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LBrands Inc (NYSE:LB)
Q2 2020 Earnings Call
Aug 20, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the L Brands Second Quarter 2020 Earnings Conference Call. Please be advised that today's conference is being recorded.

[Operator Instructions] I would now like to turn the call over to Ms. Amie Preston, Chief Investor Relations Officer of L Brands, you may begin. Thank you.

Amie Preston -- Investor Relations

Thank you. Good morning, and welcome to L Brands' second quarter earnings conference call for the period ending August 1st, 2020. 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 and in our press releases.

Joining me on the call today are, Andrew Meslow, CEO of L Brands and Stuart Burgdoerfer Interim CEO of Victoria's Secret and CFO of L Brands. All results we discussed on the call today are adjusted results and exclude the special items described in our press release.

Thanks. And now I'll turn the call over to Andrew.

Andrew Meslow -- Chief Executive Officer, L Brands / Bath & Body Works

Thanks, Amie, and good morning, everyone. The second quarter of 2020 continue to be an unprecedented time for the world, for the retail industry, and for our business. Our first priority was and continues to be the safety of our associates and customers as we reopen the majority of our stores in the second quarter.

We adopted new operating models in all of our stores that focused on providing a safe shopping experience. Additionally, we focused on our distribution, fulfillment, and call center safety, and maximizing our direct businesses.

Overall, we delivered strong results in the second quarter, and we could not have done so without the hard work and dedication of all associates across our business; in stores, distribution and fulfillment centers, call centers and home offices. On behalf of the Company, I'd like to express our deep appreciation for all of their efforts.

During the second quarter, we also took a number of important steps to prepare Victoria's Secret and Bath & Body Works to operate as stand-alone separate companies, improved L Brands' profitability, maintained liquidity during the pandemic, and maximized our financial performance; all of which we outlined in the earnings commentary that we released last night.

As we also discussed in last night's commentary, despite our strong results in the second quarter, we do expect results to moderate. And for a number of reasons, we have a cautious outlook for the second half of the year. We won't repeat those prepared comments this morning in order to leave more time for all of your questions.

Thanks. And back over to you, Amie.

Amie Preston -- Investor Relations

Thanks, Andrew. That concludes our prepared comments. And at this time, we'd be happy to take any questions you might have. In the interest of time and in consideration to others, please limit yourself to one question.

Thanks. And now, I'll turn it back over to the operator.

Questions and Answers:

Operator

Thank you. Our first question will come from Ike Boruchow from Wells Fargo. Your line is now open. One moment please.

Ike Boruchow -- Wells Fargo Securities -- Analyst

You mentioned in the press release about bankers being hired for the VS transaction, can you give us an update on timing of when you guys are [Technical Issues].

Amie Preston -- Investor Relations

So Ike, you cut out there a little bit, but I think we got the gist of that. So we're going to turn it over to Stuart.

Stuart Burgdoerfer -- Executive Vice President and Chief Financial Officer / Interim Chief Executive Officer, VS NewCo

Good morning Ike and those listening. So, our view on our activities related to the separation of the business is; first, as outlined in our circulated script and as Andrew reminded us this morning, we took important steps to create or to facilitate stand-alone companies, Victoria Secret and Bath & Body Works in the quarter. That was the organizational work that we did, taking many shared functions and creating or integrating those functions, I should say, into the respective businesses, Victoria's Secret and Bath & Body Works.

We did retain Goldman and J.P. Morgan very recently, shortly after the end of the quarter and we'll begin work with them where they'll give the Board and the Company advice about the range of alternatives and will assist us in the process as we move forward. Obviously, it's important to get a read on holiday results to value the business and to ensure that we strike the right balance in terms of timing, execution risk, and getting an appropriate valuation for the business.

And what the Company is most focused on right now is driving great results at retail. So we got a lot of people in stores, distribution centers, home offices, vendor partners, all kinds of folks organized to provide the best results at retail and I couldn't be more proud of what this team has done over the last 90 days or so through the organizational work, reopening stores, maximizing volume on the digital channel -- in the digital channel.

So we're very focused on having the best holiday possible. It will be important as we go down this path and it will be important input as capital markets, advisors, potential buyers, again the public markets' assess the opportunity for Victoria's Secret. So, very focused on having a good holiday, have hired some banks, and took a lot of important steps to create stand-alone companies. Thanks, Ike.

Amie Preston -- Investor Relations

Thanks, Stuart. Thanks, Ike. Next question please?

Operator

Our next question will come from Matthew Boss from J.P. Morgan. Your line is now open.

Matthew Boss -- J.P. Morgan Securities -- Analyst

Great, thanks, and congrats on a nice quarter. On the expected moderation in trends for the back half of the year that you cited, have you actually seen a material deceleration in trend at either of your concepts to-date? And coming out of the pandemic, curious, your confidence in Bath & Body Works in being a stronger business model. Maybe if you can touch on customer acquisition trends more recently?

Amie Preston -- Investor Relations

Okay, thanks, Matt. We're going to start with Stuart and then go to Andrew.

Stuart Burgdoerfer -- Executive Vice President and Chief Financial Officer / Interim Chief Executive Officer, VS NewCo

So, with respect to very recent results. We have not at VS NewCo, Andrew will speak to Bath & Body. We at VS NewCo have not seen any change in trend, any deceleration of the trend over the last several weeks. I realize other retailers have reported on that. We have not seen that in the VS NewCo result.

