Good morning. My name is Kyle, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Q3 Earnings Conference Call. [Operator Instructions] Thank you. Ms. Preston, you may begin your conference.

Thank you. Good morning, everyone, and welcome to L Brands' third quarter earnings conference call for the period ending Saturday, October 31, 2015. 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 are available on our website, lb.com. Also available on our website is an investor presentation, which we will be referring to during this call. The 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, and Sharen is joining us remotely. After our prepared comments, we will be available to take your questions for as long as time permits. [Operator Instructions] Thanks. And now I'll turn the call over to Stuart.

Thanks, Amie, and good morning, everyone. We delivered record third quarter results as we continued to deliver sales growth, merchandise margin rate improvement and sound inventory management. Earnings per share increased 25% to $0.55 versus $0.44 last year. Excluding the $0.04 negative impact from foreign exchange rates, earnings growth was 34%. As Les commented in our press release, our brands are differentiated and have high emotional content, and we can continue to deliver new, compelling merchandise in an exciting in-store experience. We remain focused on executing fundamentals and staying close to our customers. We are pleased with our month-to-date performance and we are well positioned for the most significant part of our year which is in front of us. To take you through the third quarter results as detailed on Page 4 of the presentation. Net sales for the quarter increased 7% to $2.482 billion. And comps increased 7%. Foreign currency negatively impacted our sales growth by about 1 percentage point. The gross margin rate increased by 80 basis points to 41.6%, driven roughly by an improvement -- driven roughly equally by an improvement in the merchandise margin rate in buying and occupancy leverage. SG&A expenses leveraged by 70 basis points. Operating income dollars grew by 19%, and our operating income rate improved by 140 basis points. Turning to the balance sheet on Page 8. Retail inventories per square foot at cost ended the quarter up 7% versus last year and down 6% on a 2-year basis. Inventories reflect some early receipts at the end of the quarter and are clean, and we are well positioned. We repurchased 751,000 shares of stock in the third quarter for $61 million. At quarter end, we had $137 million remaining under our current $250 million repurchase program. Turning to Page 11 of the…

Thank you, Stuart, and good morning, everyone. The Victoria's Secret segment grew both sales and earnings during the third quarter. Total sales increased 8% to $1.6 billion, and comps increased 7% on top of 3% last year. Operating income of $211 million was up $19 million or up 10% to last year. Included in last year's results are approximately $36 million in apparel sales in the direct channel, which we have fully exited this year. Excluding this item, our segment sales growth would have been between 2 and 3 points higher. We began the quarter with successful Body by Victoria and Wear Everywhere Bra launches as well as a record back-to-school result in our PINK business. That strength continued throughout the quarter as customers responded to our newness and fashion, leading to double-digit growth in our bra, panty and loungewear categories. In regard to the Beauty business, we are in the process of a full repositioning of this category and remain committed to delivering an elevated Beauty business that is more consistent with the Victoria's Secret brand. Throughout this transition, we expect and are seeing Beauty results, which are down to last year. Merchandise margin dollars for the segment increased versus last year, driven by strength in both stores and direct. Rate was up slightly to last year. We finished the quarter with inventory levels up to last year, driven by planned strategic investments in PINK and increased Beauty inventory related to the fantasy's restage. Now let's turn to the specific channel performance starting with stores. Sales for the quarter increased 9% to $1.3 billion and comps increased 7% on top of 3% last year. Sales growth was driven by strength in bras and panties as well as PINK loungewear. Merchandise margin dollars increased versus last year. Margin rate declined,…

