday season. In addition, we've raised our full year earnings guidance to reflect the third quarter beat. Now with respect to the third quarter, we're continuing to manage this as conservatively in light of the uncertain environment. Inventories and expenses are well controlled and we continue to pull back on our promotional activity. We're also focused on delivering the best possible holiday result. As some of you saw in our store tours last week, our product assortments are compelling and include a significant number of new items. We're also enthusiastic about the opportunity for growth of our businesses outside the United States and we continue to execute against our six-point agenda for international growth. Now Martin Waters presented an update of our progress at our update meeting in October so I won't spend time reviewing…

Thanks, Martyn, and good morning everyone. So turning to our third quarter performance, our earnings per share increased to $0.18, a share from adjusted earnings per share of $0.02 last year. Our 2009 reported result was $0.05 per share. As detailed in our press release, last year's reported results included income benefit primarily due to the resolution of certain tax matters of $8.8 million or $0.03 per share. All prior year results discussed on this call exclude this significant item. Taking you through the third quarter results in more detail, net sales were $1.983 billion versus $1.77 billion last year and comps increased 10%. The gross margin rate increased 440 basis points to 36% driven by a significant increase in the merchandise margin rate and significant leverage on buying and occupancy expense. SG&A expense increased by $61.3 million or 12% and the SG&A rate deleveraged by 10 basis points. The major driver of expense growth are as follows. Approximately 40% of the dollar increase in SG&A was driven by increased store selling costs, which leveraged as a percentage of sales. About 15% of the increase was driven by an increase in marketing costs. A little over 10% of the dollar increase was due to a change in an estimate used to calculate our stock compensation expense. About 10% of the increase was driven by an increased fall season, incentive compensation accrual versus last year as our third quarter performance has exceeded our season to date targets. And the remainder of the increase was driven by individually insignificant items including expenses to support our international growth, expenses to support technology initiatives at Victoria Secret Direct and increased payroll expense from merit increases. Year-to-date sales dollars are up 11% and SG&A dollars are up 7%. We remain very focused on growing expenses…

Thank you, Stuart, and good morning, everyone. We are pleased to report that the past quarter represented record Q3 sales and profits for Victoria's Secret. We believe that this performance is a result of three key priorities we have been talking to you about over the last few quarters. First, is our continued focus on our core category, bras and panties, coupled with an emphasis on speed and agility. Second, is our purposeful approach to managing the business with the balance between optimism and conservative management as inventory and expenses. And third is bringing all of our work into a well told brand story across channels and telling that story through innovative products, steady newness with the right fashion and outstanding in store execution. As with the first two quarters of the year we did this with leaner inventories relative to sales and again achieved record conversion rate in our stores, an indication of our assortment strength, our deep customer connection and our continued strong sales performance. Let's move to a review by channel. In Victoria's Secret stores, our comps for the quarter were up 14% with total sales increasing 15% to $842 million. Our results were driven by improvements in all three business units, Lingerie, Beauty and especially our Pink business. Throughout our business customers continued to respond favorably to the new fresh and fashionable assortment we are providing. Our third quarter launches including the incredible bra and the (inaudible) push-up were strong. Pink bras and the loungewear assortment continued to perform well. Panties were strong and a number of our innovative beauty products including the Bombshell fragrance exceeded our expectations. This of course all builds upon other newness we've introduced this year. Importantly we are continuing to accomplish our top and bottom line results while being less promotional…

Thank you, Sharen, and good morning. At Bath & Body Works, we are very pleased with the results of the third quarter. We were able to deliver sales growth and significant operating income growth versus last year. We continue to deliver improved results versus last year by maintaining focus on our three key categories, our Signature Collection product lines, the antibacterial soap and sanitizer business, and our home fragrance assortment. Improved performance in our Signature Collection was driven by the launch of our new Signature Collection fragrance Dark Kiss and the re-launch of our already successful fragrance Twilight Woods. We're also encouraged by the performance of our Men's line, which was re-launched in the second quarter of this year. The antibacterial business continued its strong growth projectory driven by growth in our hand sanitizer business as well as performance in our new seasonal collections like Halloween and Perfect Autumn. Our home fragrance sales were up to last year and continued to be driven by strong candle performance and seasonal fragrances like leaves and sweet cinnamon pumpkin as well as the introduction of new Forms and Novelty in our diffuser category. Transactions were upwards of last year driven by growth in traffic while maintaining our high conversion rates. Customers also spend more for transactions versus last year. So, with that backdrop, let me take you through the financial results for the quarter. Bath & Body Work's third quarter comps were up 6%. Total sales for the quarter were $468 million, up 7% or $29 million versus last year. For the quarter, our operating income was $32 million, up $16 million and doubling our third quarter operating income from last year. Operating income as a percentage of sales was 7% in the quarter and up significantly to last year, driven by strong…