Andrew Meslow -- Chief Executive Officer, L Brands / Bath & Body Works

Hi Matthew. So, similar to what Stuart just described, Bath & Body Works had very strong and consistent results throughout Q2. And as we got more and more stores opened through the end of the quarter, finishing with essentially the majority of stores opened and sitting here now today in mid-August, we actually have all but about 40 stores reopened. We've continued to see very strong results in both our direct channel and our stores channel and as we've moved into August, we've seen results continue to be very strong.

In terms of your question around our future confidence in Bath & Body Works, I would say there also, we have a lot of belief that our trend should be able to continue as a strong market leader in all of the categories in which we play. As you can imagine, as we've discussed in the past, one of the most critical questions we always ask ourselves is, are we in fact in the right categories of business and are those categories that are still relevant to our customers and growing in the marketplace?

And I think it's fair to say that in the case of Bath & Body Works, the answer to that question is a strong yes across our entire portfolio. Obviously, the soap and sanitizer business that historically has been 14% to 15% of the business is even more important to our customers and to all of the country right now in the midst of the pandemic.

So as expected, we've seen tremendous growth coming out of that category. And while that may moderate over time, we expect that awareness around the importance of that category, washing your hands, using sanitizers when you're not able to wash your hands, will continue even as the pandemic itself hopefully starts to wane away.

In terms of our other categories, we obviously have a huge and important body care business. That business has always been relevant to our customers. It's even more relevant to her today as an affordable luxury, a way for her to treat herself even when she is unable or unwilling to spend money on perhaps other larger ticket commodities, that is an inexpensive way whether for self-indulgence or to give as a gift.

And then similarly, our important home fragrance business has grown substantially over the last half decade, also tremendously important to her, both now during the pandemic, when we're using our homes as a place of work, a place of teaching and school, and a place of refuge and solace, Certainly making your home smell like you wanted to is something that our customer has continued to express interest in.

And again, something we would expect to continue through the pandemic and also afterwards. So again, bottom line, categories that we're in, very, very relevant today, have been relevant in the past, and we absolutely believe are just as relevant go forward.

Matthew Boss -- J.P. Morgan Securities -- Analyst

That helps.

Amie Preston -- Investor Relations

Great, thanks. Thanks, Matt. Next question please.

Operator

Our next question will come from Simeon Siegel with BMO Capital Markets. Your line is open.

Simeon Siegel -- BMO Capital Markets -- Analyst

Thanks. Good morning, everyone, and congrats on the impressive results, even environment aside. Stuart, could you quantify merch margin versus occupancy deleverage within the 2Q gross margins. And then just higher level, you grew EBIT double digits despite top line declining 20%-or-so. How are you thinking about the opportunities to grow profits on a smaller revenue base? Any general color on where you see that longer-term revenue size versus EBIT margins? Thank you.

Stuart Burgdoerfer -- Executive Vice President and Chief Financial Officer / Interim Chief Executive Officer, VS NewCo

Yeah. So, Simeon, there was substantial rate expansion on merchandise margin I'm talk -- I'm speaking for LB in total, substantial merchandise margin rate expansion in the second quarter versus last year and there were some deleverage in total in B&O. So, one was very favorable, there was deleverage, and the two effects netted to an overall gross profit rate that was about flat so -- to last year. But very significant expansion in merch margin and deleverage in B&O related to both the store channel and some in the direct channel as well, netting to about flat.

Amie Preston -- Investor Relations

And then -- sorry, Simeon, what was the second part of your question?

Simeon Siegel -- BMO Capital Markets -- Analyst

Any help on how you think about the revenue size versus EBITDA margin in whether LB or either of the concepts. I mean, it was just very impressive to see that EBIT growth despite the revenues declining.

Stuart Burgdoerfer -- Executive Vice President and Chief Financial Officer / Interim Chief Executive Officer, VS NewCo

Well, we took a lot of actions, obviously, to manage expenses, Simeon. And we took difficult decisions about expenses related to the store channel specifically. And then separately, as it related to home office overheads and marketing spending, we've clamped down pretty hard, as you would expect us to, in this environment, and a big part of the result was the difficult decisions we had to make with respect to store operating costs, including store payroll. But we're glad that we've been able to reopen the substantial majority of our stores as we move forward and we'll continue to manage expenses with discipline.

But what you saw in the quarter was very substantial actions that we took, and I think generally, what the industry took. But we were quite focused on it and tried to make the right decisions for the business to ensure cash flow and reasonable profitability in the environment and that's how I'd characterize it.

Simeon Siegel -- BMO Capital Markets -- Analyst

Great, thanks guys. Best of luck for the year.

Stuart Burgdoerfer -- Executive Vice President and Chief Financial Officer / Interim Chief Executive Officer, VS NewCo

Thanks.

Amie Preston -- Investor Relations

Thanks, Simeon. Next question please.

Operator

Our next question will come from Lorraine Hutchinson from Bank of America, your line is now open.

Lorraine Hutchinson -- Bank of America-Merrll Lynch -- Analyst

Thanks, good morning. I wanted to follow up on some of the more cautious comments you made in the prepared remarks in two pieces, really. First, you talked about some capacity constraints. Can you just discuss any efforts that you're making ahead of time to try to enhance your capacity to get ready for these peak volumes.