Thanks, Sharen, and good morning, everyone. At Bath & Body Works, we were pleased with our third quarter results. We were again able to increase earnings versus our record earnings last year. We were able to drive growth in sales while improving margin rates and continuing to manage inventory appropriately. Third quarter sales of Bath & Body Works North America was $705 million, up 7% or $46 million to last year, and comps increased 6% on top of 7% last year. Sales were strong across the quarter, and we were able to drive growth in each of our 3 key businesses: our Signature Collection product line, the soap and sanitizer business and our home fragrance assortment. Merchandise margin rate for the quarter was up with gains from effective leveraging pricing and promotion being partially offset by negative impact of foreign exchange in our Canadian business. For the quarter, operating income was $136 million, up 46% versus last year. Our operating income rate improved by 510 basis points to 19.3%, driven by improvements in sales, margin and SG&A expense leverage. We continue to see strong performance in our BBW Direct channel, which grew sales by 20% and operating income significantly in the quarter versus last year. We ended the quarter with inventory up slightly to last year as we prepared for the fourth quarter. We remain focused on disciplined inventory and expense management, and we'll continue to make appropriate investments to drive growth in the business. We have begun the fourth quarter of 2015 with our holiday theme featuring customer fragrance favorites as well as new winter fragrances in our 3 key businesses. We will be focused on delivering the Perfect Christmas and giving her the holiday experience that she has come to expect from Bath & Body Works, including newness in our core product categories, gifting options and an irresistible in-store experience. With that, I'll turn the discussion over to Martin Waters.

Thanks, Nick, and good morning, everyone. As in previous calls, I should give you a brief overview of progress in our international businesses. As you know, our opportunity for international growth is significant, and we're making good progress. As detailed on Page 13 of your presentation, we've opened 93 gross international locations so far this year, 29 in the third quarter, to end the quarter with 480 stores in the segment. Revenue increased 16% in the quarter to $92.8 million and operating income increased 13% to $18.2 million. The operating income rate decreased 50 basis points to 19.6, driven by FX headwinds. Absent the impact of FX, OI rate would have been 3 to 4 percentage points higher. Retail sales growth in local currency in the international business continues to be strong. At Victoria's Secret International, we are pleased with performance of our full assortment stores. In the U.K., we have a busy quarter ahead with another 4 stores to open to end the year with 14 stores. In the Middle East, we opened our fifth store of the year 2 weeks ago in Istanbul, bringing the total to 16 VS stores and 3 PINK stores. Staying with Victoria's Secret, our Beauty and Accessories business continues to progress well, with 342 locations opened at the end of the quarter, about 1/3 of which are in airports. We have another 40 or so to open in Q4. Turning to Bath & Body Works, we now have 110 international stores, and we continue to be very pleased with their performance. We expect to open another 15 or so BBW International stores in the balance of the year. So in summary, continued progress for our international business in the third quarter, and we remain focused on the fundamentals, great execution of our brands wherever we go. With that, I'll say thank you. And I'll turn it back over to Amie.

Thanks, Martin. That concludes our prepared comments this morning. At this time, we'd be happy to take any questions you have. [Operator Instructions] Now I'll turn it back over to the operator.

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

I was wondering, Stuart, if you could talk about just the gross margin composition going forward. Do you think there is opportunity still with markdown in fourth quarter, especially given the environment around the holiday? Then also any AUC opportunity and I guess, if you could talk about just the P&L bucket if you can continue to comp mid-single digits or opportunity there?

So a lot, Susan, in that question, and thanks for your remark about the third quarter. As we think about merchandise margin and related buying and occupancy expense and we've -- our thinking's been very consistent about this. We have some additional opportunity, probably not a lot in the merchandise margin rate. And the reason for that is, the most important thing is to get the product right. And from that, obviously, we get full-price selling and all good things happen. There is a little bit more opportunity or some more additional opportunity as it relates to speed and the value that, that creates. But all of that is balanced against making sure that we're providing great value to customers. And what we don't want to do is have the margin percents get too high and as a result, either limit our growth in terms of dollar growth or have the outcome where the customer doesn't feel like she's getting a terrific value. So that's really how we think about it. As we've talked about previously, we're not a company that's particularly focused on AUCs. We obviously do buy a lot of merchandise, and we're not looking to overpay. But what we're really focused on is innovation, newness, fashion, speed, product quality. That's where we spend most of our time and energy working with a great group of partners in terms of the folks that manufacture our merchandise. As it relates to buying and occupancy expenses, we are investing in our stores. And as we outlined a few weeks ago at our annual update, we're very energized and optimistic about the growth that, that will provide for the company and frankly, the strategic importance of that, if you will, in terms of ensuring those store environments remain very compelling for our customers. And as a result, the dollar growth in our buying and occupancy expense will be in the mid-single-digit range for the remainder of this year and going into next year. So that would be how I would outline our thinking about gross margin rates. Thanks.

