Good morning. My name is Catherine, and I will be your conference operator today. At this time, I would like to welcome you to the L Brands' Fourth Quarter 2020 Earnings Conference Call. Please be advised that today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Ms. Amie Preston, Senior Vice President, Investor Relations and company affairs for L Brands. You may begin.

Thanks. Good morning, everyone, and welcome to L Brands' fourth quarter earnings conference call for the period ending January 30, 2021. As a matter of formality, I need to remind you that any forward-looking statements we may make on our call today are subject to our safe harbor statement found in our SEC filings and in our press releases. Joining me on the call today are Andrew Meslow, CEO of L Brands and Bath & Body Works; Martin Waters, CEO of Victoria's Secret; and Stuart Burgdoerfer, CFO of L Brands. All results we've discussed on the call today are adjusted results and exclude the special items described in our press release. Thanks, and I'll turn the call over to Andrew.

Thank you, Amie. And good morning, everyone. As we reported last night, we delivered record results in the fourth quarter, and we could not have done so without the hard work and dedication of our whole team of associates and partners. We'd like to express our deep appreciation for their continued dedication and efforts. Before we take your questions this morning, I thought it would be appropriate to take a few minutes to reflect on the year we just completed, which presented many challenges but, at the same time, yielded so many accomplishments in our business. To highlight just a few of these accomplishments for L Brands in total: we led with our values and an emphasis on safety so we could be confident in our decisions and actions to support associates customers and our business. We shifted how we ran the business and, thanks the technology, didn't miss a beat in managing the calendar and processes that drive our businesses each day. We created ways to navigate the pandemic and support our associates and partners to ensure we could continue to deliver results. We took significant actions to increase liquidity and ended the year with $3.9 billion in cash and delivered $1.8 billion in free cash flow. We restructured the organization to prepare us to operate as 2 separate businesses go forward. We successfully spread business across the fall season with sales volume and margin rates that outpaced expectations. While the above comments reflect what we did tactically, it's also important to reflect on how we got there, particularly in a year where we saw a substantial social unrest and political divisiveness. The leadership of the business focused on advancing a healthy, high-performance culture, including efforts around diversity, equity and inclusion for ourselves, our business and our communities. In…

Thanks, Andrew, and good morning, everyone. First, let me say how excited I am to be joining you this morning and for the opportunity that I have to lead the Victoria's Secret business. The Victoria's Secret team, led by Stuart, has accomplished a remarkable turnaround in the last 6 months. In the full season, we delivered about a $400 million or 300% increase in operating income at a profit rate of 15% of sales. And that's a result of improved merchandise assortments, more disciplined inventory management, better management of promotions, effective selling execution online and in stores and, of course, the positive impact of our profit improvement plan. While much has already been accomplished, I'm highly energized by the opportunities that we have in front of us to reposition and grow this iconic brand as a stand-alone business. Thanks, and I'll turn it over to Amie.

Thanks, Martin. That concludes our prepared comments. At this time, we'd be happy to take any questions you might have. We are all in different locations today. So I'm going to do my best to direct the questions to the right folks. [Operator Instructions] Thanks, and I'll turn it back over to Catherine.

[Operator Instructions] The first question is coming from Simeon Siegel, BMO Capital Markets.

Big congrats on such a nice way to cap the year. So congrats. Andrew, soaps and sanitizers aside, can you speak to any changes you observed in how your customers shop during the pandemic, what you think proves longer lasting? Maybe just help us think through characterizing the growth of new customers versus higher frequency of shop versus higher AUR?

Thanks, Simeon. Andrew, obviously.