Thanks, Diane. That concludes our prepared comments. Before we take your questions, just a reminder to please limit yourself to one so that we can get to as many people as possible. Thanks, and now I'll turn the call back over to Sarah.

(Operator Instructions) Your first question comes from the line of Paul Lejuez from Nomura Securities. Your line is open.

Hey, guys. Paul Lejuez. Just wondering if you could maybe give us an update on the performance for your Canadian stores both on the Bath and Body Works sides and Victoria Secret? Maybe if you can frame it for us in terms of productivity relative to the U.S. stores?

Okay, Paul. Thanks. We'll go to Martyn for that question.

Morning, Paul. Yes, it works harder to have around 60 BBW stores opened in Canada by the end of this year. We now opened four Victoria Secret stores in Canada and we will have eight Pink stores, freestanding stores opened by the end of the year. And I think while we're not commenting specifically on the sales results or productivity it's fair to say, as we've said before all of those stores in the aggregate are exceeding our expectations and performing at a level that is significantly higher in terms of sales productivity than our equivalent U.S. stores.

Okay. Thanks, guys. Good luck.

Thanks, Paul. Next question?

Your next question comes from the line of John Morris from BMO Capital Markets. Your line is open.

Thanks, good morning. Congratulations on a great quarter and a good start to the fourth quarter, I guess. Stuart, question for you on SG&A. Thank you for that breakdown. I think that was pretty helpful. Of those items that you mentioned or anywhere within SG&A is there anything that's tracking a little bit higher than you would have planned a little ahead of where you wanted it to be? It looked a touch higher to us and what will you be looking to do specifically to focus on controlling those expenses go forward? Thanks.

Sure. Thanks, John. I mean our commitment, which we’ve been very clear about and we had achieved through 2010 year-to-date, is that expenses are going to grow slower than sales and we're very committed to that. With respect to anything that "may have been a surprise" or just additional color on what drove the outcome in the third quarter, the only thing I'd really put in the category of quote "surprise" is we did revise our estimate related to the stock comp expense which reflects frankly better than expected stability in the business as you may be aware we estimate that expense based on assumptions about forfeiture rates and so on. And as we've talked about in a business context we've really had very good stability in the business which is great but one of the outcomes of that is it's drives some additional stock comp expense as you look at the input assumptions. So that would be the key and then there's a little bit of I see, you're on your incentive comp fall season incentive comp to be more specific. And that reflects the much stronger performance in the season to date than we would have expected. So I think that's also good news story.

Okay. Great. Thanks. Good luck for holiday.

Thanks.

Thanks, John. Next question?

Our next question comes from the line of Kimberly Greenberger from Morgan Stanley. Your line is open.

Great. Thanks, good morning, all. My congratulations as well. Stuart, I'm wondering, I'm looking at your third quarter gross margin up 140 basis points and your guidance for fourth quarter gross margins to be flat. I'm wondering if you could just talk about the puts and takes in fourth quarter gross margin and if you could sort of characterize your view of the guidance as conservative or if it's actually you think really quite appropriate? And lastly you mentioned, I think the Victoria Secret sales shifting, does that move business between months and in December and January? Thanks.

On gross margin expectations for the fourth quarter the most important thing in our mind and I want to convey, and we've talked about this over the last several calls and in our other interactions, as you know we've generated very substantial improvements in merchandise margin rates over the last year, year and a half and specifically in the fourth quarter last year that merchandise margin rate was up between 500 and 600 basis points. So it's very important to understand what we're lapping and so as we think about our Q4 expectation we continue to think we're making progress in the business, we can always get better and we're working hard to get better but what it really reflects is we're now anniversary, beginning in Q4, a very substantial improvement in merchandise margin a year ago and so the guidance really reflects that. With respect to the timing of semi-annual sales for Victoria Secret it will, in terms of sales, have a negative impact on December and a positive impact in January.