Susan, one point to add on that, specifically as it relates to the fourth quarter. So Stuart mentioned in his comments that we will see 2 to 3 points of sales spread versus comps in the fourth quarter, primarily because the direct business is slipping around against exited apparel merchandise. So we will have a bit of a lower leverage point on buying and occupancy go forward.

Your next question comes from the line of Paul Lejuez from Citi.

As you grow in square footage in the U.S., can you talk about what's actually happening to rents in the new space that you get relative to existing space? And then does it do anything for you in terms of negotiating rents in existing space maybe for each of the brands, if you could talk about them separately, has there been any change there?

Paul, it's Stuart. I mean, what I would say is as we renew leases as a general matter, rents are increasing, as you would expect. So our lease terms, as a general point, are 10-year lease terms. And as we renew leases, the rents are higher. With that said, and not unlike our thinking as it relates to merchandise and margin rates that we talked about earlier, the most important thing, obviously, as it relates to real estate, is having a terrific location within a given shopping venue. So we're not looking to get the lowest rents, if you will. We're looking to get the right locations. We drive a lot of productivity, as you know, in terms of sales per foot. So our ability to do that with the major developers, frankly, throughout the world or in the world is pretty good. But we're not focused on getting the lowest rent terms, if you will. We're focused on getting great locations, driving lot of sales, a lot of 4-wall profit. And as we renew leases, our rent per foot, or rent dollars do increase. But at the end of the day, the 4-wall economics remain very, very powerful.

Your next question comes from the line of Matthew Boss from JPMorgan.

It's Christina Brathwaite on for Matt. On the international front, we were surprised by the revenue growth in Q3, given some of the wholesale shipments that shifted into the quarter from 2Q. Can you walk through the puts and takes of growth during the quarter and just tie into -- in your long-term expectations for revenue growth?

Yes, Christina, we'll go to Martin, obviously, for that question.

Sure. I'll take that. Maybe 2 points on retail sales and international one on OI. Retail sales in local currencies are up significantly to last year and broadly in line with the increases that we saw in the previous quarter. Secondly, you look at recorded revenue, which you'll remember, is a mix of 3 things. It's a mix of owned retail in the U.K., retail royalty streams that come from our franchise businesses and wholesale income that comes through travel retail. So it's 3 things in that part. The -- those recorded revenues have been up significantly to last year but have been impacted by really 3 things. The first is FX headwinds, which had about 6 points of impact. The second is delays to some store openings versus the prior year. We still have over 50 stores to open between now and the end of January, which is a little later than I would like. And the third is that the travel retail business globally has seen a little bit of slowdown. So those are impacting our revenue stream. As far as the OI rates is concerned, I'd just remind you that, that FX, when pressured, is pretty significant. And if we adjusted for that, we'd see about 3 or 4 percentage points higher rates than we're seeing right now.

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

I'm not sure if this question on Victoria's Secret Beauty is for Sharen or Stuart. I'm wondering if you can just give us the longer-term picture on the category. By recollection, I think Beauty has largely not grown here over the last 8 to 10 years. And as a result, the Beauty piece, the mix percentage of Beauty to the overall assortment, has declined. I don't know if you have the statistics. If you do, it would be great to hear them. And that would seem from Beauty's high margins that the brand has absorbed actually a gross margin headwind over the last number of years. I'm wondering if you have any quantification around that. And what's the outlook for Beauty with all of the new packaging and the new relaunch and the new restaging? How should we think about the growth of that business over the next 1, 2, 3 years?

Thanks, Kimberly. We'll go to Sharen for that question.