Yes. Thank you, Simeon, for the question. So on your first part of the question, in terms of growth outside of soaps and sanitizers, I think it's just important to remind everyone, and we've said it in the prepared remarks in both Q3 and Q4. Soaps and sanitizer was a significant growth driver for the business in 2020, really the whole year. But as we called out, we saw about 2/3 of the growth come from outside of soaps and sanitizers. And as we've said on prior calls, really, the biggest trend within that 2/3 has been in our home fragrance business. As we've seen the customer, clearly, he or she is spending more time at home and spending more attention on making their home a comfortable place to do business, schooling, et cetera. We've seen, again, continued strong growth there. But importantly, on the year, we did see strong double-digit comp growth in all of our categories. So again, a very balanced performance with the exception, as you mentioned, of soaps and sanitizers that really experienced outsized growth across the entire time frame. When you think -- when we think about customer behavior in general, we did see that our customer spending across all categories and across both channels was up significantly year-over-year. From a total number of customers, because we had stores closed for about 90 days in the first half of the year and because the store customer -- store-only customer at the beginning of the year represented a little over 3/4 of our total customers. That did mean that we saw a decline in number of customers who shopped in stores for fiscal 2020, but we were able to almost fully offset that by the increase that we saw in our direct customers and in our dual-channel customers. So while we finished 2020 with a slight decline in the total number of customers, we did see customer engagement metrics improved substantially. So spending by all customers up over 20% and, importantly, strong growth in both direct and dual customers. And as a reminder, dual customer -- dual-channel customers spend on order of magnitude more than 3x a single channel customer. And then the last piece I would emphasize is that, again, we saw strong cross-category growth in customers, meaning number of customers who shop multiple categories within the business as opposed to just 1. And as we saw that strong growth really led by customers engaging in soaps and sanitizers, we saw that spending also increased substantially. So hopefully, that helps.

Great. Thanks, Simeon.

The next question is coming from Lorraine Hutchinson, Bank of America.

Andrew, I was hoping to get your perspective on longer-term -- on the longer-term outlook for Bath & Body Works margins. If we use 2019 as a base, can you talk through the puts and takes and where you see the opportunity for margins to shake out post-2020 and into the coming 2 to 3 years?

Lorraine, thanks for the question. So obviously, we went into a little bit of detail in our prepared remarks last evening. So important to recognize that 2020 was definitely an outlier year in terms of the operating margin results that we achieved at $28.5 million, which, as you're pointing out, was up substantially to even 2018 and 2019, which were very good years for the business, up over 500 basis points. When we look at that operating margin improvement, about half of that improvement came from significant gains in merchandise margin rates. And again, those merchandise margin rate improvements were achieved by significantly reducing promotional activity within the year. And that promotional activity was against all of our different vehicles. So we saw less clearance selling, more full price selling. We saw fewer days of power traffic-driving promotions. We were able to actually take promotion on pricing, up even on essentially flat ticket pricing. And we had fewer shop-wide discounts than we had offered historically through e-mail or direct mail. So as we think about that level of improvement, our assumption is that we will have to give some of that improvement that we saw in fiscal 2020 back as we move beyond the snapback, if you will. The stores got reopened and the tremendous growth that we saw in our direct channel demand up over 100% for the year. So as we begin to lap some of that activity, we do expect that some of that merchandise margin gain, we will have to give back. But as you know and we've talked about on many calls in the past, we are constantly doing read-and-react testing to understand what our customers are responding to in terms of promotions, what it's required to drive both traffic as well as customer acquisition…

Thanks, Lorraine.

The next question is coming from Ike Boruchow of Wells Fargo.

I'm not sure this question would be for -- maybe Stuart, if he's on, but just 2 quick ones on the Victoria's Secret business. I guess, I'm not sure how much color you could give us. But just curious if -- could you give us some color on if there is -- if and when there is a potential sale of the business, how to think about tax leakage in that scenario? And then again, I know you're not giving guidance on Vickie's, but given the trajectory, it seems like the business is scaling pretty quickly. It seems like EBITDA for that brand could approach $1 billion, potentially, this year. Just any color on what your expectations are for go forward profitability would be helpful.

Thanks, Ike. Stuart, yes?

