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L Brands Inc (NYSE:LB)
Q2 2018 Earnings Conference Call
Aug. 23, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Shelby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the L Brands Second Quarter 2018 Earnings Conference Call. I will now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer for L Brands. Please go ahead.

Amie Preston -- Chief Investor Relations Officer

Thank you. Good morning, everyone, and welcome to L Brands' Second Quarter Earnings Conference Call for the period ending Saturday, August 4, 2018. 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 statements found in our SEC filings. Our second quarter earnings release, additional commentary and our earnings presentation are available on our website, www.lb.com

Stuart Burgdoerfer, EVP and CFO; Denise Landman, CEO of PINK; Jan Singer, CEO of Victoria's Secret Lingerie; Greg Unis, CEO of Victoria's Secret Beauty; Nick Coe, CEO, Bath & Body Works; and Martin Waters, CEO of International, are all joining us today.

As you know, 2017 was a 53-week year. All of the sales dollars, margin and operating income results discussed in this commentary are on a reported basis. For the quarter ending August 4, 2018, versus July 19, 2017. Comparable sales are on a comparable calendar period. For the quarter ending August 4, 2018 versus August 5, 2017.

Thanks. And now, I'll turn it over to Stuart.

Stuart Burgdoerfer -- EVP & CFO

Thanks, Amie. And good morning, everyone. Our second quarter earnings per share of $0.36 exceeded our initial earnings guidance of $0.30 to $0.35 and benefited by about $0.02 from a favorable tax rate. Absent the impact of the lower-than-forecasted tax rate, we delivered an earnings per share result toward the higher end of our range as strong performance at Bath & Body Works and Victoria's Secret Beauty offset weak results at PINK and Victoria's Secret Lingerie. We're not satisfied with this result and are very focused on improving performance at Victoria's Secret. As detailed in our commentary released yesterday afternoon, we are reducing our earnings forecast for the year to $2.45 per share to $2.70 per share from the previous $2.70 to $3 principally driven by a deceleration in PINK. Our guidance includes identified expense reductions, as well as the previously announced investment in incremental wages and benefits for our hourly workforce of approximately $100 million.

With that, I'll turn the discussion over to Denise.

Denise Landman -- CEO

Thank you, Stuart. Turning to PINK, comps decreased in the mid-single digit range for the second quarter. We saw declines in some segments of the lingerie and loungewear business. Swim, which we are exiting, continues to negatively impact performance by two comp points in the quarter. Total merchandise margins were also unfavorable. Comps began moderating toward the end of Q2 with the introduction of the new floorset enabling an explosive PINK Friday event. Although we have seen benefits from emerging businesses such as sport bras and apparel, outerwear and embellished product, the lounge fleece business has been particularly soft. The back-to-school floorset represents an important time frame for taking critical reads of all segments of the business, enabling us to leverage our speed and agility models to make rapid adjustments to our go-forward assortment.

In closing, we shared a decision last night that I plan to retire at the end of the year. This is not an easy decision, but I believe it's the right thing for me and part of my personal journey to spend more time with my family. I feel incredibly fortunate to have been part of the PINK brand since its inception and L Brands for nearly 20 years. It's been a privilege to lead and be surrounded by such incredible talent, thinking and creativity, it inspires me every day.

I'm pleased to share that the organization's commitment to PINK remain strong and that Amy Hauk, BBW President of Merchandising and Brand Development, will join PINK as CEO October 1st. Amy is an experienced merchant and well positioned to lead PINK. With BBW for nearly a decade, Amy has deep roots and a strong understanding of our enterprise. I have great respect for Amy, and I know, you will be in good hands as well as the PINK organization. Thank you, and I'll turn it over to Jan.

Jan Singer -- Chief Executive Officer

Thanks, Denise. As you read in the pre-circulated materials, we have more to do to deliver long-term growth and profitability. I remain confident as what's new in the assortment is what's working and we are very focused on leveraging these learnings to accelerate our progress going forward. We see signs of progress in Illusions, one of our highest-AUR constructed bras and it's margin accretive. It's a bra with benefits balanced with fashion and it continues to meet and beat plan. T-shirt bra also continues to see double-digit increases and building in sales on fewer frames and after three price increases. Total panty sales are up mid single digits and positive for the third consecutive quarter, speed, agility and fashion are fueling that book of business. And the key adjacent categories, we've added back like sleep are seeing growth and are critical to creating new loyals as these categories flow more frequently and attached to bras. Again, while we've made progress in critical spaces, we still have more to do to close the gap created with changes taken in 2016, particularly the gap in key franchises and building back high value dual channel customers. Thank you for joining us this morning. I'm handing it over now to Greg Unis.

Greg Unis -- CEO of Victoria's Secret Beauty

Thank you, Jan. As you read in our prepared remarks, the Beauty business saw strong second quarter performance in sales and margin with comps in the high-teens range, coming from both stores and digital. Q2 marked our fifth consecutive quarter of positive comps. Throughout the quarter, we saw strong growth from our declared priorities. Specifically, we drove growth through fashion, fueling double-digit growth in our Mist Collection category and also accessories, delivering on-trend newness to our customer. In Fragrance, we are pleased with our continued momentum of our Bombshell franchise and in July, the successful relaunch of Tease, our number 2 fragrance and a top fragrance in the country. Throughout the spring , we drove growth in Bombshell, our number 1 scent while also successfully launching Bombshell Seduction and our limited edition scent, Bombshell Summer. At the end of July, we relaunched Tease with an updated look which has delivered strong results for the month of August. Today, in stores and online, we launched Tease Rebel, an edgy new sister to our iconic Tease figure. The expansion of the Tease franchise supports our focus to make big bigger and to build out fragrance collections that our customer's love. In our new PINK beauty business, we remain very optimistic. Q2 results were strong and we will continue to invest in the business. Look for PINK beauty to get even more steady in the season as we test new store formats, presentations and product. Overall, we are very excited and optimistic about what is in-store for the remainder of Q3 and into the holiday season when Beauty becomes an even more important part of the overall business. We remain confident in our business model, our teams and our continued growth throughout 2018.