Great. Thanks and good luck through the holiday.

Thanks.

Next question?

Your next question comes from the line of Jeff Stein from Soleil Securities. Your line is open.

A question for Stuart. Just curious what the thinking was behind the size of the special dividend and what you think the appropriate capital structure for the business is going forward given your expansion plans internationally?

Great. Thanks, Jeff. You know our perspective and a lot of it reflected in our prepared remarks and our press release but to put a little more color on it and to reiterate it, the reality is we have accumulated a significant amount of cash before the announcement of this dividend. Absent this special dividend we would have ended the year with 1.7 billion or more versus our target level of about 700 million. You know, we've talked at length about our actions, reflecting that we are very committed to returning excess cash to shareholders. We are and we wouldn't want this action to be misunderstood. We are very confident in the growth opportunities for our business and our ongoing ability to generate significant free cash flow. We are also very comfortable with our capital structure on our balance sheet. By way of reminder, we have reduced our debt by $400 million and we've proactively managed our maturity profiles such that that's very little debt due before 2017. So with all that is some additional color, the management, the Board of Directors determined that the special dividend and the new repurchase program were the best actions for, the most efficient and effective method to return significant cash to shareholders and generate return for our shareholders. With respect to the capital structure, just a general point of how it relates to international expansion, as we talked about this business generates a lot of cash. We have no concern about our ability to fund growth opportunities and again the debt profile and so on we're extremely comfortable with. And as we talked about also with respect to international, certainly a large aspect of what we do internationally will be with venture partners, franchise partners reflecting a less capital intensive growth strategy. So we're very comfortable with this action and we're frankly very pleased go generate clear and indisputable return for all shareholders. So we're feeling good about it.

Got it, thanks.

Thanks, Jeff. Next question?

Your next question comes from the line of Todd Slater from Lazard Capital Markets. Your line is open.

Hi. Good morning. It's actually it's Jennifer for Todd. Let me add my congratulations. Quick kind of follow-up back to gross margins. I think, Sharen if I heard correctly you said that you feel confident that you're going to be able to expand merchandise margins and rate in the fourth quarter, but since gross margins are planned flat, does that mean we should assume that margins will be down at Bath and Body Works? And then kind of along those same lines could you both, Sharen and Diane, both touch on sourcing costs with higher cotton prices and oil prices and petroleum at BBW and cotton and freight at VS? Thanks.

So let me take a quick crack at it on an overall basis and then Sharen and Diane may want to fill in with some color. With respect to gross margins for the company our indication of roughly flat is obviously our view. There is some differentiation by this business and there will be some slight improvement in the Victoria Secret segment and also a slight improvement at Bath and Body with a little bit of offset going the other way in the other segment. And just an overall comment about input costs and then again Sharen and Diane may want to comment further. It's important to remember three or four things. First, is that our biggest priority with respect to sourcing is on speed and quality and innovation. Those are our key priorities. With that said we've got a great sourcing team or teams, I should say that have great relationships with suppliers. We've talked about that. Also, importantly cotton for us, as you know, is a lot less significant than it is for a straight up apparel company. With that said it does have an impact particularly in the Victoria Secret business. We don't expect a big impact this fall. We might see some beginning in the Spring but again for the overall company, not a big impact as compared to some others. Sharen and Diane, I don't know if you want to add anything to that in terms of input cost or how you're seeing it?

No, I think you managed that very nicely.

Yes, agreed.

Thanks, Jennifer. Next question?

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

Thank you. Good morning. Just looking at your free cash flow guidance of 800 million. It's quite an increase from your original expectations. I was just hoping that you could walk us through some of the surprises aside from maybe higher net income that you saw throughout the year?

Well earnings has been, as you mentioned, we certainly substantially outperformed on an earnings basis, our beginning of year view. We're managing capital tightly as we talked about and we started the year with a view of about 300 million. As I updated today it will be at 275 or a little less and we continue to manage inventories and working capital in a very disciplined way and we're getting upside there as well. So those would be the major drivers.

Thanks, Lorraine. Next question?

Your next question comes from the line of Emily Shanks from Barclays Capital. Your line is open.

