Good morning. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the L Brands Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer of L Brands. You may begin.

Thank you, Heidi. Good morning, everyone, and welcome to L Brands' second quarter earnings conference call for the period ending Saturday, August 3, 2019. As a matter of formality, I need to remind you that any forward-looking statements we may make today are subject to our safe harbor statement found in our SEC filings and in our press releases. Our second quarter earnings release, additional commentary and our earnings presentation are all available on our website, lb.com. All of the results discussed in today's call are adjusted results and exclude the significant item described in our press release. Stuart Burgdoerfer, EVP and CFO, and I will handle the call today. Thanks, and now I'll turn it over to Stuart.

Thanks, Amie, and good morning, everyone. Our second quarter earnings per share result of $0.24 was above our initial guidance of $0.15 to $0.20 with upside driven by favorability in income taxes. Bath & Body Works continues to deliver strong results with an 8% comp increase and a 7% increase in operating income. The operating income increased at Bath & Body Works and improvement in the international business and in the other segment as a result of the sale of La Senza and the closure of Henri Bendel was offset by a decline at Victoria's Secret. Looking to the second half of the year. Our #1 priority continues to be improving performance at Victoria's Secret. As we noted in the commentary that we released last night, John Mehas and Amy Hauk, CEOs at Victoria's Secret Lingerie and PINK, respectively, have made significant changes to our fall assortments. The significant amount of change in our fall merchandise assortments and promotional plans as well as the current trade environment and tariff uncertainty inherently result in a greater level of uncertainty in forecasting our results for the third and fourth quarters than is typical. That said, we believe the customers will react positively to our new merchandise. And therefore, as we said consistently, we have assumed in our guidance that Victoria's Secret trends will improve versus recent performance and that Bath & Body Works will continue to deliver strong results. You'll hear more from John and Amy as well as other business leaders at our Investor Day, which is scheduled for September 10. Thanks, and over to you, Amie.

Thanks, Stuart. That concludes our prepared comments. At this time, we'd be happy to take any questions you might have. [Operator Instructions] Thanks, and I'll turn it back over to Heidi.

[Operator Instructions] And your first question comes from the line of Kimberly Greenberger with Morgan Stanley.

My question is on the VS Lingerie business. I think you said initial indications in the first part of August have been favorable. I just am curious what you mean by that. And do you think that the lingerie piece, the new fall assortment is enough to replace the lost volume in core bras? I'm just wondering, if we don't see an improvement from the first 2.5 weeks of August, it sounds like Victoria's Secret will not be on track to deliver the expected third quarter numbers. So I'm just trying to understand what the puts and takes are.

Thanks, Kimberly. So as it relates to the new lingerie assortment, modern lingerie, as we refer to it, and initial results as we provided commentary in our pre-released remarks, the consumer reaction, Kimberly, to the new assortment and the new items in the assortment has been favorable and positive and consumers reacting well. But as you point out in your question, and it -- and all I can report to you is what we've observed so far and how things will progress as we see it based on what we believe for fall, the reaction to the new stuff has been very good. With that said, it hasn't been to date sufficient to overcome weakness in the balance of the lingerie assortment, including the effect of heavy promotions from a year ago that will continue through the fall season. Importantly, there will be additional new merchandise flowing through the fall season. So the full fall assortment was not in stores in the first few weeks of August, so we are reading a partial result. Additionally, we are very optimistic about our offering and the potential for growth in the sleep and lounge business that, as you appreciate, SKUs in terms of its proportion to the total to a greater percentage of that total as we move through the fall season, given its giftability and just general seasonality for sleep and lounge, we've got more work that we're doing on marketing. And we believe that our marketing effectiveness will improve as we move through the fall season. So qualitatively, that would be the additional perspective that we have in answer to your question. So consumer reaction, again, strong and favorable to the new offerings yet not sufficient to deliver an overall result that changes the trend so far, more new merchandise flowing through the balance of fall and a lot of work going on in marketing to more effectively market the changes and drive traffic in the stores. Thanks.

Thanks, Kimberly.