Thank you. So as you point out in your question, I -- we're pursuing a dual path approach to the separation of Victoria's Secret. Dual path, meaning looking at a spin option where Victoria's would become its own public company. And separately, a sale option where we would sell it to a third-party. And I think as you mentioned in your question, a sales scenario, very likely to have a significant tax cost to it. Whereas a spin-off done in the appropriate way, which would certainly be our intent, would be a tax-free transaction. So it's one of many considerations. But obviously, the tax leakage could be significant in the sales scenario. And that with a range of other factors will be considered by the Board as we work through this process, we'll get the right advice from legal and banking council and so on. But the spin option is a tax-free option where we believe it can be accomplished in that way. And that would be one of the advantages of a spin option. So that would be our perspective on that. And then, Ike, as we commented on in our prepared comments that got circulated in terms of the profitability of VS NewCo, what we mentioned and what I believe, Martin believes, we believe, is that the business can be managed well and deliver meaningful growth. In an operating income rate range, an EBIT range of between 10% and 15%. And as many of you have recognized, we're basically in that range at this point with the meaningful progress that we made in the back half of the year. So this should be a 10% to 15% business. We'll obviously shift more to growth as we move forward. And the dollarization of that is meaningful, whether it's on an EBIT basis or an EBITDA basis. And we're excited about the growth of the business.

Thanks, Ike.

The next question is coming from Roxanne Meyer, MKM Partners.

Thanks and congratulations on your strong results for the quarter and the year. My question is around BBW store growth strategy, specifically on international. I'm just -- I'm curious what the long-term strategy is there and as part of that, any thoughts around developing an own store strategy versus franchise? And then if you could, I'm also curious to hear, I know that almost half of your U.S. stores are off mall. Are there certain characteristics of your top-performing off-mall locations or formats that you can point to?

Thanks, Roxanne. Andrew?

Roxanne, thanks for the question. So on the first part of your question regarding international. International, as we called out in our remarks, had a strong year. International, in many ways, mirrored the results we saw in North America in terms of challenging business in the first quarter and first half of the year with store closures. But our international partners, franchise partners did a very, very good job of building substantially their digital capabilities and capacity through 2020, which led to closing the year in a very strong way for both Q4 and the year, growing sales and operating income nicely. And as you saw in our materials, we're also planning, our partners are very bullish on the business, so we are planning further growth in 2021 of 50 to 75 stores in primarily existing markets that our franchise partners already operate strongly in. And so they are bullish. We are bullish on the continued opportunity for growth there. To your specific question around are we contemplating or would we contemplate moving from the franchise model to an own-store model, I think the short answer on that is right now, no. We are very comfortable and pleased with the model that we have in place, the results that we're getting, the relationships we have with our partners. I'll never say never, but again, not part of our growth strategy here in the next several years. And to the second part of your question, again, we called out specifically in our prepared remarks that with the tremendous growth of digital and with the continued change in our portfolio to focus on off-mall stores, we're down to only about 35% of our revenue coming from mall stores. So obviously, the other almost 2/3 coming from digital and off-mall. Your question around…

Thanks, Roxanne.

Our next question is coming from Matthew Boss, JPMorgan.

Congrats on another great print. So 2-part question. You cited you were pleased with February top line. Could you just elaborate on trends that you've seen post holiday, maybe by concept? And then Stuart, net debt, I believe, is at a 10-year low. How would you prioritize capital allocation opportunities following the VS transaction?

Okay. Thanks, Matt. So Andrew, do you want to start with February?

Sure. So as we mentioned in the remarks, February is coming out. We still have a few days left in the fiscal month, but it's certainly trending to be a very solid month for Bath & Body Works. Frankly, performance that is in line to slightly better than what we achieved in fourth quarter and, therefore, at the higher end of what we were expecting as we came into the quarter. But as we mentioned, we've already reflected that performance of February in our current guidance. In terms of a little bit more color around February and even late January as we moved out of semi-annual sale, which takes up our first couple of weeks of January. So looking at essentially the last 6 weeks, we've been very pleased with the performance of our new spring product, both in the theme floorset that was focused on Valentine's Day, which was the last couple of weeks of January and the first couple of weeks of February as well as we've moved past Valentine's day now are tropical based floorset and theme in stores and online has also been performing well. So again, good early reads on our spring merchandise and strategies overall.

Great, thanks. And then Stuart, over to you.

You want Martin on Feb?

Or Martin?

Yes. Martin, do you want to provide a comment on Feb?