Thank you for joining this morning, and I will now hand it over to Nick Coe to share his thoughts.

Nicholas Coe -- CEO and President, Bath & Body Works

Thanks, Greg, and good morning, everyone. First, let me say, at Bath & Body Works, we are very pleased with our second quarter results. Sales grew by 12%, and our operating income grew by 8% in the quarter. And that's on top of last year's second quarter record results. I'm pleased to see that the efforts we undertook in 2017 to reinvent, our focus on the management of the product lifecycle have led to greater product successes in 2018, creating growth and momentum in the business.

True to my comments at the end of Q1, in Q2, we continued to experience pressure in buying and occupancy from our store remodels and SG&A from our wage investments. Those are not negatives, those coupled with product lifecycle focus and clearly brand building initiatives that are positively moving our business forward and driving growth trajectory. Investments in our associates, our direct distribution capabilities and our real estate are creating healthy business in both channels and an overall younger fleets of stores. These initiatives will continue to drive expense pressure in the back half, but they are setting us up for continued success.

In summary, we are pleased with the progress and the investments we've made, which are making us optimistic about the third quarter and our potential. Our business trends is positive and we are focused on continuing to deliver great assortments to our customers.

Thank you, and I'll now turn the conversation over to Martin.

Martin Waters -- CEO & President, L Brands International

Thanks, Nick. Good morning, everyone. As I look back on our international businesses performance in the second quarter at a high level, I'd make three observations. First, the franchise businesses, BBW, VSFA, and VSBA are all doing well with good sales and operating income growth. Secondly, we continue to invest in China, which we believe will be a (technical difficulty) market for us. We continue to experience strong growth in the direct consumer business and we opened three additional full-assortment stores in the second quarter, including a flagship store in Hong Kong. And finally, the UK business continues to be challenged. We have more work to do there under a new leader who joined the business a month ago.

In the balance of 2018, our priorities continue to be, continuing to scale in China, improving our performance in the UK and continuing to build on the success of our partner-owned stores around the world.

Thanks, and over to you, Amie.

Amie Preston -- Chief Investor Relations Officer

Thanks, Martin. That concludes our prepared comments. At this time, we'd be happy to take any questions you might have. Just a reminder, in the interest of time and consideration to others, please limit yourself to one question. Thanks, and I'll turn it back over to the operator.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Mark Altschwager of Baird.

Mark Altschwager -- Baird -- Analyst

Good morning, thanks for taking my question. I'm curious about the divergence between VS beauty trends and the VS lingerie. And you've discussed increased promotional activity to drive traffic, but with high-teens comps in beauty, I would suggest that maybe traffic isn't that big of a problem in the stores. So just any color on what's driving that? And then as we head into the holiday season, where beauty does over-index, any thoughts on how you leverage the better product acceptance there to drive transactions across the broader assortment? Thanks.

Amie Preston -- Chief Investor Relations Officer

Thanks, Mark. We'll start with Greg.

Greg Unis -- CEO of Victoria's Secret Beauty

Yes, we've been talking about what's working in beauty, it's really been stemming from our strategy on testing and learning. We have a tremendous speed model behind us in our supply chain, so we're able to achieve into [ph] the things that are working on. And ultimately, it's really come from tremendous focus and really focused on fewer bigger ideas. Ultimately, it's with the customer and the brand at the center. In terms of integration of beauty and lingerie, what we're finding is that the customer is increasingly buying a combined basket which for us as a brand is really strong -- a strong strategic point. And that's where we like to have the two categories work together and for those people who've been in our stores, you will see that beauty and lingerie are more and more integrated together as a total shopping experience.

Amie Preston -- Chief Investor Relations Officer

Thanks, Greg. Jan, do you have any thoughts on.

Jan Singer -- Chief Executive Officer

Sure, I'll just build on a little bit. I would say that the assortment in lingerie is very broad. Beauty is, for the right reasons and should be as a category, very focused and has been reset beautifully and it's getting great traction. I think that we -- overall really pleased with the progress. In lingerie, we are resetting franchise by franchise. We're seeing great progress on the things that we are resetting and what Greg is saying is that the bundling together is happening. We promote together, we create awareness together, we are one brand with two different businesses, I feel really good about that. The differentiation is us building back our high value customers who buy bras in particular franchises and that's the work of the work [ph] right now.

Amie Preston -- Chief Investor Relations Officer

Great, thanks guys. Next question.

Operator

Your next question comes from Oliver Chen of Cowen and Company.

Oliver Chen -- Cowen and Company -- Analyst

Hi, thank you. Our question is about helping us contrast the opportunities of bras at the VS business relative to the lingerie opportunity at PINK. Just curious about timing, customer reception and what we should expect in understanding the nature of those two issues would help us eliminate what's possible going forward. Thank you.

Amie Preston -- Chief Investor Relations Officer

So, Oliver, I want to make sure we understand your question. Are you asking about performance of bras at lingerie versus PINK?

Oliver Chen -- Cowen and Company -- Analyst

Yes, I was just curious about the bra opportunity at VS, and how you would contrast that against the PINK lingerie opportunity. And sort of helping us contrast those and if that would help us understand it better, and also get a sense of timing and supply versus demand, and understanding the nature of the opportunity.