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

Stuart, can you just maybe talk about how swim performed during the spring season as a whole now that you kind of brought that category back to some extent? Any update on what that category might look like in spring of '20? And then just go back to Victoria's Secret for a second. I just want to understand a little bit about the inventory pickup on Victoria's Secret. Where are you investing? And I just want to tie that back to -- I believe you said you've got some hopes to be less promotional in some of the prepared materials that were sent around. Just maybe square that away for us.

Sure. So Paul, as you're asking about, we've reentered the swim business this year. We made that decision relatively late in 2018 into early 2019. So our reentry into that business happened in the latter part of March, as I recall it. So we missed a little bit of the natural season for swim. It generated, in round numbers, about $30 million of volume, $40 million of volume versus what it had been in the past. We do believe that there is substantial additional growth opportunity in swim. Our focus, as we've conveyed previously, is to pursue that business online and generally with a more elevated assortment than what we had offered in the past. And consumer reaction to that, while there was a little bit of commentary out there about price points, overall, the reaction to what we put in front of customers was positive. So it was a good start particularly given the timing of our decision. There is meaningful additional growth opportunity in that category. Again, I'm repeating, but I'm trying to make sure I'm being clear. We intend to pursue that at this time online and not in stores. With respect to lingerie inventory, the first thing, Paul, I'd want to register, and you know this having followed us for a long, long time, is that we're working very hard to maintain a lot -- as much flexibility as possible, particularly for the fourth quarter, and through our focus on reducing lead times and ordering frequently and adjusting regularly. John Mehas and his team are working the assortment literally almost every week in terms of adjusting the on-order. We are making important investments in the new parts of the assortment. And with that said, we've got a lot of flexibility in particular for the fourth quarter to read and react to the overall trend and to adjust the on-order obviously to maximize our chase and pursuit of the items that are doing best and to cancel or adjust out of items that aren't doing as well. So we're making important investments. Again, optimistic in terms of the reaction to the new offering certainly in total, and we got a lot of flexibility. Was there a third part to Paul's question?

That was it.

You good, Paul?

Yes, sir.

All right. Thanks, Paul.

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

I wanted to pick up on some comments you made in response to a prior question on marketing. You mentioned in the prepared materials that marketing at the Victoria's Secret business was down year-over-year. Could you give us a sense of where marketing is as a percentage of sales in that business? And then you also talked to some changes planned for the back half of the year. Can you talk a little bit more about what you mean by that? Is it an increase in the level of marketing? Is there any change planned to the tone or nature of the marketing message?

As to the numerical question, in a rough round sense, Victoria's marketing as a percent of its sales is about 5% historically. And that's an all-in definition, including GWPs and all forms of marketing. The most important thing I would want to register about marketing, and we've been pretty consistent in this mindset now for as long as maybe 12 months, certainly 6 to 9 months, is that everything is on the table. And what's meant by that is we're taking a fresh hard look at almost every material aspect of our business. And the reason you're asking about marketing for Victoria's is it's an important part of that business. So in terms of the messaging, the imagery, the photography, the words, the pricing, promotional aspects of it, the medium of communication, the integration of marketing between stores and digital and social channels, John is getting more and more involved in it. He spent his initial focus on the merchandise because that is the longest lead-time item in the business, and he's done substantial work in that space, frankly, extraordinary amounts of work in terms of change in a short period of time since he joined us. And he's now shifting his time -- not to the exclusion of merchandising. That's a core ongoing responsibility obviously, but he's getting more and more involved in marketing. You've read that we've had changes in senior leadership in marketing. And I expect that there will be meaningful and hopefully thoughtful change in our marketing approach as we move through fall and into 2020. John will comment further on that, I would expect, when we're together in September.

Thanks, Alex.

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

I wanted to ask about BBW. Just first, with the 4% store comp, can you give us a sense of how the -- what the traffic footfalls are that you're seeing? And what is the back half outlook for BBW and bed from a traffic perspective? Then more broadly, with the remodel program, I think 840 stores in the new concept are planned by year-end. Can you give us a sense for what percent of those you would say are in A malls or off-mall locations? And then looking forward, given the continued pressure on mall traffic, has the number of BBW stores that would meet an ROI threshold changed much just with respect to the remodel? Just wondering how that refresh program evolved as we look to the second half of the fleet.

