Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the L Brands Fourth Quarter 2019 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions].

I will now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer of L Brands. You may begin. .

Thanks, Amy. Good morning, everyone, and welcome to L Brands' Fourth Quarter Earnings Conference Call for the period ending Saturday, February 1, 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. Our fourth quarter earnings release, additional commentary and earnings presentation are available on our website, lb.com.

All of the results discussed in today's call are adjusted results and exclude the significant items described in our press release..

Stuart Burgdoerfer, EVP and CFO, and I will handle the call today. Thanks. And now I'll turn the call to Stuart. .

Thanks, Amie, and good morning, everyone. I'd like to take a few minutes before we open up the call for your questions to highlight some key points related to the transformative transaction with Sycamore Partners that we announced last week..

As you know, last Thursday, we announced the sale of 55% of the Victoria's Secret Lingerie, Victoria's Secret Beauty and PINK global businesses, collectively Victoria's Secret, to Sycamore Partners for proceeds of approximately $525 million.

The transaction is the result of a comprehensive review of a broad range of options undertaken by the Board, with input from outside financial advisers, designed to best position our brands for long-term success and to drive shareholder value.

We believe this transaction will highlight the value and performance of the stand-alone Bath & Body Works business, enhance management focus and reduce structural complexity..

Additionally, we believe that a private entity structure creates the best environment for a Victoria's Secret turnaround. While we recognize that Victoria's Secret's performance has deteriorated meaningfully over the last several years, the brand leads the lingerie category in North America and has high levels of global awareness..

We believe that Sycamore, which has substantial experience in the retail industry, will bring a fresh perspective and greater focus to the business. We are pleased that by retaining a significant ownership stake, our shareholders will have the ability to meaningfully participate in the upside potential of this iconic brand..

Andrew Meslow, former Chief Operating Officer of Bath & Body Works, has been promoted to Chief Executive Officer. He's been with the business for 15 years and has an exceptional understanding of the business and its customers.

Nick Coe, previously Chief Executive Officer of Bath & Body Works, has been named Vice Chairman of Bath & Body Works Brand Strategy and New Ventures. In his new role, he will focus more intently on the strategic position of the business, the evolution of the brand, product development and new ventures and acquisitions..

We are confident that this succession plan, which leverages the unique partnership established by Nick and Andrew to advance the long-term strategic direction of the brand, is the best arrangement for the business..

Upon the close of the transaction, which is expected to occur in the second quarter, Les Wexner will step down as CEO and Chairman of L Brands to become Chairman Emeritus, remaining as a member of the Board..

We intend to use the proceeds from the sale as well as approximately $500 million in excess balance sheet cash to reduce debt. There are also about $2.5 billion in balance sheet lease liabilities related to Victoria's Secret.

After accounting for the expected debt and lease liability declines, on an adjusted debt to EBITDAR basis, we expect that our overall leverage ratio will be close to its current level..

We know that you have many questions about what the new stand-alone Bath & Body Works business will look like from a financial perspective.

In the investor presentation, which we made available with the transaction announcement, we have allocated our international business and Mast functions to Victoria's Secret and Bath & Body Works for the past 5 years..

Over the next several months, we will be reviewing the functional and corporate support required for the stand-alone Bath & Body Works business with a view to simplifying our existing structure and recognizing that we will still be supporting the Victoria's Secret business through transition services agreements with various terms, which will minimize near-term dissynergies..

The management team, in conjunction with our Board, will also be evaluating the capital structure and cash priorities for the stand-alone Bath & Body Works business.

It is our intent when we have greater clarity on the above to conduct meetings with analysts and investors and provide the financial characteristics and growth plans for the stand-alone Bath & Body Works business. Thanks..

And over to you, Amie. .

Thanks, Stuart. That concludes our prepared comments. At this time, we'd be happy to take any questions you might have. [Operator Instructions].

And now I'll turn it back over to Amy. .

[Operator Instructions] Your first question comes from the line of Omar Saad with Evercore ISI. .

I was wondering, Stuart, if you could talk a little bit more about the rationale behind the Victoria's Secret spin-off. Was there a lot of interest in the brand? It's such an iconic asset, and it's just been such a big part of the LB franchise.

And any thoughts -- maybe a little bit more detail or any further thoughts on how the structure of that brand could evolve in a private environment that obviously the public shareholders could still benefit from.

Are there certain specific things you guys see in that business that will help it operate better in a more of a private environment?.

Yes. Thanks for the question, Omar. So there was significant interest in the brand for the reasons I think that you, Omar, and the capital markets and people generally understand.

With that said, as you know, the results of the brand, including the financial results, have been challenged, and that pattern continued in 2019 and is projected to continue certainly for a portion of 2020.

And so while an iconic brand with leading positions in key markets, financially -- as you know, as has been reported financially, the business has gone through a very challenging period financially, and again, that continued and accelerated in some regards in the fourth quarter..

And so management with advice from financial and legal advisers and heavy input from the Board as appropriate, a very substantial process was undertaken.