And then second on the costs, obviously, you'll see some incremental COVID costs in the back half. If there is any help you can give us on quantifying that? Thank you.

Amie Preston -- Investor Relations

Thanks, Lorraine. Andrew?

Andrew Meslow -- Chief Executive Officer, L Brands / Bath & Body Works

Thanks, Lorraine. So, in terms of your question around capacity, again there is capacity in both of our channels in terms of our stores channel and our direct or online channel. On the online channel, we have obviously been experiencing holiday like volumes really since the start of the pandemic. And what that has meant is that we have substantially ramped up our fulfillment center capacity even while needing to run those fulfillment centers in a way as we mentioned earlier, very consistent with our overall focus on safety protocols.

And as you might expect, that puts some constraints on throughput and other -- and other productivity measures in those centers, as we have to apply social distancing and other parameters in those centers. That said, we are very pleased with the ramp up in capacity that we have already achieved in both Bath & Body Works and Victoria's Secret. And as we move into the back half of the year, where volumes continue to grow, we're also on track to increase capacity even further across both networks. So feeling like we're in good shape there.

But obviously, any time there is a concern around an outbreak, that's something we have to monitor and take appropriate actions. And so, again, we are cautiously optimistic that we have -- that we have procured and are using capacity wisely.

When you think about our stores channel, in some ways, it's a similar constraint in terms of the number of customers that we're able to actually allow into the stores at any point in time in order to, again, be focused on safety as our key priority, as well as in our ability to process customers through our cash registers and lines within the stores.

As we've reopened stores, we started off with -- I'm speaking now for Bath & Body Works, a store opening pilot in late April that put a significant constraint on the number of customers we were allowing into the store early in that process early on keeping it at about 10% to 20% of max occupancy. As we move through the second quarter, we got comfortable with our protocols, again, around safety, social distancing, consistent sanitizing of all the surfaces and products within the store on a regular basis. And that allowed us to get comfortable with raising that max occupancy up to about 30%.

But that's still going to be an issue as we move into the height of holiday in terms of how many customers do we feel comfortable metering into the store at any point in time. Also, in terms of a different cash wrap layout. If you've spent time in our stores, either at Victoria's Secret or Bath & Body Works, you'll see that in order to allow for social distancing by our associates, not all cash wraps have been -- or not all cash registers on cash wraps have been able to be utilized, that has caused us to look at more mobile POS cash wraps in order to spread out customers and associates in the back of store to allow for that.

So, again, we're doing lots of additional testing here in the third quarter to simulate peak volume and understand how will that impact capacity and throughput? But those are really the reasons, Lorraine, for, again, the cautious outlook as we move to volume levels in the fourth quarter that I know you know about our business are many times, two to three to four times higher than what we would normally see in the second quarter.

In terms of incremental costs, as one would expect, putting in place safety parameters and personal protective equipment has certainly come with costs in our stores and we are happy that we have made those investments and happy that we were able to procure all those supplies in a very efficient way. But that does come with additional costs.

We're also seeing costs associated with what it takes to then run stores in this new operating model in terms of the level of labor in order to keep customers and associates safe, in order to be able to guide customers through the store, in order to be doing the ongoing sanitation of store and their product, as I mentioned earlier. So that all comes with additional costs.

And then in other parts of the supply chain, whether it's in our fulfillment centers that we are, again, from a safety standpoint, operating differently, including in some cases, paying premium, pay in order to procure enough labor, as well as we look upstream in terms of our base of supply and in terms of our distribution and logistics network. We are seeing some inflationary pressure there on wages in order to procure enough labor. So that's at a high level, how I would describe both of those things.

Stuart I don't know if there is any other color you would add either from a VS or total perspective.

Stuart Burgdoerfer -- Executive Vice President and Chief Financial Officer / Interim Chief Executive Officer, VS NewCo

No. I think -- I mean, as we've talked about together, Andrew, I think that covers it. And I just would put emphasis on -- you said it, I'd just put emphasis on the store capacity dynamic in the critical holiday period and Andrew described the things that we're working on and we are really working on them.

But our priority is to keep associates safe and customers' safe, which gets to metering of traffic and sorting out the balance on that capacity in that critical period is key. And we talked about in our remarks that we'll be working to try to spread demand to other time periods to serve customers with -- providing them with the things they want and enjoy and also to just logically [Phonetic] spread out the business to deal with some of those constraints.

Amie Preston -- Investor Relations

Great, thanks guys, and thanks Lorraine. Next question please.

Operator

Our next question will come from Alexandra Walvis from Goldman Sachs. Your line is now open.

Alexandra Walvis -- Goldman Sachs -- Analyst

Good morning, everyone. Thanks so much for taking the question here. I wonder if you could update us on the plan timeline for the closures at Victoria's Secret. And, on a related topic, I think you mentioned in the press release that you're expecting to recapture around 30% to 40% of the sales at those closed stores.

Can you talk a little bit about how you're getting to that number? Does that -- is that consistent with the types of recapture rates you've seen historically when you've closed stores, are you planning for that recapture to mostly take place in other stores or online? And do you see the risk that online traffic could fall a little in those areas as you -- as you close stores. So, any color on that would be really helpful.