Hi, good morning. Great quarter, guys. I had a question as we look into next year. I believe if, I want to refresh my numbers that the $250 to $350 million CapEx run rate is fair and was just wondering if there's any elevated store growth to (inaudible) implementation or any one times spends we should keep in mind as we look into next year?

Well, it's Stuart. We're working on our 2011 plans. We obviously have views today but we'll continue to work on those views over the next few months. We give our 2011 guidance in February so that's when we'll be "more definitive" about it. In the spirit of looking to be helpful, I think we will be 300 to 350 on CapEx, would be our sense but again we're still working those details.

Okay, thanks.

You're welcome.

Next question, please.

Your next question comes from the line of Janet Kloppenburg from JJK Research. Your line is open.

Thanks so much and congratulations on a great quarter. Stuart, I was a little surprised by the SG&A ratio as well. I was just wondering, I know you expect to leverage from SG&A in the fourth quarter but I'm wondering if selling expenses plan to be up again in the quarter as it was here in the third quarter? And for Sharen and Diane, if you could just discuss, I know you're being less promotional, does that policy stand for this Black Friday weekend versus last year as well? Thanks so much.

So Janet, on selling expense, specifically we did leverage selling expenses in the third quarter and in Q4 what we think will be will depend on the ultimate comp out obviously but our overall is that SG&A in Q4 will be between low and mid single-digits in terms of a percent increase and obviously selling costs are the biggest component of that. So we think we'll be in good shape in terms of managing selling costs in Q4.

Yes, on terms of, this is Sharen.

Hi.

Hi, How are you?

Good.

In terms of Black Friday this year we are very well prepared. We have some exciting PWPs and GWPs. We will be promotional on Black Friday as we were last year so we are expecting a big day, are very well prepared for.

Lots of luck.

Janet, this is Diane and our promotional strategy for Black Friday is basically flat to what we did last year.

Great. Thanks, Janet.

Thank you.

Next question?

Your next question come from the line of Michelle Tan from Goldman Sachs. Your line is open.

Great, thanks. Hey, Stuart. Thanks so much for all the color that you've given so far on SG&A. I was just wondering if you could, without giving a total, help us think about the puts and takes you're expecting for next year? The incentive comps side, the international growth and some of the other areas that are offsets you can lever?

It's a little premature, Michelle to be honest with you beyond our clear view and it's not just a nice thing to say. It's a management commitment. We are going to grow expenses slower than sales. Period but in terms of going through the details for 2011, the reality is we're still working those plans, those trade offs, those choices and we'll give more color on that in February but our end goals are very clear.

Great. Thanks.

Sure.

Thanks, Michelle. Next question?

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

Thanks. Morning and congratulations as well. I think the company has talked a lot about systems and processes that are going to help you guys get to your 15% margin goal? I was just wondering if Sharen and Diane can give some examples of how the systems impacted their Q4 thoughts, whether it's lead times or planning or markdown thoughts?

Okay Brian, we'll go to Sharen and Diane.

Just to start I think that, when you think about your systems they really are an enabler and the merchandising decisions are what really drives the business and that's where we're really focused but having said that what really has, and an example of where this system has benefited us is better store by store view of inventory that we're able to actually maximize where we didn’t have that view as extensively as we do today.

And I would just, this is Diane. I will just piggy back on that. The systems have really just allowed us to balance inventory store by store replenished based on what stores are actually selling versus pushing. That's something we've been working on for a few years and really the whole process and success is really about shortening our lead-times and reacting to what our customers are buying.

Thanks, guys. You good, Brian?

Yup. Thanks, Amie.

Okay, next question?

Your next question comes from the line of Neely Tamminga from Piper Jaffray. Your line is open.

Good morning. I was just wondering if you guys could apply a little bit for us some of the learning’s you've had out of Chicago in terms of how we would be looking at to next year if you were to apply some of the learning’s that you've had in your respective brands in that Chicago area test? Would we see a lift in comps, conversions, margins, better store payroll? I'm just trying to get a sense of what that might positively impact next year? Thanks.

Thanks, Neely. We're, that's primarily going to focus for Victoria. So we're going to go to Sharen for that.

We have really been pleased with the ability for us to learn within our Chicago initiative. We've been able to understand our selling force better, training, inventory, inventory availability, fixture diversification as well as floor spacing. And we've have got a nice return on that investment. We are planning to take those learns strategically and surgically into other markets as we go forward into 2011.

Thanks, Sharen.