Denise Landman -- CEO

I would say in PINK, this is Denise speaking, that we're coming from two very different places. PINK has a relatively underdeveloped bra business which we've worked hard over the past several years to leverage and expand upon and have found recent successes with our incursion into the sport bra category which we continue to be excited about. That drives our penetrations to levels that are certainly higher than they've been historically. But the PINK business is not completely centered around the lingerie business as the VS lingerie business is. So we start from very different vantage points. I do think, secondarily, the assortment architecture seeks to differentiate itself and message itself in ways that are very centric to the core population of customers that we're both speaking to and we acknowledge that we're speaking to two different sets of customers. So product differentiation, and how the business has evolved, our starting point versus lingerie's, I think are fairly central to your question, and I hope that I've answered it accurately.

Oliver Chen -- Cowen and Company -- Analyst

Yeah. I guess on the PINK side, how quickly can you fix it and what do you think, we should focus on as timing and what happened here? Just more simply and directly on PINK.

Denise Landman -- CEO

No, that fix is the right word. We've been developing both core, bra business through, what you might be aware of as, the lens of, we're everywhere and have made inroads as I just mentioned into the sport bra business as a central adjacency. There has been residual bra led [ph] volume in our baseline that we're working our way through. I don't consider that baseline, reference point to be an impediment to the brand's ability to grow strongly into the category in the future.

Amie Preston -- Chief Investor Relations Officer

Jan, do you have anything to add on?

Jan Singer -- Chief Executive Officer

I think, Denise, said most of it, I mean, the percentage of our business in bras is different, our approach is different, our customer, it all really comes down to customer at the center. And if you really are building products with the insight of the shares, we complement the (inaudible) -- pricing is different. So I think Denise covered most of it. (inaudible).

Amie Preston -- Chief Investor Relations Officer

Okay. Great, thanks. Thanks, Oliver. And next question please.

Operator

Your next question comes form Paul Trussell of Deutsche Bank.

Paul Trussell -- Deutsche Bank Securities -- Analyst

Yes, good morning. Just wanted to get some additional color on the August commentary about PINK in particular where there was a little bit of a slowdown? And if you can also just help us understand the thought process around low single-digit comps in 3Q? Just given the more difficult compare and whether or not there is an expected term in the 2-year of the VS comps versus just continued strength at BBW? Thank you.

Amie Preston -- Chief Investor Relations Officer

Thanks. We will go to Stuart for that Paul.

Stuart Burgdoerfer -- EVP & CFO

So Paul with respect to August, for L Brands in total and the major pieces of L Brands, August is running pretty consistent with the Q2 and recent results. So the pattern is continuing or is consistent in August to-date versus recent results. With respect to our assumptions in the third quarter and the fourth quarter, both with respect to comps and margin dollar year-on-year results, again implicit in our guidance are assumptions that would suggest that results are pretty consistent with recent results. Obviously, the team is working hard to do better than that. But as an overall modeling comment, we're assuming a balance of year result that's generally consistent with recent actual results, both sales and margin dollar. Thanks.

Paul Trussell -- Deutsche Bank Securities -- Analyst

And then just a follow-up on that, maybe bit more big picture and for Denise. First of all, congrats and best wishes on your retirement. But I'm really curious in your view just given your tenure there in the state of the industry, and how you view competition and the meaningful impact of digital? And also just what is it that the young millennial customer is responding to from a merchandise and marketing standpoint, and to what extent is PINK and Victoria's Secret on top of those trends?

Denise Landman -- CEO

So this is Denise, I will answer the question as best I can. It's an expansive conversation. I do not think nor do I think anyone in this room believes that PINK has lost its ability to connect astutely with customers and drive excitement in our core constituency. We had, as I mentioned earlier, a very explosive PINK Friday moment, which is celebratory to all things [ph] PINK. And that moment in my mind and for the folks that work around me in the brand has edified the exuberance that consumers feel for our product when we create these celebratory moments. The issue of how well or effectively we're competing in the market, I think from the mix point of view, we are competing fairly effectively. I think, as I mentioned, our fleece business, that due to what we believe is very much a mindset -- a consumer mindset of buy now, wear now which is delaying her inclination if you were to buy into more seasonally appropriate product has reflected in our fleece performance in recent times. But there are many, many healthy and emerging sectors of the business, which are in some cases on top of the market and in some cases ahead of the market that we believe we can continue to mine for true benefit. And that's I think is a sync -- an answer I can give you to a very expansive question.

Amie Preston -- Chief Investor Relations Officer

Great. Thanks Denise. Next question please.

Operator

Your next question comes from Kimberly Greenberger of Morgan Stanley.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Great, thank you. Good morning. My question is for Stuart. Stuart, I wanted to ask about inventory, which has been growing faster than sales here for the last three quarters or four quarters and I know that looked at on a two-year basis inventory is more flattish. But on a two-year basis, sales are down, not flattish. So if we looked at both sales and inventory on a two-year basis, we'd still find inventory running kind of well ahead of the sales, and I'm wondering if there has been a philosophical change just in the way that you manage inventory or if there are some other strategies that are entering the inventory conversation that maybe we're not aware of on the outside that are causing you to want to make some of those investments. If you could just sort of add some insight there that would be really helpful.