Stuart Burgdoerfer -- Executive Vice President and Chief Financial Officer / Interim Chief Executive Officer, VS NewCo

Sure. Good morning, and thanks for the question. So, the store closure activity for Victoria's has been largely complete, not fully complete, but largely complete. We remain comfortable with the estimate of about 250 stores closing this year in North America. The difference between largely and fully is, we have some ongoing dialog with landlords, property owners, developers on some of these situations.

And so, not all of those -- not all 250 are fully resolved. But again, we remain comfortable with the estimate and an important decision for the business, as you appreciate. With respect to sales transfer, as you would also intuit or understand, there is a range of outcomes. We remain comfortable with the 30% to 40%. A portion of that, the minority portion, call it 5%, I'm generalizing, is going to the digital business, the balance going to nearby stores. As you would understand the specifics vary by trade area.

So a lot of this gets down to shopping patterns, traffic flows etc. in trade areas. It's how we look at it. And lastly, Alex, you asked if the roundly 30% to 40% is generally consistent with our past history? And the short answer to that question is, yes. And so, we've done more testing on this a year ago. As we got somewhat more aggressive with closures last year, we learned more, we had experience prior to that.

But again, what we're seeing is that 30% to 40% range, again, expecting that activity to be EBITDA and profit neutral as we move through and we think a healthy thing for the business. We all know what's going on in retailing generally and for the VS NewCo business, we believe this is an important step, a good step for the long-term health and profitability of business. So that's where we're at.

Amie Preston -- Investor Relations

Thanks Alex. Next question please.

Operator

Our next question will come from Jamie Merriman from Bernstein. Your line is now open.

Jamie Merriman -- Bernstein -- Analyst

Thanks very much. As you think about ramping up capacity for e-commerce for Bath & Body Works into holiday, how do you think about leveraging cost there? Does that put any limits on it and as e-commerce grows as a percentage of sales for BBW, do you see any investments on the horizon in terms of the digital platform or capabilities that you need there? Thanks.

Amie Preston -- Investor Relations

Thanks, Jamie. Andrew?

Andrew Meslow -- Chief Executive Officer, L Brands / Bath & Body Works

Hi. Good morning, Jamie. Thanks for the questions. So, on your first question, in terms of the capacity ramp up, obviously we are making any and all investments required in order to procure that capacity. That means working with more fulfillment centers than what we had at this time last year or even at the peak of holiday. We're already operating with more centers this year than last year by about 2 times and that magnitude will continue as we move through the rest of the year.

In terms of the other investments being made into those centers, obviously I described many of the investments associated with safety and making sure that we have adequate protocols, PPE equipment, as well as labor in those stores. Those are really the investments that we'll be making from a capacity standpoint.

From a -- your question around the percent of sale for Bath & Body Works direct and other capabilities that we're looking to add to the direct business over time. I think it's important to just reground ourselves on where has Bath & Body Works online historically been as a percent of the total business.

So, it finished 2019 at just under 20% of total revenue for the Bath & Body Works segments, but had been growing rapidly over the past several years, over the prior five years compounded average growth rate in the high 20%s and in the prior two years, 2019 and 2018, growing at about 30% per year. So already a large and fast growing portion of the business.

That said, as you would have seen in our materials released last night for the spring season to-date, this first six months of the year, Bath & Body Works direct was about 42% of revenue. Obviously peaking in the timeframe that stores were closed. But even as the majority of stores have reopened here through July and into August, the direct business as a percent of sales has continued in the high 20%s to 30% range and that's frankly how we're modeling the business go forward.

In terms of capability, you would have noticed that we have added the capability of buy-online-pickup-in-store. That is not something that the business had as a capability prior to second quarter of 2020. We have added that into, at this point, a little over 60 of our locations. 45 of those locations are specifically buy-online-pickup-in-store curbside only. That was a model that we were fortunate to have available to us in California when some stores that had reopened were forced to close as a result of governmental and jurisdiction requirements in that state.

So we have been able to continue to operate those stores and are pleased with the results we're seeing. Obviously stores do more volume when they're fully opened as opposed to curbside only, but it is a model that has allowed us to continue to serve our customers and associates safely in those environments. We do also have about a dozen locations where we have buy-online-pickup-in-store in addition to being fully open and we are pleased with those results as well and we're intrigued with how to roll that out more broadly as we move through the rest of the year.

Again, as Stuart mentioned earlier, we do need to smooth the volume out from our peaks in terms of peak days and peak time frames. And certainly, the buy-online-pickup-in-store option that allows the customer to lock in her sale, but then come and pick it up several days later is a key part of the strategy to do that as we move into the back half.

In terms of other capabilities, you've heard us talk about our loyalty pilot over the last couple of years. With the onset of the pandemic, we have not rolled that more broadly, but we continue to be intrigued and pleased with the results we're seeing there and do believe that we'll take that out more broadly as we move into fiscal 2021.

And we're also looking at other, what I'll call omnichannel capabilities to, again, more closely integrate our direct channel with our stores channel and so certainly all of the -- all of the tremendous surge in business online has had us accelerate some of the projects that were on maybe back burner or further out to be faster and we're intrigued by some of those opportunities as we move into next year. Nothing additional I would highlight, though, for balance of this year. Hopefully that was helpful.

Jamie Merriman -- Bernstein -- Analyst

Great. That was really helpful. Thanks.