Yes. Sure. Happy to. Very similar to what Andrew said. We're pleased with February, very solid results with the 90% of the month that's in at or above what we saw in Q4 overall. And that's driven by significantly higher AUR, significantly higher merchandise margin rates, less promotionality and a really good response to our V day collection. We had a very good V day period. And overall, the response to spring merchandise have been very positive. So we're upbeat and we're bullish.

Thanks, Martin. And Stuart, question on debt?

Yes. So Matt, as you point out, we've generated a lot of cash, and we're holding a lot of cash in the business, and it was an intensive effort, including support from lots of people, including our partners and then a strong operating result. But we are -- we ended the year with $3.9 billion of cash. And so as we think about where we are and as we think about the next roundly 6 months, 5 or 6 months with respect to the separation, we are evaluating the subject that you asked about, which is what are you going to do with all this money and how do you think about it? We haven't made any decisions. We are getting outside advice. We've retained Goldman and JPMorgan to help us with the separation, and they're giving us their perspectives on the subject you asked about as well. So we're evaluating options. The Board, obviously, will review thinking and will approve anything that we do. But in answer to your question, what are we thinking most about? We're thinking about reducing debt. We're thinking about buying stock. We do believe in the opportunity to drive appreciation in the stock, including through a re-rating of Bath & Body Works. And we're also thinking about resuming a dividend. But these are all things that we're just thinking about. No decisions have been made. Obviously, when we make decisions, we'll communicate those. And we're thinking about the timing of that evaluation and the timing of those decisions in terms of before or after or multi-step or single step with respect to the separation. So it's a big subject. The good news is we're in a good place. So we've accumulated a lot of cash. The maturity profile, as you know, is very healthy. We took a number of actions this year to improve that maturity profile, so we start the subject in a very sound position. But again, we believe it appropriate to reduce debt. There is absolutely an opportunity, we think, with respect to the repurchase of shares. And the company paid a dividend for a long period of time, and that is an important form of return for shareholders in a company like this. So we're evaluating all of it but have not made any decisions.

Thanks, Stuart.

The next question is coming from Susan Anderson of B Riley.

Let me offer my congrats on a nice end to the year. I guess I wanted to follow-up on the PINK business. I think in the prepared commentary, you talked about 80% comp growth in the logo shop. I'm curious what percent of apparel is logo now and then also how the other apparel performed?

Martin or Stuart?

I'm happy to jump in there. Thanks for the question, Susan. So yes, we're pretty pleased with the performance of the PINK business. I think the way to think about PINK is that approaching half of the business is in the intimates category. And about the other half of the business, broadly, round numbers is in the Apparel segment, and about half of that half in Apparel is Logo. And that's where we saw significant growth. So hopefully, that helps you dimension the business overall.

Thanks, Susan.

The next question is coming from Kimberly Greenberger, Morgan Stanley.

Great. I wanted to ask 2 quick follow-up questions. One, on the sale versus the spin debate. Is there a price for the Victoria's Secret business that makes a sale, even with the tax consequences, more attractive than a spin? And then just a follow-up on the debt question. Do you have a sort of targeted leverage ratio for BBW and/or Victoria's Secret that you'd like to get to? And any thoughts on when we might see some action on debt paydown?

Thanks. That is Stuart.

So Kimberly, in terms of like what's the threshold price that might tilt the scale sale versus spin, as you appreciate, there's a lot of judgment in that question. And that's a judgment that the Board will make. So it wouldn't be appropriate to kind of speculate on what the numerical threshold would be. We could all throw numbers against the wall. And those numbers -- what I will say is those numbers are substantially greater than they were a year ago. So I think we all appreciate that based on the performance of the business. But the judgment involved in that is important and is not based on a single factor. But obviously, valuation and cash generation are important considerations as we evaluate the plus minus. But again, I think as you appreciate the -- we could all do math and speculate, but it's more involved in that. And the good news is, as we think about what the valuation of the business may be in the public markets, again, we can all do that math, and it certainly implies a bigger numbers with respect to what would be required to tilt the scale, if you will. So it's a good question, an important question but not one that we'll throw a number out on a call this morning. And again, the Board will make that determination. With respect to leverage, what we would say is we're doing the capital structure work. We do believe that a leverage in the 2.5% to 3% range on a lease-adjusted basis feels like a good target, but we're continuing to refine our views on that. And then with respect to when might we see some action, as I mentioned in the comments with respect to Matt's question, we're looking at the subjects. Important judgment to make about timing of actions and a 2-step thing or a 1-step thing and in terms of decisions and actions, and we're evaluating those things. And the Board, again, will make those determinations. But nothing to announce today.