Stuart Burgdoerfer -- EVP & CFO

Thanks, Kimberly. Appreciate that -- it's big a subject, important subject. Four or five points I'd want to make. The first is in terms of where we expect to end the fall season, we're expecting to end the fall season up low-single digit and maybe a little lower than that. So flat to up low-single digit, that's where we expect to end the fall season, first point. Second point would be, our view of growing inventory at the rate of sales or slower than sales to improve, turn our philosophy, our belief around that has not changed. Obviously, with growth in international business and a lot of change in a dynamic situation, I'll describe it at lingerie and at PINK, Victoria's Secret lingerie and at PINK, the situation given the degree of movement and it has been a little bit more challenging to manage.

We are very focused, as you know, to clear seasonal inventories twice a year aggressively through our semi-annual sales and we've done that consistently. So in addition to the quantitative aspect of inventory qualitatively, our commitment to ending seasons clean has not wavered at all. We are making important investment in the sleep and loungewear business for Victoria's this fall, we think, as pre-circulated in remarks and Jan might comment on further on this call, we think, it's an important category of growth for us. And we are making investments there which creates a little bit of investment in inventory in advance of sales. But fundamentally, Kimberly, our view hasn't changed as to how we manage inventory again a little bit more challenging given the variation in outcomes for lingerie and PINK in recent quarters and seasons. But the view doesn't change in terms of how we look at it. And we are making some important investments internationally in the digital channel and in the sleep lounge business that I described for lingerie. Thanks.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Thanks so much.

Stuart Burgdoerfer -- EVP & CFO

Sure.

Amie Preston -- Chief Investor Relations Officer

Thanks, Kimberly. Next question please.

Operator

Your next question comes from Paul Lejuez of Citi.

Paul Lejuez -- Citi -- Analyst

Thanks guys . Stuart, Victoria's Secret of sales productivity over $900 a foot including e-com sales. I'm just curious, what do you see is the right EBIT margin for business with that sort of productivity and it seems like relative to peak, the VS business is off about 1,000 basis points from peak margin. How much of that is due to lower merch margin deleverage on occupancy, maybe SG&A deleverage, if you could maybe break that down for us? Thanks.

Stuart Burgdoerfer -- EVP & CFO

So lot in that Paul, I appreciate the question. We believe, as we've talked about pretty consistently and we've demonstrated when we're performing at our best, and there're lot of reasons for the decline in performance over the last few years. But a business like Victoria's Secret, stores and digital, high quality brand, pricing power, nature of competition, etc., we believe that that business when running optimally should be a high teens operating income rate business. And we have that view based on our own history. And as we look at businesses like this when they are performing at their best over time. It's easy to say that, it's hard to accomplish that in terms of where the business is running now versus that ideal level, there is meaningful improvement opportunity both in merchandise margin rates and in expense leverage. You appreciate that the expense structure, a lot of that relates to stores and square footage and payroll and wage rates and lots of things. But again, we've got -- the biggest opportunity for us is to drive sales growth at reasonable and healthy margin rates to get back to what should be the ideal operating income rate in that business or EBIT rate in that business. It's not going to happen overnight, it will take a few years to accomplish. But as you know and for different reasons when we pulled out of the top performance of '08 and '09 driven by macro events, we steadily and consistently improved the operating income rate both at Victoria's and Bath & Body Works over that period of time. And this management team is focused on achieving the same result over the next several years for Victoria's Secret. And the most important thing to do is to drive volume at healthy margin rates. We will manage expenses with discipline, we will certainly continue to look at real estate as we've talked about at length. The cash flow and profit characteristics of our real estate today are very healthy, but as is obvious, the sales productivity and underlying unit economics at Victoria's aren't as strong as they would have been a couple of years ago, but they remain very healthy. But big part of the cost structure in the business relates to stores and we'll continue to look at that as we move forward. But the biggest opportunity is around volume and that's what this team is focused on. Thanks.

Paul Trussell -- Deutsche Bank Securities -- Analyst

Thanks Stuart, Good luck.

Stuart Burgdoerfer -- EVP & CFO

Thanks.

Amie Preston -- Chief Investor Relations Officer

Thanks, Paul. Next question, please.

Operator

Your next question comes from Brian Tunick of RBC Capital Markets.

Brian Tunick -- RBC Capital Markets -- Analyst

Great, thanks and good morning. I guess, I wanted to hear a little more about your comfort on your Q4 guidance. Maybe if Stuart could maybe talk about how you're thinking about gross margin rate in Q4 versus Q3. And maybe, Jan, you could talk about what are some of the biggest initiatives, whether it's changes in marketing, product, store environment that you think will help stabilize the business embedded in your fourth quarter guidance. Thank you very much.

Stuart Burgdoerfer -- EVP & CFO

So, Brian, obviously, we spend a lot of time looking at the third quarter and the fourth quarter range of outcomes. Obviously, management believes that we are put out in appropriate range for the business. I wouldn't describe our views around margin dollars, our margin rates, as in any stretch heroic or unrealistic for either the third or fourth quarter. I realize, you're asking about the fourth quarter, but we believe they are realistic. There are couple of inputs in the rate that I would remind you of, one is that, sourcing part of the business has gone out and done some work with our vendor partners to get some benefit that will benefit the fourth quarter. And apart from that, the margin rate assumptions are relatively consistent with recent results on a year-on-year basis and a multi-year basis. So we feel that we put out a model that should be achievable for sure if we execute well.

Jan Singer -- Chief Executive Officer

So fourth quarter is what you asked about, Brian, right. So we have a few critical bra launches as we always do in fourth quarter around specifically T-shirt and Dream, of course the panty businesses, the usual are really heavy hitter for us. But what is important is that Stuart mentioned earlier, the sleep and lounge category, adding adjacent categories like sleep lounge and even sport fashion has been a really important investment and growth driver. It's something that we've been working on all year. And casual side of the sleep businesses had double-digit comps, detaching [ph] to bras up to as high as 40% of the time. It's bringing in a new customer over 20% of the time week-on-week. And we have an existing customer who is coming back more frequently, feel really good about the adjacent categories and what they do to the core of the business . So very big part of us building back our high-value customer file as well.