Kimberly, thank you. Our Beauty business is about $1 billion business today. And you're right, it has not grown really over the last 3 years. It's been pretty much a practice. As we have thought about our Beauty business, we have continued to shrink the real estate in our Beauty business because we feel like it has the opportunity to be much more productive. The strategic intent of taking Beauty off the lease line and closer to the cash wrap has allowed us to become more productive. Therefore, we've been stagnant a little bit in our growth category. We felt like the Beauty business was trading on the brand equity versus the opportunity to trade up, to have it really leave the category from a prestigious perspective. And as our -- base of our business was in the fantasies business, which is more of an opening price point, high unit velocity business. We're trading into more of a fine fragrance business as well as a higher in body care business. As we go through these transitions, just like we did in direct, we know that we will take a step back as we take a step forward. We also know that the Beauty characteristics are very exportable. We're still very -- we still believe in our Beauty business. We still believe that there's growth in our Beauty business, but it's up to us to reformat this business to make it much more elevated so it does have growth characteristics.

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

Sharen, I wondered if you would talk about the bra category and the performance. Obviously, PINK we know had a great performance but maybe the core bra and panty category performance for Victoria's Secret in the third quarter and your outlook in the fourth. I think you are launching a new bra. And just as a point of clarification, Stuart, could we expect that spread differential of I think you said 2 to 3 points. Is that something we should be factoring into our models for next year?

Thanks. We'll start with Sharen.

Janet, thank you. We're very pleased with our Victoria's Secret launch array bra business. It was in the low -- the high low double digit -- high low single-digit growth over 8 -- between 8% and 10%. So very happy about that business. And when I think about our total bra category, both from the Victoria's Secret lingerie perspective, a PINK perspective and a sport perspective, we're seeing mid-double-digit growth, which is a very strong category. We're excited about the bra launch that we're bringing in, in December. This will be the first time that we will have one. It was on in the fashion show. So we have a good track record of bra business. We see growth in our core bra business, and we still believe that we have a lot of potential as we continue to segment that bra business go forward.

Hey, Janet, on the spread. The short answer to your question is, yes. And as Amy remarked that why we haven't been realizing the spread year-to-date, is due to the impact of the VSB apparel exit through the first 3 quarters of this year. We're going to have that spread in the fourth quarter. And as you think about '16, '17, '18, I would expect -- we would expect it will be the spread from square footage growth and that we've been outlining.

And FX pressure may be less?

If anybody has got a crystal ball about foreign currency, I'd love to -- call me off-line, I'd love to learn more about that. So we'll see.

Your next question comes from the line of Lindsay Drucker Mann from Goldman Sachs.

It's great to see how insulated the business has been relative to some of the other challenges we've seen from your peers in the mall. I was curious if you could give us any perspective on whether you're seeing a difference across regions, across mall type. It does seem like consumer behavior shifted a little bit in the last few months. So I'm curious if there is any color you can add there on your business. And then, Sharen, I was curious outside of the Angel Card relaunch, how were your promos in Victoria's Secret third quarter versus last year? Were they generally -- were they consistent outside of that one launch? And as you think about the fourth quarter, how are you planning your promos versus prior year?

Okay. Thanks, Lindsay. We'll start with Nick on the general traffic question.

Hi, Lindsay. We're not seeing any dramatic differences or demonstrable differences between either regionally and/or mall type. I think what we're really, really focused on at the moment is continuing to try and keep the store looking as animated and interesting as possible, so that we can continue to drive traffic. We're very, very focused on first quality selling. We're very focused on units. We're very focused on storytelling. And that seems to be what's helping insulate us from challenge in traffic. So in terms of are we seeing anything really different, I can't say that we are either regionally and/or mall type.

Thanks, Nick. And Sharen?

Yes, in terms of the regional mall types, we're really not seeing a big difference. There will be certain stores in certain regions depending on their penetration of beauty. But outside of that, there's pretty much of a consistency. So we're excited about that. As I'm thinking about the Angel Card relaunch and the margins that you are talking about for third quarter in the promotional activity, the promotional activity was not greater or we did not have more promotions this third quarter versus last year. We did -- the promotions we did actually were bigger and better. So we're trying to get fewer but bigger and better, therefore, driving traffic and efficiencies within the store. As I think about fourth quarter, right now, we are planning to have a few less promotions in the fourth quarter. We felt like we had too many last year. This year, we also have a lot of contingencies in place just in case that we need to react to the business to keeping that agility. So we're looking forward to how this fourth quarter does play out.