Thanks, Kimberly.

The next question is coming from Omar Saad of Evercore.

A couple of quick follow-ups on Victoria's Secret, but great margin performance there. Was there a big lift from the shift of the U.K. stores into the JV and the other key drivers behind that margin transformation. I'm sure promotions -- reduced promotions is part of it? And maybe also with e-com. Are you seeing an inflection in e-com profitability in Victoria's Secret? And then Martin, maybe you could touch on you've been at the company a long time. You know the brand really well. Maybe you could touch on where you see the Victoria's Secret brands position today and your kind of ideas for the longer-term brand strategy.

Thanks, Omar. Stuart, do you want to take that first part?

Yes. So with respect to the back half, Omar and, more particularly, even the fourth quarter, the results related to the U.K. was not a major driver of the profit improvement for the quarter year-on-year. We are very pleased with what we're doing there go forward and how it will improve the operating results of the business for us or the recorded result of the business for us, and we think Next is a great partner. But in terms of did it make a big impact financially year-on-year in the fourth quarter, the answer to that is no. But again, we feel good about what we did. With respect to the digital business and did it improve its profit rate meaningfully year-on-year, the answer to that is it did. And that was driven by the improvement in merchandise margin rates that we saw across the business. And so that effect was significant in the online business, and it's a very profitable business and a good business. And in addition to growing top line, the profit rate in the business improved meaningfully, again, driven by the improvement in the merchandise margin rate.

Thanks, Stuart. And Martin, do you want to talk about how you're thinking about brand positioning?

Yes. Be delighted to. Thanks so much for the questian, Omar. So in taking on this role, I think about having 4 key priorities. So firstly, it's about establishing a happy and healthy culture within the business. Secondly, it's about really improving our product offer, focusing on the architecture of our good, better, best pricing and being really sharp on opening price points. Thirdly, it's about leaning into digital so that we adop a digital-first mentality, and we expect it to be probably 50% of our business going forward. And then fourthly and very importantly, it's about pacing into the brand repositioning work. And I couldn't be more delighted to be leading the work to refresh the brand positioning to make it more relevant, to make it more inclusive, to make it more consistent with the attitude and lifestyle of the modern woman. And so we've listened to her, and we've carefully decided to make some change. And that change is summarized by her asking us to move away from telling her what we think is sexy and what we think she should wear and how we think she should look, to being there to help her craft the story that she wants to tell. So our job is to support her in whatever way that she needs us to. And we know that she's rooting for us. The engagement that we saw in the fourth quarter was up significantly to previous years, both in social channels and obviously, in digital commerce generally. And we're winning her back by celebrating her and inspiring her and supporting her to show up however she wants to show up. So you will see significant change in the way that the brand is presented. And rather than expecting a big reveal or a big relaunch of the brand, this will -- the change in the positioning that I've just described will show up in everything that we do on a day-to-day basis. And that means, whether it be the imagery when you turn on the screen on our website, on your phone, on the e-mail that you get every day, in our social media, in the magalog that arrives with The Swim on Monday, every single interaction that we have with the consumer either polishes or tarnishes the brand. And we are determined that we will have a polish mentality in everything that we do from here onwards. So hopefully, that helps give some color. And I'm happy to talk more about it privately if people want to hear more.

Thanks, Omar.

The next question is coming from Michael Binetti of Crédit Suisse.

Congrats on a nice holiday. I guess I'd like to ask about the BBW digital customer. How many of the new customers that you referenced earlier in the digital channel are known to you, are in the database from the stores that may move back to the store channel as it reopens versus those that are new to you in the digital channel? And then if I could just reflect back on some of Stuart's comments on the e-commerce margin. I know you said a lot of it was the merch margin improvement. Maybe any thoughts you could give us on some of the other lines below merch margin in that channel so we can think about how the profitability and leverage lines are looking aside from the merch margin?