Sure. So a number of questions in there. If I didn't catch them all, Amie'll remind me of what I missed. So in terms of the traffic at Bath & Body Works in the second quarter, it was about flat, store-level traffic flat year-on-year. And the growth in the business came through transaction increases driven by conversion. With respect to the refresh program, as we've commented on consistently and updated in our script, we're very pleased with the results of it. The refresh activity has not been limited to A malls but has also happened in other mall tiers. We are seeing strong results in almost every situation. Whether it's an A or a B mall or a C mall or an outlet center, we're seeing strong results broad-based, very, very few exceptions to that. And we'll keep pursuing the program. Obviously, as we move down into the fleet, we'll continue to watch the ROIs. But again, they've been good so far, and we're very optimistic about continuing to pursue this program over the next several years. With respect to the ROI on the program and just the unit-level economics for Bath & Body Works, frankly, they're just outstanding. They're very solid. That said, as you can see in our information that we share externally, the fleet is actively managed. So even at Bath & Body Works, we close a few stores every year, and we're also opening stores as well. We're expanding square footage modestly or, I think, carefully. But the fleet is in great shape. And the most important thing about that remodel program is, in addition to the financial profile almost immediately being strong, it really sets the business up very well for the next 7 to 10 years with a very current store design that consumers respond well to. So we won't be in what some retailers can get into, which is a kind of a deferred CapEx situation. So it's a very good outcome for the business.

Thanks. Mark, did we get everything there?

I think you did.

All right. Great.

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

I wanted to follow up on the strategy at PINK to rebalance the good, better, best. Can you just talk a little bit about the go-forward implications on sales and margin that you expect from the strategy?

Sure. We're trying to have good balance among price tiers. As in any business, you've got to balance unit volume growth and transaction volume growth with pricing. As Amy came into the business, and she will comment on this further when we're together in September, she assessed a lot of things, as you would expect that she would. And based on that assessment, she believed that there was opportunity to drive engagement in terms of transactions and unit volume in lower price points. She's been careful to not go -- working hard to -- not to go ditch to ditch on that. But she's just trying to make sure that she's got what we would call a balanced assortment pyramid or assortment architecture between good, better and best and felt that the business had gotten a little tilted towards higher price points. So she's made adjustments there, including in areas like the bra business where she's delivering a lot of volume growth and getting to a margin profile now that's starting to look very solid. So that's the mindset.

Thanks. Thanks, Lorraine.

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

Amie and Stuart, 2 quick ones. On the marketing, I know you can't go into it much now, and hopefully, we'll hear more at the Analyst Day. But I guess the quick question is, will there be a time to change the marketing message in a meaningful way ahead of holiday, meaning should there be some benefits or potential impacts on your Q4 performance at VS from -- by changing the marketing strategy? And then on the international business, it sounds like -- based on the commentary that the operating losses in China are getting a little bit better. Can you kind of give us an update on where we stand from an operating income or loss perspective in China and what the thought process is into next year and beyond in terms of when that business could potentially turn a profit?

Yes. So Ike, on the first question with respect to is there the opportunity to make meaningful change in the marketing approach and message for the fourth quarter, I believe that there is. John is engaged in it. The -- while marketing is complex and needs to be migrated in a careful way, the inherent lead times, as I've commented on earlier, not nearly as long as will be the case to design and develop and have manufactured new product into the assortment. So simple answer to your question, is there an opportunity to make meaningful change in our marketing message and approach for the fourth quarter, the answer is yes. With respect to China, it's a multiyear situation, Ike. We do have some flagship stores there that play an important role in marketing the business, but they are generating some losses. And I -- our view at this point would be it's a 3- or 4-year journey in China to get to the -- to a profit profile in that business, 3- or 4-year journey.

Thanks, Ike.

Your next question is from Susan Anderson with B. Riley FBR.

I was wondering if you could maybe give us an update, from what you're doing on a digital perspective, it looks like online continues to outperform stores. So maybe if you could provide some color on what you're doing from a technology perspective to continue to drive that online business and improve the omnichannel aspect for VS and PINK mainly?