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

Sharen, a question for you. We've talked a little bit about it thus far. The store trending and incentive program, can you give us the status update and the progression there? And what so far are your learnings? And kind of another part to this is, I think we -- you and I had talked about how -- one of your initiatives is to get out of holiday a little bit faster this year. And I'm wondering how that will play out in the quarter and could that set you up a little bit better for Q1 when you have Valentine's Day coming.

Thank you, John. Thanks, John. As we think about -- we are so focused on -- in terms of our selling organization really about getting great experienced sales associates who really want to have careers with us. So as you know, we're testing a lot of different programs. We're really working on thinking about how to educate our people. Obviously, going into the holiday, we're focused on about making sure that we get all the holidays' help that we need. So we are still focused on testing and learning at this point. We are seeing positive results of our effort, but there's still so much for us to learn. And we'll continue to evolve along on this focus over the next 24 months. And we are really going to get leverage out of the selling cost as we think about it as we go into next spring and the fall season. In terms of the question about getting out of holiday earlier, this year, we are actually pulling up our semiannual sale, which will be a shift out of January into the last week of December. This will allow us now to really convert into spring, convert out of all of the getting sale off the floor and really coming out strong with spring fresh merchandise, really wear now merchandise in terms of the transition. We're excited about this strategy, and so there will be some puts and takes between the month of January and December.

A better setup, I assume, for the all-important Valentine's Day period?

Absolutely.

Your next question comes from the line of Christian Buss from Credit Suisse.

So I was wondering if you could talk a little bit about your lean manufacturing initiatives and how much progress there is still to make there.

Okay, Christian. We'll go to Stuart for that.

Sure. I'll handle it generally, and Sharen and Nick may want to elaborate further. So I think you're referring to the work that we've been doing for now a number of years to reduce fundamentally our lead times and focus on speed. And as we talk about it, our read, react and case capabilities, we've talked about it generally, as sometimes we use the metaphor of a baseball game and I'd say we're in the middle to maybe the sixth inning or so. Again, Sharen and Nick may want to add to it. But it's very important to our business in terms of a lever to increase full-price selling and reduce markdowns. And we've made substantial progress across all of our businesses. There is some additional opportunity, but it's been a very important focus for us now for 3 or 4 years and we've realized a lot of benefit from it. There is more yet to do, but we're well into the opportunity. And again, Nick, Sharen, if you want to add to it, certainly feel free to do so.

Yes, Christian, it's pretty much well leveraged at this point. It is fundamentally the way we do run the business. And so really, it's incredibly well embedded. And so a lot of the energy really goes into our ability to make sure that we're selecting the right types of products to be in that chase mode, so that we can read and react and respond to customer behavior. But I would say it's pretty well leveraged at this juncture.

No, I was just going to say, I think from a Victoria's Secret perspective is that, we still believe that there's more opportunity to be had. I think that how we do business, speed is just one way to do it. And as the world keeps changing, the opportunities keep changing for us to think about how to get faster and faster. And each and every one of our partners throughout the world are on this journey with us. And it's amazing how powerful these collaborations are when we think about the opportunities that we have. So I don't think that from a Victoria's Secret perspective that we're totally leveraged yet and still have some opportunities as we go forward.

Your next question comes from the line of Brian Tunick from Royal Bank of Canada.

I guess, Stuart, first, you did talk about the BOW leverage potentially for next year. Curious on the SG&A side and where are we on the payroll investments, particularly at VS? And what are we lapping? And maybe what new markets we'll be extending into? And then maybe for Stuart or Nick, maybe on the BBW EBIT margins. I think now you're poised for a mid-20s operating margin this year. That's pretty incredible. So as we think about that business going forward and the remodels that you're initiating, what do you think is the right margin level for BBW?

Brian, I'll take the first part of that. So on SG&A expense, as a percent of sales, what our goal as a company is over time, and we've been pretty consistent in our thinking about this, is to grow expenses slower than sales. You point out in your question we've talked about, you're aware of the fact that we are investing in a more highly paid, more productive sales associate in our business. And that certainly is putting pressure on near term results. But we're also, in many cases, finding ways to at least partly offset some of those investments. And you should be sure that we'll continue to look for ways to work to offset those investments. But as a general matter, we will be looking to hold SG&A rates flat or get slight leverage over time. We referenced in our remarks a few weeks ago in the broader group that we're also thinking about dollar growth versus rate expansion. And as you appreciate, there's a lot of balance in that. And so -- and that certainly applies to the SG&A line as well. But as we sit here and knowing the mindset of Sharen, Nick, Martin, the other leaders in the business left, at the end of the day, we will continue to make sure we're making the right investments to grow our business but also be tough-minded about driving trade-offs to either fully fund or at least partly fund those investments. So that's our state of mind about it.