Amie Preston -- Investor Relations

Thanks, Jamie. Next question please.

Operator

Our next question will come from Matthew DeGulis from KeyBanc. Your line is now open.

Matthew DeGulis -- Keybanc Capital Markets -- Analyst

Hi all. Thanks for taking our questions. So with inventory receipts being down 50% in VS and digital doing well, can you talk about how you're planning the balance of inventory between stores and digital? And I guess asked a different way, how lean can you keep stores relative to what stores were in the recent past and keep the full VS experience for shoppers?

Stuart Burgdoerfer -- Executive Vice President and Chief Financial Officer / Interim Chief Executive Officer, VS NewCo

So why don't I take a crack at that. It sounds like your curiosity is mostly on the Victoria's Secret side, it's Stuart. So, over the last several years, the inventory levels at Victoria's and the need to promote based on consumer response to what we were doing not being as strong as we would have hoped, has been high, meaning we've been somewhat over bought over the last two or three years. I'm speaking generally. It's varied some by line of business and by category.

With that said, the pandemic actually creates a real opportunity for us, in the positive sense, to make a substantial change in the profile of inventory purchases, which we've outlined. That in combination with what we do believe is being closer to the customer and delivering better fashion and newness, better merchandising fundamentals around good-better-best basics with Greg, Amy and John's leadership in those areas as the key merchant leaders in the business.

The combination of those things gives us real reason to believe along with some focus on getting the cost balance in line that we've got a real opportunity to deliver good experiences to customers and substantially improves the profitability, the merchandise margin rates in the business.

Obviously, being appropriately in stock for the customer in core categories and key sizes is a fundamental, and something that needs to be and we will remain very focused on delivering a good experience for her. So we understand the importance of that. We're managing that well.

But really, the need to fundamentally become much more conservative on the inventory buy or the purchases, again, triggered by the pandemic has a silver lining to it, in that it provided a real clarity to the organization about buying much more conservatively and then chasing in the business when the trend was in fact there.

So that's where we are. We understand that being in stock is important but in terms of overall turn in the business, importantly. In certain categories we were turning reasonably well or at a level that we are very comfortable with, and in other categories we had meaningful opportunity to improve the turn in the business. And again, the combination of everything I've just described, I think, is going to get us to a much healthier balance between inventory levels and purchases and the underlying demand. So that's where we're at on. Thanks.

Amie Preston -- Investor Relations

Great. Thanks, Stuart. Next question please.

Operator

Our next question will come from Roxanne Myers from MKM Partners. Your line is now open.

Roxanne Myers -- MKM Partners -- Analyst

Great. Thanks for taking my questions. My question is on Bath & Body Works. I'm just wondering if you can talk about how you're planning inventory for the holiday, what your ability to chase into trends looks like, and also your approach to the gifting strategy at Bath & Body Works, you know whether you're going more after packaged gifts or you know make your own or anything big that we should think about in terms of strategic changes there? Thanks a lot.

Stuart Burgdoerfer -- Executive Vice President and Chief Financial Officer / Interim Chief Executive Officer, VS NewCo

Thanks, Roxanne. So, as you can imagine, we are absolutely going to be relying very heavily on the agility and flexibility that our supply chain for Bath & Body Works allows us, as we move into the back half of the year. Again, because we don't know, it's a very wide range of outcomes that are possible. And so we want to be able to absolutely chase to the upside, if we're able to continue a trend more like what we've seen year-to-date, but also, use our agility as we have historically, to also cut back if in fact things don't materialize to the level that we would expect them to.

So, as a reminder, the Bath & Body Works supply chain is almost fully a domestic supply chain and a lot of it is actually produced right here in Central Ohio. And so that gives us, again, tremendous flexibility and agility and allows us to, as you mentioned, really chase into trends. So in our vernacular, maximize winners and minimize losers or things that end up performing worse than our expectations.

The ability to do that has been a critical part of our historical success and we're absolutely relying on it already through the first half of the year because we were surprised to the upside in the second quarter. And so, Bath & Body Works had originally cut back pretty substantially on receipts at the beginning of the quarter, but we were able to successfully chase back into receipts through the quarter in order to meet our demand that exceeded our expectations and we would expect to be able to use that same flexibility and agility in the back half.

In terms of your question around gifting strategy and specific -- assembled gift sets versus more open-stock [Phonetic] gifting. Again, I think it's important to remind everyone that Bath & Body Works is absolutely a gifting destination for customers' year-round at any point in time, at the height of holiday, probably 50% to 60% of customers claim to be coming in for gifts. Even in the rest of the year, that number is in the 30% to 40% range. So, year-around gifting is something that we focus on for sure at Bath & Body Works and we see that as a successful driver of the business.

As we move into this particular Christmas, I would say, based on several years of testing results around the pros and cons of having assembled gift sets, we certainly have moved over the last couple of years to having fewer, smaller portion of our business in those assembled gift sets and later, meaning closer to Christmas as opposed to earlier in the holiday season is when that business really peaks. And so we'll continue to rely on those learnings to impact our flow of assembled gifts, in terms of amounts and timing.

But again, what that does have us focus on then is ensuring that the whole assortment that's available for customers inside of the holiday time frame is giftable and making that as easy as possible for her with things like cellophane wrap available for all customers, ribbons to create gifts, our associates are happy to create those gifts for you in store, as well as provide you with supplies to do that from home. So, gifting in general has much, if not more of a focus this year than it's ever been. Hope that's helpful.