Yes. Thanks, Susan. So I think as you would know, but it's important just to reiterate, the most important thing we've done in the digital business is a project that we went live with in the last few months, which was a replatforming -- a full replatforming of victoriassecret.com. It had been running on systems and hardware that were more than 25 years old. And it served that legacy system, homegrown system, by the way, served the business very, very well for a long time. But it was time to upgrade that platform, which is a big deal obviously in terms of getting that right and doing it well. And again, the business -- the domestic business has been running on that new platform now for a couple of months. So that's the most important thing. It will enable us to pursue a number of customer-facing benefits that we're now moving forward to. And those would be things like buy online, pick up in store. Another foundational element that we're working on now before we roll with buy online, pickup in store and other similar things is we want to make sure that we have appropriate accuracy in our inventory. And obviously, we have that for financial statement purposes, but I'm talking about at the item level at a specific location on a particular day. And with a very broad assortment, with so many choices in the broad business, particularly at Victoria's, that inventory accuracy is critical, which is why we're in 2019 pursuing on RFID initiative and rolling out an RFID initiative for Victoria's Secret. So with the foundation of the new domestic -- what we call the domestic order management system and accurate inventories that are sufficient to make reasonable promises to customers, we will be able to do a lot of things that many other retailers can do today. One of the other things that the new system allows us to do is to have a broader distribution network for Victoria's in the United States, which will allow us to add capacity and have more flexibility with capacity. So that's another benefit that we're getting now. So that's the biggest thing that -- those are the biggest things, I should say, that we've been working on. Bath & Body, as you know, it wasn't implicit in your question, has a terrific online business in addition to Victoria's growing at a very healthy rate. And they're regularly looking at ways to upgrade the customer experience in that part of the business as well. Thanks.

Thanks, Susan.

Your next question is from the line of William Reuter with Bank of America.

I was wondering if you could talk a little bit about the List 4 tariffs at 10%. I think most of your products were included on List 4A, but what the impacts of these would be on a dollar basis for 2019 or how we should think about it on an annual basis going forward.

Yes. So the List 4 effect is included in our guidance. We considered it in our guidance. We are working to offset some of that impact through various migration of production to different countries and discussions with our supplier partners. We haven't given out a number, but again, it's included in our guidance. Importantly, its materiality -- this situation's materiality to our company is not as great as many other retailers. The United States is our #1 country of production given the importance of personal care and beauty in our business. And our -- in terms of our total sourcing activity, China represents less than 20% of our total sourcing activity and has moved down almost 10 percentage points over the last 3 or 4 years based on very deliberate efforts by the sourcing and production teams in our business to make sure that we have a -- continue to have a well-diversified base of supply. So we've got it covered in the guidance and, again, importantly, not as material to us as it is to many other retailers. Thanks.

Thanks, Bill.

Your next question is from Roxanne Meyer with MKM Partners.

My question's on BBW. It's been a healthy and consistent source of comp and operating income growth for you. I'm just wondering, from a rate perspective, how you think about BBW over the next few years as you think about the various puts and takes to the business, whether it's the impact of supply chain and sourcing costs, a shift to direct, which is growing at a very healthy rate but then, on the flip side, the benefits from scale and expense leverage that you may be getting.

Yes. So understand the importance of your question, but as you would imagine, the first thing that we're focused on is dollar growth. As we say around here, "You take dollars to the bank. You don't take percentages to the bank." With that said, your question is a serious question. And Bath & Body has demonstrated over a very long period of time to -- its ability to effectively balance dollar growth and long-term health of the business with profit rate. All that said, do I see that there's a little bit of downside risk to the business or downside pressure to the business due to the factors that you mentioned? There is some. But again, we believe that the growth potential on that business remains very high. And its ability to deliver very healthy growth in profit dollars, EBIT or operating income dollars, we're very confident in its ability to do that given the categories it's in, the very strong and capable leadership team that runs that business, the assets that it has, including very strong store design; compelling merchandise assortments; short lead times; highly capable, highly enthused, dedicated, loyal selling force in stores; a very strong online business, just a lot of assets that, that business has. So is there a little bit of downside on the rate? Yes. Is there lots of opportunity on dollar growth? Absolutely. And I think the business has well demonstrated that or demonstrated that well for a long, long period of time. Thanks.