Brian Tunick -- RBC Capital Markets -- Analyst

If I could just.

Amie Preston -- Chief Investor Relations Officer

Go ahead, Brian.

Brian Tunick -- RBC Capital Markets -- Analyst

Thanks, Amie. I was just curious, the marketing and the messaging, it seems to be a hot topic out there. Just curious if Jan and the rest of the organization, how they're looking at the marketing message today at Victoria's Secret versus the last couple of years and how you're making changes to that? Thank you very much.

Jan Singer -- Chief Executive Officer

Yes, thanks for the question. The brand, as I've said, we're not exactly where I think we need to be. However, we've debated this rigorously as a leadership team and a management group. And it's been decided that we had to focus on (inaudible) transactional traffic driving marketing that transitions into the results that we're all looking for.

Amie Preston -- Chief Investor Relations Officer

Thanks. Next question, please.

Operator

Your next question comes from Ike Boruchow of Wells Fargo.

Ike Boruchow -- Wells Fargo -- Analyst

Hi, good morning, everyone. So Stuart, I want to kind of dig into the answer you gave to Paul's question. Obviously, you think VS is a much higher margin business than what you're seeing today. So I guess at a higher level, VS is seeing ongoing declines in profitability margins. I kind of just wanted to ask about how you view the cost structure of the brand and how you think about balancing investment spend versus protecting profitability. And I guess, what I really mean by that is when the brand was hot, you guys had a lot of investment behind the brand to capture the volume, but with the top line pressure, now do you rethink some of your larger global investments, things like the Fifth Avenue flagship, Bond Street potentially partnering back in China and even the fashion show. I'm just kind of curious, what you kind of look at to kind of keep those margins higher than where they are today from an balancing investment?

Stuart Burgdoerfer -- EVP & CFO

Yes, thanks for the question Ike, it's a big subject as you appreciate. I mean, what this business is about both at Victoria's Secret and frankly at Bath & Body Works and what Les has done over more than 50 years running the business is to make investments whether it's in the store design, in the merchandise, in the experience with customers, they create emotional content. And from that emotional content, you generate pricing power, that the products got to be great and the emotional content of that merchandise along with the environment in which it's sold, the marketing of it et cetera, has got to be special, unique, different that creates that got to have a emotion for customers. So that's a fundamental philosophy of how we think about our business. Obviously, evaluating whether you're getting paid for the range of investments that you described, and those were just examples, is the work of the work. And what I would want you to know is that we have had historically and given recent results are having more intense debate about evaluating whether we're getting paid for that range of investments. But -- or the wide range of the types of investments that you're asking about. Obviously, there's a lot of business judgment involved in evaluating that.

We test things where we can, we make some decisions based on vision and intuition as you would expect. Often times, the greatest value is created in things that aren't obvious in terms of the return on investment. But a big question, we look at it intensely, regularly, periodically, obviously with some of the shift in the business. I understand why you're asking the question and you can be sure that myself, other leaders in the business, Les, are also looking at all those investments, and just challenging, are we really getting paid for them or not. And generally speaking, this business is relatively short-cycle again versus other industries, so we are able to adjust. So things like the stores that we're now opening in China are smaller than the initial stores that we opened, as an example, or you could take the Bath & Body Works remodel program where we tried several different iterations before we came upon a store design that really drove incremental sales and profit . So big subject often multi-year in nature requires iteration, testing, learning, adjusting. And I think, we haven't always gotten all those things exactly right, but I would want to assure you and those listening to the call that those things get rigorous evaluation as part of running the business. Thanks.

Ike Boruchow -- Wells Fargo -- Analyst

Thanks, Stuart.

Amie Preston -- Chief Investor Relations Officer

Thanks, Ike. Next question, please.

Operator

Your next question comes from Chethan Mallela of Barclays.

Chethan Mallela -- Barclays -- Analyst

Hey, good morning. On BBW, the business has been strong for some time, but the comp acceleration over the past couple of quarters has still been notable. And I think the double-digit comp growth in 2Q, was the first time is at that level in a couple of years. So could you just kind of frame what's primarily responsible for the improved trend? How much is idiosyncratic versus just kind of a better industry backdrop in general, and how you're thinking about the growth rate for that business over the mid-term?

Amie Preston -- Chief Investor Relations Officer

Sure. We'll go to Nick.

Nicholas Coe -- CEO and President, Bath & Body Works

Hi, thanks. So I think, the first part of the question is, we feel very good about the categories that we're in, being in beauty and being in home. And they are dynamic categories, as you can see in the industry, so that's a positive thing for us. Secondly, as I mentioned in our opening comments, the amount of work that we took on during the latter part of 2016 and the majority of '17 where we were really investing in the product and trying to reposition a lot of the products that we had and that has manifested itself in, I would say, a healthy comp. As we continue to roll products out and programs out post 2017, we can see the trajectory of our business continued to grow. So we still from the latter part of October 2017 into Q4, Q1, Q2, we've seen that continually grow. So as we look forward, I think, it's more about us continuing to stay as close as we can to the customer, continue to refine the assortments to reflect what's going on in the market and what we're learning. And hopefully, maintenance of the current comp performance that we've got.

Amie Preston -- Chief Investor Relations Officer

Thanks, Nick. Next question please.

Operator

Your next question comes from Michael Binetti of Credit Suisse.