Amie Preston -- Investor Relations

Great. Thanks, Roxanne. Next question please.

Operator

Our next question will come from Susan Anderson from B. Riley FBR. Your line is now open.

Susan Anderson -- B. Riley FBR, Inc. -- Analyst

Hi, good morning. Nice job managing the quarter. I guess first one clarification, just on the performance. You talked about quarter-to-date, is that from July or I guess from the total performance you saw in the quarter? And then, as it relates to VS, it seems like there is some stabilization going on there, though a little bit muddled, given the pandemic.

Can you maybe talk about the drivers of the performance? I guess, what's working now versus historically? And then the 250 stores you'll close this year, are there any thoughts around how this is going to impact profitability and the retention rate of sales you expect either online or at other stores? Thanks.

Amie Preston -- Investor Relations

Thanks, Susan. We'll start with Stuart.

Stuart Burgdoerfer -- Executive Vice President and Chief Financial Officer / Interim Chief Executive Officer, VS NewCo

So in terms of, is Victoria's Secret stabilizing? I think in many respects it is. Earlier in this call, we talked about the benefits of a more conservative posture on inventory purchase levels, how aggressive we're buying and how that has an effect on promotional activity. So that's been an important change. It's starting to bear some fruit.

I talked about the work that Greg, Amy, and John are doing in Beauty, PINK, Victoria's Lingerie and the fundamentals that they're pursuing in terms of merchandising fundamentals, easy things to say but hard to do, really gaining some traction, and seeing across all major categories healthy average unit retail growth and meaningful margin rate improvements, which is certainly indication of a better, stronger response from consumers with respect to what we're selling.

We are implementing a profit improvement plan that we've talked about. A lot of that benefit relates to the Victoria's Secret NewCo business. But with all that said, we got a lot of work in front of us. The business' results have declined substantially over the last few years. We're not in any way out of touch with reality about where we are.

But with that said, and in the spirit of your question. I sense a real stabilization and with the combination of actions that we're pursuing and that we've talked about, I see the opportunity for that stabilization and then for resuming to the pattern of growth, most importantly at retail in terms of top line and margin dollars, again, in combination with the cost rationalization actions that we've pursued.

Maybe lastly and a lot into the -- in my response but it all is -- all of these factors matter. Amy has done important work on the PINK brand positioning. John is doing important work on the Victoria's brand positioning. Some of the changes one might argue had been subtle so far, but we have indication that the consumer is noticing those changes and those are important changes, and there is more to come on both those things.

So we got a lot in front of us. Again, we're not confused about where we are. You put that in combination in operating in an environment that's a pandemic with the effect of closing stores and the earlier conversations around store capacity and so on at holiday. But feeling like the business is stabilizing and that we're creating the platform for growth. So that'd be my perspective on Victoria's. Thanks.

Amie Preston -- Investor Relations

And Susan, you did say that the closure of the 250 stores we expect to be neutral to profitability. I'm not sure we understood your question about quarter-to-date versus July or -- I wasn't sure what you mean by that?

Susan Anderson -- B. Riley FBR, Inc. -- Analyst

Yeah, just in terms of -- it doesn't sound like you've seen any weakness from back-to-school or anything, like the trends have continued. I guess, I was wondering if that was from July, just given, I think there was maybe some variances from the beginning of the quarter to the end of the second quarter?

Amie Preston -- Investor Relations

Yeah. No, we had consistent business throughout the quarter and that has continued so far into August.

Susan Anderson -- B. Riley FBR, Inc. -- Analyst

Great, thanks.

Amie Preston -- Investor Relations

Okay. Next question please.

Operator

Our next question will come from Omar Saad from Evercore ISI. Your line is now open.

Omar Saad -- Evercore ISI Group -- Analyst

Good morning. Thanks for taking my question. A quick follow-up on BBW, the plus 87% store comp or opened store comp, obviously, we assume that slowed as more and more stores open. I think 98% of the stores are open now. Is there a way you can kind of put some guardrails on how we should think about how the stores are operating kind of on an ongoing basis. And then Stuart, would you mind kind of addressing quickly as you do more BOPIS and curbside, the margin differential in those types of transactions versus pure traditional e-commerce? Thank you.

Amie Preston -- Investor Relations

Thanks, Omar. We'll go to Andrew actually for both those questions.

Andrew Meslow -- Chief Executive Officer, L Brands / Bath & Body Works

Yeah. So, thank you, Omar. In our prepared remarks last night, we talked a little bit about what were the factors that we thought certainly helped benefit the strong positive comps that we did see as stores open. So, again, to reiterate what those were. Obviously, when you have a very small number of stores opened in the early part of the quarter.

As a reminder, we -- for Bath & Body Works, started the quarter with only 23 stores reopened in North America and we gradually increase that number by -- about 50 a week through May, about a couple of hundred a week through June and then down to about a 100 a week through July to get to that essentially fully reopened as we sit here now in mid-August.

But as you would expect, when very few stores were reopened and only a couple of stores in each market early in the quarter, we obviously saw tremendously high comps out of those locations as they were drawing from a multiple store trade radius.