Thanks. Andrew?

Yes. So thanks for the question, Michael. In terms of the growth we saw within Bath & Body Works digital, about half of the customers that were new to the channel were also new to the brand overall, so had not made any Bath & Body Works purchase either online or in stores for the prior 2 years. And about the other half were new to the channel, meaning they were making their first direct purchase but had historically made a purchase in stores. And again, I'm speaking to the full year there. And then importantly, as I mentioned, specifically on that second group that would now be considered a dual channel customer, the spending associated with those customers relative to the spending of a customer who shops only online or only in stores is, order of magnitude, 3x greater. So we're very excited about that growth in dual-channel customers, and we'll work very hard to both retain those customers and to continue to drive their behavior go forward.

Thanks, Andrew. And Stuart, any more color on direct operating margins?

Honestly, not really. And it's not because I don't want to provide it or I don't have it in front of me, because I do. But the big driver is what we commented on, which is the merchandise margin rate improved meaningfully, materially, year-on-year to what we would describe as a healthy rate. And the profit rate or the EBIT rate within the e-comm channel, the digital channel for DSA Newco is very healthy and wouldn't offer a comment beyond that.

Thanks, Michael. [Operator Instructions]

The next question is coming from Kate Fitzsimons, RBC Capital Markets.

Congrats on the results. I guess my question is on Victoria's Secret lingerie, AURs in the 30s, PINK comping in the 80s but, overall, branded comps down 3%, as you guys are tightly controlling the unit. Obviously, I know your focus is on profitability recovery, but we will be lapping some pretty significant inventory declines in that brand. So just curious how you're approaching balancing the return to growth with profitability as we approach rebuilding on the inventory.

Martin, do you want to take that one?

Sure. Happy to. Thanks for the question, Kate. So I think you characterized it rightly that we've had significant AUR increases. You probably noticed, we've had significantly less promotionality. And the reason for that is we've got better merchandise. So if you've got better stuff and you've got inventories managed more tightly, then good things happen to the margin. And we saw that particularly in January where we didn't need to lap the extensive SAS from prior year, and we didn't need to lap the same number of panty parties, et cetera, et cetera. So we're seeing just a much healthier business right now that's less dependent on promotions and more dependent on talking about new and back and free rather than off. We're also seeing very good momentum in PINK as well as lingerie and in beauty. So all in all, we feel like we're on a good track. And I think the word you used is balance, and that's how I think about it. That we -- while we want to ensure that the quality of earnings is good and that the profitability of the sales is positive, at the same time, we want to drive volume. So we want to be the market leader. We want to have deep shares in all of the core categories in which we operate. So we're trying to keep a very careful balance on the tool to ensure that we're getting the right level of promotional support to drive volume and, at the same time, hang on to the terrific gains that we've made already. And the way I would say it is that for the first half of the year, we expect that trend to continue. Because we're up against a difficult period from 2020 last year. And as we move towards the back half of the year, well, that will ameliorate a little bit because we were already starting to see significant improvement in performance. So hopefully, that gives you a bit more color, Kate.

Thanks, Martin.

The next question is coming from Paul Lejuez of Citi Research.

I think you mentioned 35% of BBW sales are Mall. Curious if you could give that number for VS? And also curious on BBW side, what is the absolute level of sales productivity look like in mall stores versus off-mall stores after that big outperformance that you mentioned in off-mall stores this year?

Okay. Let's start with Andrew and then go to Stuart.

Paul, thanks for the question. So your question for Bath & Body Works around sales productivity in off-mall locations versus mall locations with the outperformance. So if we were talking at this time last year, the reality is on a selling sales per foot basis, mall stores have historically outperformed off-mall stores by a relatively meaningful margin. But with the performance that we saw in 2020 that I described where the comp was essentially double in the off-mall locations versus mall, those numbers are now closer. But mall stores on an absolute dollars per foot basis do still outperform our off-mall locations. But as mentioned, our operating costs in off-mall locations are lower than our operating costs in mall locations. Hopefully, that helps.