Michael Binetti -- Credit Suisse -- Analyst

Hey guys, good morning. Thanks for taking our question here. Jan, I think you've mentioned a strong focus on building back the customer file quite a bit in the last few quarters. But you've also commented today, I think, briefly on rebuilding a gap with the dual-channel customer. I was wondering if you could discuss a little bit how to marry those two comments and what you were referring to that you mentioned on the dual-channel customer specifically? And maybe just bigger picture, remind us of some of the metrics around that customer and how valuable they are for the franchise relative to your total customer book?

Jan Singer -- Chief Executive Officer

Thanks for the question, Michael. The short answer is, it's the same commentary. Building back the customer file refers to the high value dual-channel customer.

Michael Binetti -- Credit Suisse -- Analyst

Okay. So Nick, if I could sneak one in, is with the remodels. Could you remind us of the KPIs you look at to measure the rollout of the White Barn doors maybe and how those are progressing relative to your plan with any numerical example you might be able to offer to help just kind of reorient us from some of the goals you mentioned before?

Nicholas Coe -- CEO and President, Bath & Body Works

Sure. And I think part of our performance -- part of our solid performance has been also driven by continued good performance in the existing real estate activity that we took on and the new real estate activity. So the real KPI that we look at is, what kind of growth are we seeing in the first, second and now into the third year. And we continue to see a very nice lift in that first year and then continued performance in year two and year three. What I really want to reiterate is the agility that we have and so we continue to read, very, very diligently the result of those investments we're making in the stores. And if that ever slows down, we have terrific agility in terms of being able to slow that pace or stop that pace. Now as we go into a number of years of doing this and by the end of the year we will be well north of 600, we continue to see a return on investment that we like and so we'll continue to invest, but at the moment if we feel like that's not happening, we do have the agility to pause that. So continually evaluating that performance is a high priority of ours.

Michael Binetti -- Credit Suisse -- Analyst

Okay, thanks. Stuart, can I sneak one in. You guys have remained very committed to very, very high dividend yield despite, I think, the operating results coming in below, some of your hopes are a bit here. I know you've worked hard to moderate CapEx down a few times here along the way. But could you help us with how you think about holding steady the approach to the capital deployment in contrast to the variances you've seen in the operating plans?

Stuart Burgdoerfer -- EVP & CFO

Important subject obviously, important source of return for shareholders. Obviously the payout ratio is abnormally high, the yield is very high. We look at it regularly, management does. We have the appropriate conversations with our Board. Obviously, a lot of our earnings and our cash come in the fourth quarter. We have conversations about this regularly, but importantly, as we have more insight into holiday results. We're comfortable with the dividend today, have the free cash flow to support it. But it's obviously something that should be looked at periodically and we do, we're comfortable with it. We expect to, one way to deal with payout ratio is obviously to increase earnings. That's what we're focused on. Earnings increases would drive obviously an increase in the share price and get dividend yields and relationships like that in a more normal range. But with that said, our operating performance has lagged our expectations over the last several years. So we look at it periodically in a rigorous way. That will continue. We're comfortable with it based on what we know at this point and we'll continue to look at it. Thank you.

Michael Binetti -- Credit Suisse -- Analyst

Thanks and best of luck.

Amie Preston -- Chief Investor Relations Officer

Thanks, Stuart. Guys, sorry, reminder, we've got a lot of people trying to ask questions here, can you stick to one question. Next question please.

Operator

Your next question comes from Roxanne Meyer of MKM Partners.

Roxanne Meyer -- MKM Partners -- Analyst

Great, good morning and thanks for taking my question. My question is about the right number of Victoria's Secret PINK and BBW stores, just giving us perhaps an update as to how you see the portfolio evolving, taking into account on one hand expanded categories but also, you've seen some rapid growth in DTCs. How does that change if at all, your view on what the right number of stores and even the size of the store should be? Thank you.

Stuart Burgdoerfer -- EVP & CFO

Hi, Roxanne, it's Stuart, I'll try to take that and others may want to jump in. But as we've talked about pretty consistently in our communications, the first point I'd really want to register is that we actively manage the subject you're asking about. And we're opening and closing stores every year. In the information we put out publicly, there is a forecast of store activity this year and it's being actively managed. We shared a slide at the Investor Meeting a year ago that showed our activity over a 10-year period where we opened, by memory, more than 700 stores and we closed more than 500 stores. So it's being very actively managed. As you know, our sales productivities are high, not as high as Victoria's as they were a few years ago, they're continuing to grow and be high at Bath & Body Works, you know that our cash flow and profit profile in our stores is very strong. And with that said, we're not unaware of what's happening with mall-based retailing in an overall sense. But with that said, those retailers that have strong brand, strong offerings, strong execution are doing very well in malls and again within our own business, Bath & Body would be an example of that, Victoria's Secret Beauty would be an example of that. So it is very actively managed.

We'll see how it plays out over time and we'll continue to manage it actively year-by-year, looking at the current version of our schedule, Victoria's Secret is going to close about 20 stores in North America this year and is going to open about three. So there's some net reduction. But it's actively managed, and it will be a function of performance. It's performance-based, that's how we evaluate the initial investments and that's how we evaluate decisions as to whether to close stores or not. We obviously understand sales transfer and cannibalization and all those dynamics and consider those things as we actively manage the real estate portfolio. So big important subject, got a very strong team that is responsible for it within the enterprise and we have a lot of experience working with it. Thanks.

Amie Preston -- Chief Investor Relations Officer

Thanks, Stuart. Next question please.

Operator

Your next question comes from Jamie Merriman of Bernstein.