Obviously in our categories too, which is a use up category, where if you're loyal to our products, whether again that's soap or body care or home fragrance, you tend to, if you're using it every day, go through it in about four to eight weeks depending on the product category, which means as stores were closed there was clearly some pent-up demand. And while some customers did move their purchasing online, many customers waited for our stores to reopen and so we certainly felt some of that impact as we reopened.

And then also, as mentioned, obviously industrywide, there is a tremendous demand for soap and sanitizers and so we certainly felt the benefit of being a strong player in that category. All of that said, even at stores were opened for a longer period of time, so specifically stores that opened late in Q1 or early in Q2, by the end of the second quarter, we were still seeing very strong double-digit comps out of those locations. And again that's what we're looking at, and again building our upside use to assume that what would it take to maintain that kind of a trend, while also managing to downsides, again, either based on capacity or if there were to be a change in momentum in the business.

On your question regarding BOPIS, I think maybe it's -- or buy-online-pickup-in-store, I think it's important to clarify that the capability that I described earlier was specific to Bath & Body Works. That's the only locations right now where we are utilizing that buy-online-pickup-in-store capability.

In terms of your question around what do those trend -- the profile of those transactions look like relative to "a normal transaction." Again, when you're buying online, you're doing so through the website and then directing the purchase ultimately to be fulfilled in one of our stores. But the profile of those transactions look very similar to our other online transactions.

Our online transactions tend to have a slightly average order size -- a higher slightly average order size than our in-store transactions. But in terms of margin or category mix, very similar to a "normal or average transaction." So not something that we would think go forward drives a material change.

Amie Preston -- Investor Relations

Great.

Omar Saad -- Evercore ISI Group -- Analyst

That's helpful. Thank you.

Amie Preston -- Investor Relations

Thanks, Andrew. Thanks Omar. Next question please.

Operator

Your next question will come from Kimberly Greenberger from Morgan Stanley. Your line is now open.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Great, thank you so much. Good morning. Andrew, I wanted to ask about the capacity -- store capacity that you're talking about at Bath & Body Works. I think you indicated that as a result of social distancing that you had capped your capacity at 30% of max right now in Bath & Body Works stores.

Does that continue into the third quarter? And what percentage of revenue -- so we understand the foot traffic is at 30% of max capacity, but what percentage of last year's revenue can that low level of traffic capacity deliver in your stores? I would assume that it's materially better than that, but I just wanted to see if you could help us understand how the traffic capacity limit translate into store-only revenues at this level?

Andrew Meslow -- Chief Executive Officer, L Brands / Bath & Body Works

Thanks, Kimberly. So, obviously a lot of complexity associated with that answer or with that question, so I'll try to directionally answer it, hopefully in a way that's helpful. So again, when we're speaking in terms of metering traffic or number of customers in the store, the percent capacity that we're talking about there is generally a capacity that's given by local authorities around what would the fire marshal, for example, say as a safe number of people to have in the store at any point in time. And we've pegged that 30%, directionally, number due to -- really looking at what does that allow for in terms of social distancing of associates and customers throughout the store?

So, obviously, in many days of the week and many times of the year, that's not a problem at all, meaning that even at a 30% capacity, we don't -- that doesn't create a line outside the store at all. But at other times of the year, in the peak of holiday, that's obviously what we're looking at and trying to figure out.

So, in terms of that number itself, we certainly will be continuing to test and monitor that. Again, the priority is safety. So we're not going to make any changes to that if we think that requires us to compromise on safety and social distancing. But certainly, we are continuing to monitor to see if that number is right.

The other part of your question was around modeling. What does that allow us to do in terms of covering last year revenue? So obviously, in the second quarter, even with those parameters in place and even more stringent parameters in place earlier in the quarter, you saw that obviously, there was no constraint in terms of our ability to maximize revenue in the stores.

Traffic into our locations in the second quarter was down, it was down in the high single-digit range. There was some differentiation of that traffic between mall stores and non-mall stores. It was down more in mall stores. It was actually up in non-mall stores, driving performance differentiation between those locations. But the other parts of the selling equation were up dramatically. So conversion up in the 30% range and average dollar sale up in the 40% to 50% range.

So, way more than an offset obviously to that traffic decline and we will be relying on those metrics to continue to drive performance as we move into the back half. The combination of those things obviously means that the dollar generated by every footsteps into our store is up dramatically -- up basically double to last year, if that's helpful.

Amie Preston -- Investor Relations

Great. Thanks, Andrew.

Stuart Burgdoerfer -- Executive Vice President and Chief Financial Officer / Interim Chief Executive Officer, VS NewCo

Maybe, Kimberly, just to add on a little bit or to further emphasize, you're trying to envision as we are, how many people can you fit in the store safely, right? And if we think about in Bath & Body's case, base case run rate, 40% to 50% conversion rates, right, generally. And at Victoria's, let's say 30% conversion rates. How do you think about lookers versus buyers, right? And what do you see in terms of conversion rates and dollars per foot step? That's a key part of what we're trying to sort of out, what Andrew was describing.

And what we've seen so far is a substantial increase in dollars per foot step, right. So it's a complex thing. You're trying to sort out physical capacity in your question, I think, and then there is another aspect of what's the nature of that visitor to your store, right? And what is she doing? And how many people are with her? And what's her intent to buy, right? So it's complicated beyond just how many people can fit in a store.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Great, thank you for that color.