Thanks, Roxanne.

Your next question is from Dana Telsey with Telsey Advisory Group.

As you think about Victoria's Secret Beauty, any more color in terms of what you're seeing there, what happened with the July launch and what you're seeing in the emerging businesses of PINK beauty? And then on the breakdown of CapEx, I believe the store investments is going to 55% of CapEx from 75%. How do you see that moving forward in the business? And is technology investment or direct investment making up what's being removed from store investment?

Thanks, Dana. So Victoria's Secret Beauty remains a very good business. As you know, Dana, they're in the fine fragrance business, as we would refer to it, and then they got a significant fragrance mist business. Over the last year, 1.5 years, as a general point, they've had very strong results in the mist business. And just -- I'm again speaking about the last year, 1.5 years, and okay results in the fine fragrance business. As we -- with that said, as we look at very recent results -- and they just had their most successful, what they would call, sister launch in fine fragrance over the last few weeks. So Greg and his team recognize the opportunity in the fine fragrance business. As -- you've followed us a long time. As you know, they've got 3 or 4 of the top 20 fine fragrances literally in the industry, which is a terrific place to be. In addition to continued work on the assortment itself, Greg is very focused and team very focused on improving the selling within our stores. And so we've got a number of things going on that we think will move the business in a favorable way and should represent a lot of upside in what is already a very sound business. With respect to the CapEx, you recognize that in the formation of your question, we have pulled back on CapEx for -- store-related CapEx, real estate-related CapEx for Victoria's Secret and international. And as was mentioned in an earlier question, we continue to invest in technology particularly pointed towards the online or digital part of our business. And we are also investing some in distribution and fulfillment assets as well. And so that's tilting the mix a bit from what it had typically been, again, representing some pullback in store-related driven by Victoria's and international just based on current trend, results, performance. But we're trying to maintain, if not increase, our investment in the online digital part of our business and again some work in distribution logistics as well. Thanks.

Thanks, Dana.

Your next question comes from Kate Fitzsimons with RBC Capital Markets.

My question is on sourcing. Just with more volatility in the wake of the trade tensions, and it sounds like you're making some changes on the supplier side, can you speak to how your ability to chase product on the PINK and VS side is evolving into the back half? Is this furthering your need for airfreight? Or just how should we think about the flexibility there? Also, just looking ahead to the fourth quarter, can you just speak to your open-to-buys for holiday?

Sure. So the last part of that question, we're essentially almost fully open for the fourth quarter in terms of open-to-buy. So take that part of it first. And then with respect to speed and agility in the supply chain, it's been -- it's a legacy part of our business in a positive way. It's something that less focused on as long ago as the late '70s and early '80s. And we renewed our work in that area beginning now 7 or 8 years ago, both on the apparel -- the intimate apparel side of the business and in the personal care and beauty side of the business. So it's something we have renewed our capabilities in. And today, we would judge our capabilities in that area in terms of speed and agility in our supply chain as among the best in retailing based on what we know. With respect to the use of airfreight, frankly, substantially everything that we have produced outside the United States is on an airplane, other than some gift and accessory business. And it's because the value in our judgment of speed and agility, the question you're asking about, the economic value of that far outstrips the incremental cost of moving stuff on a boat. And as we like to say around here, "You can't sell it if it's on a boat, by the way." So our agility is good. And our standard model, if you will, with respect to things that are produced outside of the United States is, in fact, to move it by air. So the speed part of the businesses are fundamental, as we see it, and we're in good shape.

Great. Thanks, Kate.

Your next question is from Omar Saad with Evercore ISI.

Stuart, I wanted to ask you about the more targeted promos at VS this fall holiday. I feel like you guys maybe did some of that a couple of years ago with mixed results. Maybe talk about the strategy there. And is it important to kind of get into that point where you have less promos in the back half but stronger comps? Is the targeted promos a key part of that? And then did you mention the trend through the quarter? I don't know if there was a big difference between the months in the VS comp.