Thanks. And Stuart?

Yes. So Paul, as we mentioned, we're in the 40% range, digital versus store going to 50% or 50-plus. And then within store, it's about 80%-20% mall, non-mall, 80%-20%. And the 20% is comprised largely of street locations, not exclusively, but largely street locations.

Okay. Thanks, Paul.

The next question is coming from Janine Stichter of Jefferies.

Just a quick one on Bath & Body Works. I wanted to ask about the direct channel, if you had a sense of how much some of the fulfillment and shipping backlogs you saw constrained sales? And then any sense of a time line or a time frame for improvement there?

Janine, thanks for the question. So Bath & Body Works had an incredible year. Obviously, sales up over 100%. Fourth quarter sales growth was lower at about 75%. Certainly, part of the reason that, that sales growth moderated was what you're poking on in terms of some of the constraints we saw specifically with shippers, UPS, Fedex, et cetera, and their ability to handle the total industry level growth. But it's also important to remember that fourth quarter and specifically, the holiday time frame within fourth quarter is such a steep slope for the Bath & Body Works online business that putting up even that 75% growth in Q4 was a remarkable achievement and significantly above our expectations. So to the second part of your question around how are we thinking about the growth go forward, we're continuing to make big investments into our overall fulfillment capacity. We saw remarkable progress there. 2020 versus 2019 fulfillment capacity, up over 50%. But we recognize that's an area that we need to continue to make investments in go forward. And so short answer, I do not see shipping or fulfillment constraints as an impediment to the business growth as we move into 2021 and beyond.

Thanks, Andrew.

The next question is coming from Gaby Carbone.

Congratulations on a great quarter. I was wondering if you can give a bit -- a little bit more detail around how you see e-commerce trends playing out at Bath & Body Works versus stores channel kind of when excluding the closed stores from last year?

Thanks, Gaby. Yes. So again, what we saw was remarkable growth online, what we would probably have viewed as several years' worth of growth all in 1 year in that channel. And so certainly, I think it's only natural as we approach 2021 to be more conservative in terms of what we assume will be growth in that channel, specifically for this year. And we won't know the answer to some of those questions until we start to lap the time frame from a year ago in a couple of weeks when stores were closed and direct was our only channel operating. So we'll certainly be smarter over the next 90 to 180 days, but a lot to still learn. As we think about the business long term, though. So again, prior to 2020, the direct penetration to the total business was in the high teens percent, and we got all the way to 31% of the business in 2020. And we view that over time, that number should grow to the mid- to high 30s, perhaps as high as 40% over the next several years. But importantly, our goal is to continue to have strong growth in the direct channel but also to maintain a strong, vibrant, growing store environment. That is still the ultimate expression of the Bath & Body Works brand in terms of being able to really stand for our tremendous fragrance experience and the interaction that we have between our associates and our customers, which we believe is such a strong part of the brand.

Great. Thanks, Andrew.

The next question is coming from Dana Telsey of Telsey Advisory Group.

Nice to see the progress. As you think about the 30 to 50 store closures that you talked about for Victoria's secret for 2021, is that the normalized rate that you expect of store closures going forward post the 241 this year? And then just following up on Victoria's Secret, how do you see the AUR journey progressing by category? How should it differ?

Thanks, Dana. Martin, do you want to take that one?

Yes. Sure. Thanks, Dana, for the question. So as you know, we closed 250 stores. Took that opportunity during the pandemic. We think that it's reasonable to expect, for the next year, 30 to 50 stores, and we'll continue to review the fleet on a month-to-month basis. Reminder, about 96% of our fleet is cash flow positive. So we don't feel like there's a burning platform to close hundreds of stores. And implied in your question is that we might be 30 to 50 stores a year forever and ever, amen, and I don't think that's so. So I would take it 1 year at a time. Expect 30 to 50, and we'll continue to update guidance as we go. As it relates to AUR growth, we have seen pretty consistent AUR growth across the categories. We saw particularly good growth in the sleep and lounge categories, good categories during COVID time, stay-at-home time, but also in our core lingerie. So I don't think there's a big difference there. Similarly, in PINK, good AUR growth. I think Beauty is probably the 1 category where there has been less to go out on the AUR growth. But overall, we should expect a continuation of the trend that you've seen in Q4, at least through the spring season.