Thank you.

Thanks, Neely. Next question?

Your next question comes from the line of Randy Konik from Jefferies. Your line is open.

Yes, great. Thanks. Stuart, just two things if possible? Is there any kind of guidance you can give us on how you are thinking about the Spring inventories? I know you gave us the color for fourth quarter and then just looking at a little bit further than that, if we get the change on (inaudible) with operating leases having to go on the balance sheet does that impact anyway your thinking about the capital structure, any type of way of paying down debt early? Do you even think about that? Just trying to get your sense around that? Thanks.

Thanks, Randy. In terms of Spring inventory plans, again we're still working on them. What my general expectation would be is that inventory will be up low single-digits, you know in aggregate would be my expectation but again we're continuing to work those plans. With respect to leases in the spirit of humor the first thing I would express is annoyance because it's quite annoying and doesn't add a lot of value as we would see it anyway. But we'll send in our comment letter and see what happens. But with respect to how it would affect how we manage the business the answer is it's not going to affect how we manage the business at all because this is, we're talking accounting here versus cash economics. And as you know users of the financials today capitalize the leases at six to eight times to understand the leverage aspect of that. And is some ways it's no more complicated than that but certainly they're going to make it more complicated that that. But again, it doesn't affect cash economics at all and as such I don't expect that it will have any impact on how we manage our capital structure or any other aspect of the business.

So, just to read it clearly then, it would not impact any sort of way you're thinking about future special dividends, dividends, et cetera, right?

I don't know how to be more clear Randy. It has no effect on cash. So, I'm not sure why it would affect those things. So, no it won't affect those things.

All right, thanks.

You're welcome.

Thanks, Randy. Next question?

Your next question comes from the line of Jennifer Black from Jennifer Black & Associates. Your line is open. Jennifer Black - Jennifer Black & Associates: Thank you. Let me also add my congratulations. This question is for Diane. I know you've been experimenting with a loyalty program and you said last quarter that you might have more information this quarter? So I wondered what your findings are at this point of time and when will you make a decision if you will roll it out? Thank you.

Sure. Hi, Jennifer. We are doing more extensive testing into the fourth quarter for the loyalty program. We have a lot more customers in our store in the fourth quarter than we do throughout the remainder of the year so as soon as we get through the fourth quarter we'll kind of solidify our plans as far as what we'll plan to do next Spring. Jennifer Black - Jennifer Black & Associates: Thanks a lot. Good luck.

Thank you.

Thanks, Jennifer. Next question?

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

Great. Thanks. Let me add my congratulations. My question is on conversion? You've been both leveraging mall traffic and driving conversion all year and I'm just wondering how you see the opportunity to continue to improve conversion into next year? And how far off peak you are on your conversion rates? Thank you.

Hi, this is Sharen. I'll talk about Victoria Secret first. Our conversion rates are at our peak so we have record peak conversion rates and have continued to increase them over this last year. We still believe and are striving to get better and better and want to continue to see our conversion rates improve. And we're doing that with many ways, in terms of some of our strategic initiatives such as inventory availability in the stores, better selling associates, better training and then also it depends on your product and the fashion and the newness that we continue to deliver. So we do, we are expecting and would like to see even more improvement in conversion.

Hi, Roxanne. This is Diane and at Bath and Body Works we also are at our peak in conversion and we run a fairly high conversion rate overall. But for us it's really about more fashion, more newness, more introductions than we had the previous year and that's what's really driving our business.

Great. Thanks and best of luck.

Thank you.

Thanks, Roxanne, Next question?

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

Congratulations, everyone and good luck for holiday. You mentioned that the Victoria Secret sale was going to start a little bit later. I was curious if there was any change in the Bath and Body Works sale as to either length or timing and I was also curious if you run the same events at La Senza and if you're planning on running the same types of sales as you roll out internationally at Victoria Secret?

Hi, Marni. It's Diane. The Bath and Body Works sales will basically be the same as last year. As you remember last year we shortened it significantly so we're not (inaudible).

And Marni, it's Amie. La Senza does run a semi annual sale, a post holiday sale. I'm not sure the timing on that but I can get back to you on it.

Yes, it's very similar to the U.S. in calendar with the exception being that Boxing Day for instance in Canada is a very big day. It's almost like Black Friday so to speak and so it's a little bit different but similar.