Yes. So in terms of targeted versus broad-based promos, Omar, we continue to pursue the right balance between those 2 things. And the considerations in that is if you have a very broad-based promo, then you're essentially discounting the whole assortment, if you will, if it's very broad-based. I'm exaggerating a little bit to make a point. Whereas if you have targeted promos, obviously, you're not discounting large portions of the entire assortment, and you can get more full-price selling on particularly strong choices within the assortment. And the balance point, which you recognize in the question, is that it tends to be that the broader-based promotions drive more consumer response and more traffic in an overall sense. So we're trying to strike that balance. The variable that's different from a year or 2 ago, and this is what makes the business interesting and fun, particularly when you largely figure it out, is that the assortment's different. So you could look at a promotional strategy in isolation and say, "Hey, didn't I try this a few years ago, and it didn't work? So like what are they thinking, right?" I'm again trying to make a point. But the dynamic has to include an evaluation of the strength of the assortment. It all starts with that. And with the work that Amy and John have been doing, we're optimistic that we can get reasonable result without having to do a substantial number of broad-based promotions. All that said, we've got a lot of flexibility there. And we will continue to test and learn and make trade-offs. And we'll be reevaluating the promotional strategy as we move through the fall season to get to the right customer response, get the right traffic, get the right margin dollars to work hard to deliver the results that are embedded in the forecast. The second part of the question was about trends within the months. So June was the strongest of the months, as I recall, and July was the weakest of the months, Omar, in the quarter -- second quarter for Victoria's, yes.

Thanks.

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

You talked earlier about the rebalancing of the price points that Amy is doing within PINK. And I was wondering if there's any similar plans for Victoria's Secret Lingerie as John looked at the assortment there. And then second one is, just as you've sort of put everything on the table, are there any cost opportunities that you've identified that could help drive an improvement in profitability apart from the assortment and revenue initiatives that you're pursuing?

Yes. So with respect to an evaluation of good, better, best pricing and opportunities in the lingerie part of Victoria's, it's one of the most fundamental things that any merchant leader in any retail leadership team would evaluate. And so John has made that assessment for Victoria's Secret Lingerie. And the number of offerings at the better and best price points for Victoria's Secret Lingerie is up meaningfully versus what it had been. And that's based on -- if you've seen the merchandise online or in stores, you would see more sophisticated merchandise with a lot more, we believe, emotional content. And as we talked about at the start of the call, initial response from consumers to those new offerings has been good. The other aspect of what John and Amy have done is to have a clearer demarcation between the Victoria's Secret Lingerie and PINK businesses. Again, PINK is targeted towards a college-aged customer, and lingerie, more typically, somebody that would be postcollege and at higher price points and with a greater degree of sophistication. So that's another aspect of the good, better, best pricing work that both leaders have done to properly segment and position their respective businesses.

Cost opportunities.

There are always, in a big business like ours, cost opportunities. With that said, they come with trade-offs. And the company has worked hard to be efficient over its long history and including at our -- in our record result of 2015 when we had an overall company 18% operating income rate that -- one of the contributors to that was the highly efficient business. With that said, we've had a lot of sales pressure and margin rate pressure in the business. We have taken what I'd call targeted actions to reduce expenses in connection with a lot of the change at Victoria's Secret. In 2016 and 2017, we have -- we took substantial home office cost reductions. And in more recent periods, over the last year to 18 months, we've taken a lot of expense out of the business in terms of variable expenses in selling -- certain selling areas and in marketing as examples. But there's always more that you can do, but it comes with trade-offs. And you've got to be thoughtful about not getting into an ongoing cost-cutting exercise that can hurt the near-term and longer-term prospects for the business. So we're trying to strike the right balance, and we'll continue to monitor that as time progresses. If retail selling trends don't improve, margin trends don't improve at Victoria's Secret, you would expect us to take another hard fundamental look at expenses. And what we're focused on to the greatest extent right now is getting the results at retail in terms of sales and margin. But there are other things that we could look at, but they again come with trade-offs. Thanks.