Thanks, Martin. 2 more questions.

The next question is coming from Oliver Chen of Cowen.

Martin, regarding Victoria's Secret, as you think about marketing and this changing nature around beauty, what demographics do you see as the most opportunities there in new versus existing customers? And then your comments on good, better, best. Are they where you want them to be? It sounds like that's the important part of the strategy.

Thanks. Martin?

Yes. Happy to take that, Oliver. So I think the part of our brand that has the most clearly defined demographic targeting is PINK, where clearly, we're going after the Gen Z consumer, very important part of that brand. And we know that our messaging around diversity, equity inclusion, sustainability is really resonating with that consumer. So that's the most targeted. I think as it relates to Victoria's, we have a pretty broad church, don't we? And actually, we want that church to be even broader than it has been. If anything, we've been too specific in our target. And we think that as part of the brand narrative that I described earlier that we should be appealing to more women, more of the time for more stages of their life. And that means that we'll be there for her in significantly more ways than we have been historically, whether that be through swim or whether it be through vacation or whatever it may be, different life stages. So I would expect us to be less focused on a specific demographic target and more focused on being broadly inclusive of all women of all shapes and sizes and colors and ethnicities and genders and areas of interest. As it relates to good, better, best, I think we are critical of ourselves of saying that we haven't always had that balance right. And that has led to some opportunity for competitors to attack us in our core space. And the fundamentals of merchandising take us back to those core principles. Make sure you have really good opening price points in all of the key threshold categories. Make sure that you're able to represent the brand in each of the good, better, best areas. And so I think the way we showed up in fall was a significant improvement on where we've been year-over-year or credit to the team. And as we brought new players into our team with different merchandising experience, they have observations about areas where we can see even further improvement during the fall and into next year's season. So hopefully, that gives you a bit more color of how we're thinking about it.

Thanks, Oliver. One last question.

And our last question is coming from Janet Kloppenburg, JJK Research Associates.

Congratulations on the year. Congratulations to Stuart. Congratulations to Martin. All good things. For Andrew, I was wondering if -- as we think about quarterly sales for BBW this year and the very challenging comparisons you're up against, should we think that there'll be pressure in 2, 3 and 4? Or could there be some opportunity during some of those periods? How would you want us to think about that? And for Stuart or for Martin, I was wondering about the 10% to 15% operating margin goal for Victoria's Secret as compared to historical peaks. And if you're thinking that there is some competition complexion that's more difficult or lower store productivity that may be limiting the upside opportunity, albeit still a great margin, but I'm just wondering about returning to historical levels.

Thanks, Janet. Andrew?

Janet, so as your question implied, we're obviously up against some incredible record performances as we move into Q2 and even more so in Q3. But as we said, we're really only providing guidance at this point for Q1, where we do see opportunity for meaningful sales growth over last year where our stores were closed for about half the quarter. And then as I mentioned earlier, we're really need -- going to need to get a handle on what level of stores performance do we see as we lap that closure period and really looking at 2-year results, meaning, 2021, back towards 2019 results and then similarly understanding how does direct perform up against those incredible results. So too early to speculate at this point what that will mean for Q2 and beyond.

Thanks. And Martin, do you want to take the question about VS operating margin?

Yes. Sure, happy to. We don't see that there's a cap on the -- on our earnings at all. Far from it. However, we do see that we want to leave room in our performance for reinvestment in the business, and we have a couple of specific areas. We want to make sure that in our digital business that we're the best that we can be both in fulfillment and in terms of user experience. And we spent quite a lot of time over the last several years replatforming that business to get the fundamentals right. And now we're in a position to offer a much better experience. Similarly in those stores that we have out there, some of them will need some love over time. And so we want to put ourselves in a position where we can deliver the best possible brand experience and the quality of earnings at the same time. And that's what's really behind the thinking of a 10% to 15% rate.

Thanks, Janet. That concludes our call today. Thanks for your continuing interest in our brands.

This will conclude today's conference. All parties may disconnect at this time.