And on the BB?

Hi, Brian, it's Nick. So I think I'd echo what Stuart is saying, so an awful lot of energy and effort going into top line growth as opposed to further margin rate expansion. So -- and we're very, very focused on first quality selling. So a lot of investment will continue to go into product to make sure we're as innovative as possible. And obviously, as we head into the fourth quarter, which is -- or rather into November, December, which is such a dynamic period, maybe naive to think there was more in that.

Your next question comes from the line of Laura Champine from Cantor Fitzgerald.

Stuart, on the La Senza business, or maybe it's for Martin, what is your time frame on turning that at least to breakeven? And why strategically hold onto the business at this point? Is it -- it somewhat obscures the health of your bigger businesses.

Thanks, Laura. We'll go to Martin.

Thank you. Well, La Senza continues to be a work in progress, no doubt about that, but we're pretty pleased with the progress we've made. We continued to see positive sales momentum in the business. We're getting closer to the target customer, better assortments, more fashion-right, on significantly tighter inventory. So that's all really good and really positive. We also see sales momentum in the business, where we're collocated with Victoria's and PINK is really strong. So there's a real relevance for that brand in the marketplace alongside the other 2 businesses that we own. The logic for keeping it, I think, is obvious and compelling. We own the number 1, number 2 and number 3 lingerie brands in the world. Having a value play underneath the Victoria's makes a ton of strategic sense and so we're very committed to its future. But the one bogey that we have on La Senza, of course, and we've referenced it a number of times in this call, is the FX rate between the Canadian dollar and the U.S. dollar, which gives us a really, really significant headwind. But it is what it is. FX is outside of our control, and we continue to get better, stay focused on the customer and really lean into this key time of year.

Your next question comes from the line of Joan Payson from Barclays.

You've given us, I think, some good color around the investments that are going into the stores and the selling experience. I was hoping you could talk about whether there are any incremental investments coming up that you're putting into the direct and online businesses, particularly as you begin to lap some of the apparel reductions that you've been going through on the Victoria's Secret side?

Okay. Let's go to Sharen for that question.

Hi, thank you. Our investment in direct, number one, obviously, we're going to continue to focus on the core products. That's going to be the main investment. The other piece of it is that we are constantly investing in looking at our technology platforms to drive mobile. Mobile continues to be a big part of our business. It continues to be the fastest-growing piece of the business. So as we go forward and look at some of the investments that we'll be making, they're going to be made in terms of the technology that we need to help continue to drive this very, very powerful online business.

Your next question comes from the line of Dorothy Lakner from Topeka Capital Markets.

I wanted to go back a minute to the Canadian business and just overall, I guess, Martin, your impressions of the consumer environment there overall and maybe Sharen and Nick can answer this as well. But just differences that you're seeing maybe in that environment versus the U.S., if you're seeing them.

Yes. I wouldn't describe the difference in customer behavior, particularly different in Canada and what we're seeing in the rest of the U.S., to be honest. On a day-to-day basis, the customer in the malls in Canada doesn't think about FX rate. She isn't thinking to a first base on what the movement in currency is. So I think it's pretty much the way we see in the U.S. The one exception I draw out from a regional point of view that is a little different in the U.S., is the west of Canada is significantly weaker. So impacted by the oil industry and oil prices particularly, we do see that the west has a weaker level of sales comp than we're seeing elsewhere. But I think that's about it. I don't know if the others have anything to add, probably not.

No, I don't.

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

My question is on Victoria's Secret margins in 3Q. I'm just wondering how much the lower Beauty business and FX impacted the segment margin. And then how should we think about each of these in 4Q, particularly Beauty, given that you're signaling that the business is probably going to be down and that mix shift probably will have an impact.