Jamie Merriman -- Bernstein -- Analyst

Thanks very much. Jan, I think, this question is for you. You've talked pretty positively about some of the products that you've relaunched like the Sexy Illusions bra, like the T-shirt bra. Can you just update us and give us a sense of timing for some of the initiatives for maybe second half of this year until next year -- I think, Body by Victoria is one. And then as you move beyond that, are there other big legacy businesses that will still need relaunch? Thanks.

Jan Singer -- Chief Executive Officer

Thanks, Jamie. Well, we continuously update each part of the portfolio, so BBV as recently as this month has been relaunched with color and fashion, we're continuing on the innovation of that bra, that's a very important franchise and we're very thoughtful and mindful about how we manage it. But going into the fall, as I mentioned, it's balancing that portfolio with again the acceleration and the success we're seeing in panties, which we're super excited about. It's the business that we flow new goods super-fast, sometimes weekly and we continue to see again new customer acquisition as well as existing engagement and moving up to finalize the deal. The adjacent categories, I mentioned, and sleep and lounge and sport fashion if you will and sport performance are really important to build back again that, not just the file but the business in a long-term sustainable way. So that's upon the docket.

Amie Preston -- Chief Investor Relations Officer

Thanks, Jan. Next question please.

Operator

Your next question comes from Marni Shapiro of Retail Tracker.

Marni Shapiro -- The Retail Tracker -- Analyst

Hi everybody. Best of the luck for the fall season, but I don't forget to mention it. Can you talk a little bit or dig a little bit into the lounge business at PINK and Victoria's Secret? It seems that over the last several seasons there's been a little push and pull between the two brands. Are you seeing the customer gravitate to whichever looks better, so maybe one season, it's Victoria Secret, the next season it's, PINK. Or do you think these are separate issues at Victoria's Secret and PINK?

Jan Singer -- Chief Executive Officer

So Marni, it's Jan. Hi. I will say that we're not in the quote, lounge business, per se, the way PINK is. We're in the sleep business for sure, which is different fabrications, different silhouette, different content and different fashion. Our quote, lounge effort, is a much smaller part of the business. We are not in fleece in the way that PINK is in fleece and Denise, I am sure will speak to it. So I don't see them as trading off each other. We have a very different handwriting again at different target consumer, a different end purpose and different pricing structure. I don't know, Denise, if you want to add to that.

Denise Landman -- CEO

I would agree that not unlike the commentary specific to bras, they are hopefully and discernably differentiated. I think, the thing that I would reemphasize specific to the sleep segment of our lounge business, which is currently under some pressure is in our minds attributed to this buy now, wear now phenomenon that has fairly rapidly effecting the buying habits of our age cohort. And so, we are adjusting into seasonality based on these consumer insights and feedback that we get from the consumers that we're in constant contact with. But I would say, overall, the lounge business continues to be a relevant category to the college-age consumer and a category of interest. It's just silhouette reference points, fabric reference points have to be seasonally accurate and in the appropriate quantities to drive the velocity that the business requires.

Marni Shapiro -- The Retail Tracker -- Analyst

That make sense. Thanks and congratulations, Denise.

Denise Landman -- CEO

Thanks, Marni.

Amie Preston -- Chief Investor Relations Officer

Thanks, Marni. Next question, please.

Operator

Your next question comes from Susan Anderson of B. Riley FBR.

Susan Anderson -- B. Riley FBR -- Analyst

Hi, good morning. Thanks for taking my question. I guess as a follow-up on the profit margins of the VS business, there has been a lot of new competitors pop up in the space. So I guess has the -- do you guys think the bar has been reset in terms of where these margins should be and then also we've had a mix shift in the bra lines (ph) and sports bras, which are still part of the mix, which are lower ticket and potentially lower margin. So does that also reset the business?

Stuart Burgdoerfer -- EVP & CFO

Susan, it's -- Jan jump on. Where I start and many of you have heard us talk about it in this way. A company that we admire a lot is Inditex and particularly their Zara business. But they run a strong portfolio and they run for sustained periods of time at high-teen margin rates. Their cost structure is different which relates back to an earlier question, but in terms of intensity of competition, I can't think of a more competitive set of segments in retailing than the ones in which they operate and through very strong execution on their part. Over a very long periods of time, they run at a high-teens operating income rate. And so if I think about that set of circumstances in comparison to the environment in which Victoria's Secret and PINK operate in, I think, when we're executing our business extremely well including again back to some of the questions about making sure that we're trading off investments appropriately, there is no reason while there might be that -- to some degree an increased level of competition vis-a-vis the segment. For example that Zara is competing in, I think we're in a much better set of categories with a much stronger relative competitive position. And so again, we are of a view that when we're really running this well and we realize we got a lot of opportunity to get there and it's our job to get us there, that we have the potential to get back into that high-teens rate which we've been at before, even with a little bit more competition in the industry, so that we might take, Jan you have something else.

Jan Singer -- Chief Executive Officer

Susan, I think, the thing about expansiveness of this brand and the assortments that we offer unlined [ph] push-up bras. So there is choices in the portfolio. It is important to be in balance. An example that you're mentioning about the price architecture due to the landscape is, I will just take T-shirt for a second, which originally was an opening price point bra. We've taken four price-ups on that bra and we continue to see unbelievable builds week-on-week. So it's an interesting phenomenon. To casual bra, it definitely speaks to the landscape you're talking to. Yet every time we keep putting out our call fashion content on that bra, she continues to pay us more for with selling out of the most important styles in it. And even when we look at BBV, and while we're starting to deal with it and adding fashion again to that bra franchise, we're seeing many young consumers pay us for that work. So it is an interesting time and things are moving but we are on top of it.