Thanks, Jamie.

Your final question comes from the line of Michael Binetti with Crédit Suisse.

Stuart, could you -- I guess 2 questions quickly. Could you -- I know we've talked about the outlook for promotions and how you're working on the mix of targeted versus more broad-based. Can you tell us how you thought about the expectations for the promotional environment outside of your business as we head into the fourth quarter? I'm really -- I'm trying to reconcile the guidance for inventories to be up in the mid-teens with the comp items that you baked in for fourth quarter and, I guess, merch margins planned to be down a little bit. But since I know a lot of the year, a lot of the annual earnings happens in the fourth quarter, I'm trying to think about how much room you might have left for yourself given what we've heard so far in second quarter is a fairly volatile outlook for the rest of the year as far as where the peer group's promotional levels will be for the holiday.

Yes. So a couple of thoughts in reaction to your question or in response to your question. The first is, in the lingerie part of Victoria's particularly, the -- what we would call the initial markup or the inherent markup in the goods is substantially greater than what it had been. And so that provides the opportunity for higher-margin rate results and more flexibility or room, if needed, to promote the business. Again, that's not our going-in plan, but as we've talked about, we needed to balance volume with rate. And again, the point I'm trying to register is there's higher markup in the goods in terms of their initial retails and their costs. So that gives us more flexibility than we've had over the last few years. With respect to the promotional environment, there are others in the industry and in our company that have been doing this longer than I have, and I've been doing it for a while. And going into every holiday, there's commentary about how it's going to be more promotional than ever. I am aware that we're in our 10th year of an economic recovery, and there's greater discussion understandably about the potential for a recession. But the truth is, absent a dramatic change in the environment like we saw in '08 and '09, we sell relatively affordable things. They are discretionary, but they're relatively affordable. And I would say, as a close-to-home data point, we look at Bath & Body's results in what folks might say is a promotional retail environment, and they're very strong results. And again, what those come from is a compelling brand position, a compelling merchandise assortment, well executed in the most complete sense. And we think that Victoria's has that opportunity. So there's nothing about the promotional environment per se that I would say is uniquely different versus most typical years. And it's really in our hands to deliver compelling assortments, again, well delivered in stores and online to get to a good result. And we have higher inherent markup to work with. Thanks.

Okay. Can I ask one follow-up on PINK if it...

Go ahead, Michael.

Sure.

Okay. I know you're up on time. But on PINK, Stuart, it seems -- you seem to think some of the issues with the comps there were, excluding swim, I guess, were isolated to single-category product issues. And I think there's been some variability on some of the product categories quarter-to-quarter as I look back over the last year. With your -- with the knowledge you have of where Vicky's has been over the last few years and looking at PINK, how do you isolate that this is contained to single products that we can always try to get right next season versus any metrics that you look at to gauge the longer-term health of the brand and whether there could be a longer-term issue that let you feel like, "This is okay. This really is just category-to-category issue, and we fixed it up. And we're not seeing issues with the brand that should cause a little bit more urgency here?"

Well, it's hard for me to not react to -- clearly on the last part of your question. The urgency, there can be greater urgency on management. So if you don't feel urgency, then we're not communicating well, okay? So we're about as urgent as we...

I shouldn't have said urgency maybe. I'm just -- I'm more curious for the...

Yes. We're about as urgent as we could be. And what the merchant leaders are focused on, John and Amy, is improving the merchandise offerings and then, again, executing those well in terms of all of the aspects of delivering that well to consumers in stores and online. We're aware of the time frame under which the Victoria's segment has had year-on-year declines in sales. It started in 2016, so this has been a multiyear situation. With that said, we think that the assets that the business has in terms of brand awareness, brand regard, footfall in stores, visits online, sourcing and logistics capabilities, strong management certainly on an overall basis, that there's a lot of assets that this business has that, when well led and executed, we believe we're going to make substantial progress this fall and that there's a lot of opportunity for this business over the next several years. So -- and we're pursuing all that, trust me, with a lot of urgency. Thanks.

Thanks, everyone. And that concludes our call today. Thank you for your continuing interest in L Brands.

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