Thanks, Roxanne. We'll go to Sharen.

Roxanne, the majority of the margin was really about 1/3, 1/3, 1/3 in terms of you're looking at the Angel Card relaunch, our FX from the Canadian business. And then the shift in the Beauty. I think that what, as we go forward and we look at fourth quarter, the Beauty business is about 18% of the business in fourth quarter. So I think, hopefully, that we have tried to architect the business in a way to help offset that. We feel that there's probably some opportunity and are anticipating merchandise margin dollar improvement in Q4. But I think the margin rate will continue to be impacted mostly by the FX and the Beauty business. So we are trying to look at that very carefully as we go forward. We still believe that the Beauty business has opportunity to bounce back for us as we go forward into next year. So that's where we really are as we think about our fourth quarter.

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

A question to Stuart on inventories. This team has done such a great job managing very tightly. The 9% increase in the third quarter being a little bit higher than, I think, original guidance, maybe talk about what drove that and what was the increase, excluding the early receipts? And also, just with the addition of debt to the balance sheet, is there a cash balance that the team all talks about?

So on inventory, you're referring to the balance sheet number, and I understand why you do that and it's up 9 year-on-year. It's down 1% on a 2-year basis, the balance sheet inventory, and sales were up meaningfully over that period of time. We typically talk about and report on, on a monthly basis, inventory per foot because we think that's a relevant measure. And on that basis, inventory for the quarter ended up plus 7 and down 6 on a 2-year basis. The bottom line is we think inventory is in great shape, as I've commented on in the prepared remarks. The early receipts had a couple of point impact on the inventory levels. And then what was the second part of your question, sorry? What was the second thing you asked?

Cash flow.

Oh, cash flow. As we think about kind of minimum cash levels, I would say a range of $800 million to $1 billion in terms of starting the year such that we wouldn't need to use the revolver. Now we have a revolver. It's $1 billion revolver. We generally don't use it. One could debate that we obviously seek to manage the business conservatively. But in answer to your question, $800 million to $1 billion with an assumption that we wouldn't seek to use the revolver. That number has come up a little bit as our capital spending levels have come up over the last few years.

Your next question comes from the line of Ike Boruchow from Wells Fargo.

I think this is a Stuart question maybe a Nick question. But when we look at -- to piggyback of Brian's BBW margin question, significantly more leverage in this quarter versus the first half of the year on the operating margin at BBW on the fairly similar comp. And if I look last year, it was kind of the same dynamic as well in terms of how much leverage there was in Q3. Is there anything special about Q3 in terms of why maybe there's more margin opportunity for the business in the last 2 years or anything this year? Just kind of curious about that.

Yes. Ike, thanks for your question. I mean, I want to make 2 points about it -- we'd want to make 2 points about it. I mean, Bath & Body, over time -- and we've done this the whole company over time, but Bath & Body, particularly, over time, has done a great job improving margin rates -- merchandise margin rates and managing expense levels with a lot of discipline. Some of that's also reflected about the fact that we have invested a lot in the store fleet in terms of remodeling stores and so on. But main, main point is Bath & Body has done a great job driving profit rate through discipline in their business, and that's a headline and a familiar one. Separately, a year ago, we did have a discrete, unfavorable item, and this year we had a small discrete favorable item that impact the third quarter result a bit just in terms of some uniqueness in the quarter.

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

I was wondering if, Martin, you can talk a little bit more about the travel stores. You certainly referred some impact in the third quarter. Any additional color you can give us on what you're seeing in that business and how we should think about it for Q4 and maybe 2016? And then my follow-up question is, as we continue to think about the brands making an emotional connection to the customer, how should we think about marketing dollars plan for the holiday season and perhaps next year as well?