Amie Preston -- Chief Investor Relations Officer

We're going to try to get two more questions here. Next question.

Operator

Your next question comes from Simeon Siegel of Nomura Instinet.

Simeon Siegel -- Nomura Instinet -- Analyst

Thanks, good morning, guys. Stuart or Nick, to what percent of the new BBW stores are side-by-side versus shop-in-shop. And I guess, where relevant, how much of the remodels have that -- how much of those remodels added to comp? And then just any help on where the PINK margins operate currently? Thanks.

Nicholas Coe -- CEO and President, Bath & Body Works

Hey, Simeon. The majority actually shop-in-shop and as a go-forward point of view on that we -- that tends to be where we would want to get -- continue the investments into it. So we're actually happy with both side-by-side and shop-in-shop, I think, operationally and the ability to manage the store, it's probably more efficient and probably more customer-friendly from a shop-in-shop perspective. And that tends to be where we will continue the investments at the moment. But as I said earlier on, we're pretty fluid in terms of how we read those and how we manage them, but that's pretty much the answer.

Amie Preston -- Chief Investor Relations Officer

And I think that has not been in a meaningful contributor to comp, right, it's less than a point, I think.

Nicholas Coe -- CEO and President, Bath & Body Works

Yes.

Stuart Burgdoerfer -- EVP & CFO

Simeon, on PINK margins, they remain very healthy but are down versus their peak, but remain very healthy. We don't get into fine detail of that margin rates by at that level of detail, but in an overall comment they are very healthy, margin rates are down somewhat versus their peak but remain healthy. Thanks.

Simeon Siegel -- Nomura Instinet -- Analyst

Thanks a lot guys. Best of luck for the year.

Amie Preston -- Chief Investor Relations Officer

Thank you, Simeon. Next -- actually last question.

Operator

Your final question comes from Janet Kloppenburg of JJK Research.

Janet Kloppenburg -- JJK Research -- Analyst

Good morning, everyone, thanks for sneaking me in. Congratulations to Denise whose brand leadership has been remarkable and has taught us a lot. And also welcome Amie, who I think will do a great job at PINK. Couple of quick questions for Denise. We've often talked about the logo business at PINK, can you talk about that in light of the fact that logo was working universally and maybe if there is some updates necessary for the PINK logo. And just for Jan, in the businesses of strength [ph], can you talk about margin direction there and maybe in panties and the new bra introductions in sleepwear. Thanks.

Denise Landman -- CEO

It's by logo, you're referring to our collegiate business.

Janet Kloppenburg -- JJK Research -- Analyst

No, I am talking about -- it's all the PINK logo product.

Denise Landman -- CEO

Logo, sorry. The logo segment of our business literally defines it. And what we're experiencing lately which as well I take as a sign of brand validation is increasing engagement with more expansive brand iconography. So you would be familiar with the PINK dog as another discernible brand reference point selling very well. So the attachment rate to love PINK, PINK logo, logo manipulated in a myriad of creative ways and the inclusion of more expansive iconography has not met with consumer rejection far from it.

Amie Preston -- Chief Investor Relations Officer

And Jan?

Jan Singer -- Chief Executive Officer

Janet, just one more time with your question. I'm sorry, I don't think I heard the whole thing.

Janet Kloppenburg -- JJK Research -- Analyst

I was saying, I know you have a lot of new products that are working very well. And I'm just interested in whether you're seeing margin gains in those categories. For instance in the panty category, which you turned rather quickly, are you able to see the rebound in margins back to historical levels and on the new bra introductions, are you seeing margins comparable to, let's say legacy Body by Victoria or Very Sexy. Thanks.

Jan Singer -- Chief Executive Officer

Yes, so on the businesses that I talked about, we are talking about not just top line sales, but also margin -- healthy margin in line with sales. I can't speak to historical levels because some of these items didn't exist back in the day, but panty certainly is tracking to where we have been and we're excited about that. Same with the T-shirt bra, and Illusions is a new book of business.

Janet Kloppenburg -- JJK Research -- Analyst

Thanks, great, and lots of luck.

Jan Singer -- Chief Executive Officer

Thank you.

Amie Preston -- Chief Investor Relations Officer

Appreciate it, Janet. Thank you. And thank you all for joining us this morning and for your continuing interest in L Brands.

Operator

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

Duration: 58 minutes

Call participants:

Amie Preston -- Chief Investor Relations Officer

Stuart Burgdoerfer -- EVP & CFO

Denise Landman -- CEO

Jan Singer -- Chief Executive Officer

Greg Unis -- CEO of Victoria's Secret Beauty

Nicholas Coe -- CEO and President, Bath & Body Works

Martin Waters -- CEO & President, L Brands International

Mark Altschwager -- Baird -- Analyst

Oliver Chen -- Cowen and Company -- Analyst

Paul Trussell -- Deutsche Bank Securities -- Analyst

Kimberly Greenberger -- Morgan Stanley -- Analyst

Paul Lejuez -- Citi -- Analyst

Brian Tunick -- RBC Capital Markets -- Analyst

Ike Boruchow -- Wells Fargo -- Analyst

Chethan Mallela -- Barclays -- Analyst

Michael Binetti -- Credit Suisse -- Analyst

Roxanne Meyer -- MKM Partners -- Analyst

Jamie Merriman -- Bernstein -- Analyst

Marni Shapiro -- The Retail Tracker -- Analyst

Susan Anderson -- B. Riley FBR -- Analyst

Simeon Siegel -- Nomura Instinet -- Analyst

Janet Kloppenburg -- JJK Research -- Analyst

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