Amie Preston -- Investor Relations

Thanks, Kimberly. And we're running a little short on time here. We have lots of people left in the queue. So let's try to ask only one question and we'll see how many we can get in here. So, next question please.

Operator

Our next question will come from Jay Sole from UBS. Your line is now open.

Jay Sole -- UBS Securities -- Analyst

Great, thank you so much. My question is about Bath & Body Works International and the partner-owned stores. How are you thinking about the growth potential in that business from the roughly 285 stores or some odd this year? I mean what countries do you see it from? And is there anything about the separation which will cause a change in that business' growth potential and how you're managing it?

Amie Preston -- Investor Relations

Thanks Jay.

Andrew Meslow -- Chief Executive Officer, L Brands / Bath & Body Works

Thanks, Jay. Yeah, so as we've talked about in some prior calls, the BBW franchised stores around the world, outside of North America is a very nice business model, very successful and profitable business model that has seen nice growth over the last several years. Obviously, the pandemic had an impact on that business, just like it had an impact on all of our businesses. But similar to the U.S., the Rest of World franchise partners are now largely reopened in terms of locations around the world and also we're able to very successfully shift business to online in all of their markets as well.

So when we think about, from a future potential opportunity, again, that franchise model, which is a low capital -- capital-light investment with a lot of potential upside, it's something that we absolutely do believe over the next several years we will want to expand further into additional geographies, because, again, we have seen it perform well essentially everywhere we've gone.

In terms of specifics around that, again, in the midst of -- in the midst of still figuring out 2020 and operating safely, we're not going to speculate on what that will be going forward. But certainly an important profitable business and one that we do see with growth potential go forward.

Jay Sole -- UBS Securities -- Analyst

Thank you so much.

Amie Preston -- Investor Relations

Thanks Andrew. Thank Jay. Let's try to get two more in here. Next question please.

Operator

Our next question will come from William Reuter from Bank of America. Your line is now open.

William Reuter -- Bank of America -- Analyst

Good morning. Thanks for squeezing me in. My question is just on the marketing savings, how much you achieved during this quarter? And then, will you continue to keep your marketing expenditures at lower levels in Q3 and Q4 or since stores are open, are you going to increase from the historical levels? That's it, thanks.

Amie Preston -- Investor Relations

Thanks, Bill. We'll get to Stuart.

Stuart Burgdoerfer -- Executive Vice President and Chief Financial Officer / Interim Chief Executive Officer, VS NewCo

Bill, the short answer is, they'll return back to more typical levels. So we've pulled back on a lot of stuff, as you could understand, but they'll return to more normal levels as we move into the holiday period.

Amie Preston -- Investor Relations

Great.

William Reuter -- Bank of America -- Analyst

Great, thank you.

Stuart Burgdoerfer -- Executive Vice President and Chief Financial Officer / Interim Chief Executive Officer, VS NewCo

You're welcome.

Amie Preston -- Investor Relations

Thanks. So, one final question.

Operator

And our last question will come from Paul Lejuez from Citi. Your line is now open.

Paul Lejuez -- Citigroup -- Analyst

Hey, thanks guys. I'm sorry if I missed this, but can you talk about how the soap, sanitizer business performed during the second quarter and also what percent? If you look at it this way, what percent of transactions included soap, sanitizer items compared to the first quarter and maybe the -- versus same quarter a year ago. Thanks.

Andrew Meslow -- Chief Executive Officer, L Brands / Bath & Body Works

Hi Paul, it's Andrew. So I did mention earlier that we obviously saw a very strong performance out of our soap and sanitizer category. Directionally, that business last year, on an annual basis, was 14% of the business in the first half of the year, last year was in that same 14% to 15% of the business range. And this year, in Q1, it was about 25% of the business, and in Q2, a little higher than that.

But in terms of percent of transactions, I don't think that's something we historically have talked about. But safe to say that customer engagement into that category has been very high, and so as it's grown as a percent of sales, it's seen a comparable growth in terms of customership into that category. And certainly a business that we remain very bullish on into the future.

Paul Lejuez -- Citigroup -- Analyst

Thank you.

Amie Preston -- Investor Relations

Okay. All right, that concludes our call today and thank you for your continuing interest in L Brands.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Amie Preston -- Investor Relations

Andrew Meslow -- Chief Executive Officer, L Brands / Bath & Body Works

Stuart Burgdoerfer -- Executive Vice President and Chief Financial Officer / Interim Chief Executive Officer, VS NewCo

Ike Boruchow -- Wells Fargo Securities -- Analyst

Matthew Boss -- J.P. Morgan Securities -- Analyst

Simeon Siegel -- BMO Capital Markets -- Analyst

Lorraine Hutchinson -- Bank of America-Merrll Lynch -- Analyst

Alexandra Walvis -- Goldman Sachs -- Analyst

Jamie Merriman -- Bernstein -- Analyst

Matthew DeGulis -- Keybanc Capital Markets -- Analyst

Roxanne Myers -- MKM Partners -- Analyst

Susan Anderson -- B. Riley FBR, Inc. -- Analyst

Omar Saad -- Evercore ISI Group -- Analyst

Kimberly Greenberger -- Morgan Stanley -- Analyst

Jay Sole -- UBS Securities -- Analyst

William Reuter -- Bank of America -- Analyst

Paul Lejuez -- Citigroup -- Analyst

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