Sure. So I'll take the travel retail part and then maybe pass to Stuart on the other question. So the travel retail business continues to be very, very good business. It's sophisticated customers around the world who have got money to spend, who have time on their hands and it's just a terrific space to be in, particularly for beauty and accessories businesses. So we remain committed to it. I think Victoria's is now the largest stand-alone retail operator of stand-alone stores in travel retail globally, which is terrific from a standing start in just a few years. And we still see significant growth ahead of us. So we're going to continue to open 30 or 40 more travel retail doors in 2016. Has there been a slowdown in the last 3 to 6 months? Yes, there had. And I think that's primarily driven by a couple of things. The world is not what it was. There's certainly more security challenges around the world than was probably the case this time last year. The Russian customer's not traveling to the extent that she was. The Chinese consumer has changed patterns of travel. So all of those things in the mix, along with generally a bit of a malaise in travel retail driven by security concerns, I think have taken the market down overall. The overall travel retail market down some probably mid single-digit would be my guess. But overall, the message is we're very, very happy with the business, and we see it as a very productive and strategically right place for us to operate.

Thanks, Martin. And for the marketing question, we'll go to Nick first and then Sharen.

Hi, Betty, thanks for the kind words on the quarter. I think the way we're really thinking about it is, it's flat, but we're also in a position if we see something excited -- exciting happening, we'll be in a position to invest in that. I think the real focus for us for fourth quarter, though, is really about agility and our ability to react to either customer behavior or market dynamics more importantly than are we taking marketing up or down. But the message would be flat fundamentally.

Thanks. And Sharen?

As I think about it from a total-total mega brand perspective, we'll be down a little bit in our marketing as we go into the fourth quarter and into spring.

Your next question comes from the line of Simeon Siegel from Nomura Securities.

If I can piggyback on Brian's other question. Just Stuart, given the VS stores deleverage despite that 7 comp, what would you expect the SG&A leverage point for stores to be next year? And then can you contextualize what percent of the store expenses are now fixed versus variable?

I mean, there is a lot in that question. So in terms of the flex point on SG&A or store selling, it's not actually static, it's more dynamic. Really, the only -- at least in meaningful times of the year, important times of the year, the only fixed part of store payroll is the management complement, certainly, in lower volume periods in the year, more of the payroll is fixed, if you will. But again, we'll be looking to grow expenses lower than sales as we move forward. We are making investments in store selling. We'll give you more guidance about '16 when we give guidance in February for the coming year. But again, know that we are looking to grow expenses lower than sales. And I know it's kind of handy or helpful to have a breakpoint, but I'm just being transparent with you. It's not as simple as oh, it's 4% or 5%, because it's more dynamic than that, and we manage it in a more dynamic way than that.

Your last question comes from the line of Oliver Chen from Cowen & Company.

As we look across holiday season for other retailers, a big theme is earlier promotions, the integration between online and stores and buy online, pickup in store, as well as some degree of differences on the traffic patterns of the customers. I just wanted to get your highlights about how you're competing in that context and if you expect the holiday sales to be spread out, but I know you mentioned you're intensifying some of the marketing.

Thanks, Oliver. We'll start with Nick.

Hi, Oliver. We're not looking to go earlier or later. I think we want to be in a position to fundamentally follow last year's pattern, but be in a position to react to the market and/or react to the customer in terms of the dynamics of that particular period. And how that relates to the online channel, we're pretty well integrated from a comparable product, comparable price, comparable promotion. And that works really, really well for us. So we'll leverage either the channel dependent upon what's really going on in the market.

And Sharen?

Yes, Oliver, we, over the last, I would say, 4 years, 5 years, have seen the patterns of holiday being changed. What you see is that there's a big Black Friday weekend and kind of leading up to, then it kind of tranches down a little bit, and the last 2 weeks gets stronger and then continue to -- through past Christmas. I think that having seen these patterns, we've been -- we're very well positioned in our thinking, in our programs, how we're delivering merchandise to take advantage of those change in the patterns. We also have had much alignment and are still aligned within our direct channel as well as our store channel. We believe the engagement in social and how we are looking at using our social media this year will be very important. So I think that we are ready. And I think the most important thing is that you just never know. There's always something that comes up and surprises you. And because of our trying to make sure that we stay as agile as we can with our contingencies in our thinking and how we were going to operate the business in holiday, I think we're prepared for those. You never know. There are always some surprises. But we're not really starting earlier. I think we understand where the big days are and where the traffic is going to be, and that's what we're focused on.

Thanks, Oliver. Thanks to all of you for joining us today, and we hope you all have a happy Thanksgiving.

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