Thanks, Marni. Next question?

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

Hi. Good morning, everyone and congratulations. As you think about international and obviously it's a focus of growth? Over the long-term how do you see the product assortment being the same or different and could the operating margins be at or above those of the U.S. level? Thank you.

Thanks, Dana. We'll go to Martyn for that question.

Well Dana as you know we're in the process of kind of building a portfolio of business opportunities outside the United States starting with our first priority being Canada and the BBW, VS and Pink expansions in Canada. And then beyond that we're working very hard on repositioning La Senza and repositioning our business with our La Senza franchise around the world. We're also introducing BBW through the franchise system in the Middle East as I commented on before. And we're also testing and learning around this new traveling tourism concept and finally the Body Shop store in London that we've described and Martin Waters updated a couple of weeks ago. A lot of things in the works and in addition to that our Victoria Secret Direct business continues to be a very important and growing business outside the United States so as we look at that portfolio of opportunities, we're learning a lot. It's all very much a work in progress for us and while we understand the economics of each of those pieces of the portfolio, what we're trying to do is build a portfolio businesses that generates the kinds of sales and productivity that we experience in the United States and profitability in terms of the operating income rates that we experience in the United States. And as you understand it's going to be a blend of company owned operations, franchise operations which has a fundamentally different kind of P&L characteristic to it in terms of royalty income versus retail sales and wholesale operations which is more in the T&T, the travel tourism category which again has a different set of economics but the headline would be sales and productivity equal to or greater than the United States and targeting to get the operating income rates that are equal to or greater than the United States.

Thank you.

Thanks, Martyn. Next question?

Your next question comes from the line of Laura Champine from Cowen and Company. Your line is open.

Good morning, guys and congratulations. So, Stuart this is the seventh consecutive quarter that Limited has beaten guidance and I'm wondering if there is a specific element that you're being systematically conservative on and if you are similarly conservative in your Q4 guidance?

Well, what we think the most about is how we're running the business internally and how we're running the business internally is on a conservative basis with respect to inventories, expenses, CapEx, cash liquidity, all that stuff. But as it relates to your question our mindset operationally is one of conservatism as we enter a season. And then as we get feedback from customers in terms on what's working and what's not we're working hard to take those opportunities but as we talked about some before we may get a little up on the upside reflecting that conservative mindset so that's the mindset from which we're running the business and our views that we discussed externally reflect that mindset. The only other thing I would add to it is as we start lapping better results and as you'll remember from an earlier question, particularly as it relates to merchandise margin rates, the level of flow through and the level of margin rate improvement is kind of as we would all understand it's going to moderate as we lap better results. So that's what’s reflected.

Got it. Thank you.

You're welcome.

Thanks, Laura. Okay. I think we're going to have time for two more questions.

Your next question comes from the line of Carla Casella from JP Morgan. Your line is open.

Hi. I may have missed this if you said it but did you give a leverage target that you're comfortable with, just given the dividend and the share buy backs, if we could get a sense for how high you'd be comfortable taking leverage?

The short answer to your question is we're not formulaic about it nor do we have a specific new miracle guideline so we're very comfortable with the balance sheet as it is for reasons we've described in terms of the cash generation of this business and the maturity profile, et cetera. We're very comfortable where it is now but there's a lot of impacts into judging the appropriateness of the capital structure and again we're not formulaic about it. We do review it with our board regularly and get good perspective from them and again, we're very comfortable where we are.

Great. Thanks.

Thanks, Carla. And final question?

And your last question comes from the line of Erika Maschmeyer from Baird. Your line is open.

Thanks. I just snuck in here. My questions about Pink. Given the strong results that you've seen there. Could you talk about your thoughts and strategy around expanding the square footage for that brand and existing stores, kind of compared to standalone?

Sure, the Pink business has had great performance too and we're very excited about the growth opportunities that we see in Pink. We definitely have a strategy to expand the square footage of Pink. Our first initiative would be to be able to find the square footage that we would have side by side to Victoria Secret. Where we don't have that luxury of making, of getting the right amount of square footage we still believe in the free standing strategy. The leverage of the customer in the side by side is greater than the free standing but both work very well for Pink.

Great. Thank you, Sharen and thanks to everyone for joining us this morning and for your continuing interest in Limited Brands.

This concludes today's conference call. You may now disconnect.