And from that, got to the conclusions of a sale of a majority interest and certainly had interest from a number of parties, but through a process that you would understand would occur, got to the deal that we've disclosed with Sycamore..

With respect to the potential of the business and how we thought about it, we felt strongly about retaining a stake. As you mentioned, this is an iconic brand with very strong positions.

And with new leadership and new perspective coming from Sycamore who has a lot of experience in the retail sector, as you know, we believe that this business can be stabilized and turned around. And that significant value can be created and specifically for L Brands shareholders through that 45% retained stake.

That's part of the sale of the majority interest..

So a thorough process, thoughtful process, meaningful interest, retaining a stake to participate in upside.

We have a history in our own past with respect to other transactions that we've entered into in the rationalization of our portfolio, whether it was Alliance Data Systems or Express or other businesses, the sourcing business for Mast, warrants that we had on Lerner, all kinds of different ways that we retained interest in businesses sold, majority interest sold.

And in each of those cases, L Brands shareholders benefited from the value created, monetized through that retained interest..

So it's a terrific business. We will be providing significant support to the business, as mentioned, through these transition service arrangements, doing so to try to minimize dissynergies that could otherwise occur if one rushed with respect to those things..

So we think we've got a good form of transaction. We're energized about the future. We have some experience importantly with Sycamore, good experience with them as an organization. And so the combination of all those things, again, through a thorough process overseen by the Board has got us to this outcome. Thank you, Omar. .

Thanks, Omar. .

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

Regarding VS strategy, you previously identified bras and marketing as big priorities.

Has the transaction changed the mindset or timing? And what are your thoughts with strategy around that as well as digital as you contemplate the priorities?.

Thanks, Oliver. In many respects, many of the elements of the strategies that we've talked about and the opportunities that we've talked about, I would expect, Oliver, will continue.

And things as fundamental as the opportunities around marketing or the growth in the core category of bras for Victoria's Secret Lingerie or for that matter, PINK, those strategies will continue. I think in some respects, we might see differences in execution, if you will, in terms of how those opportunities are pursued.

But as indicated, the transaction was signed -- the definitive agreements, I should say, were signed a week ago at 3:15 in the morning, and I happen to know that. And the time between signing and closing will be roundly 3 months, subject to regulatory approvals and other work..

And so in terms of specifically, what will change, obviously, the transaction needs to close. And the current leadership of the business will engage appropriately, and some of that's already begun with Sycamore as to a relaying of where the business is and what its best opportunities are.

And from that, as we move through -- as the business, I should say, moves through 2020, a re-articulation of the strategy and changes that may come from new perspective will become apparent and evolve as the business moves through over the next 12 to 18 months. That would be my expectation -- our expectation. Thanks. .

Thanks, Oliver. .

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

I was curious about how you're thinking about the growth of BBW for 2020. Will that come across all categories like we've been seeing? Or are you planning new products or categories? Maybe if you could talk a little bit about product strategy there as we look out this year. .

Well, what I would say generally, Susan, and this -- I'll go on to explain it more deeply. The strategy from a merchandising standpoint in the 3 major categories of the business has been working.

And so it's the business' view that they'll continue that strategy, and that may not sound exciting or revolutionary, but the reality is that strategy has been working well.

And with that said, there will be regular delivery of newness in the merchandise assortments, which has been the goal of the business over time and in most periods, delivered very effectively..

So from a merchandise category standpoint, no revolutionary change in 2020 because it's not needed. The business is running well. And again, with that said, I wouldn't want you to think that the business thinks about just selling the same thing day after day and month after month.

There is a regular flow of newness in each of the major categories, and that will continue in 2020. Thanks. .

Thanks, Susan. .

Your next question comes from the line of Tiffany Kanaga with Deutsche Bank. .

I know you're not providing 2020 guidance, but perhaps you could discuss the cadence this year for the pressures against Bath & Body Works' operating profit growth.

At what pace do you anticipate these headwinds rolling off? And how are you thinking about the longer-term algorithm for growth?.

Well, there's a lot in that question. But the business has the potential, and has delivered this pretty consistently, to deliver comps in the low to mid-single range in most periods of time, and to do that, managing margin rates and expenses with discipline and growing operating income dollars pretty effectively.

That's been at the 9% to 10% CAGR range, both top line and operating income, over the last several years. The business has had a very strong run. We have reasons to believe that the business has a lot of future potential..

But in terms of financial planning, if you will, the business tends to think about those things with appropriate balance because it serves the business well in terms of the management of risks and investments and so on and so forth. And we believe that there's comp growth in the low single range. There's ongoing growth in the direct channel.

That's growing at a very healthy rate. There's some growth potential in terms of number of stores but want to manage that carefully in terms of making sure that we're -- they're managing risk related to real estate in a thoughtful way we have been. You've heard a lot about the White Barn remodels. We have a lot of flexibility in our real estate plans.

And importantly, the growth of -- I'll get into a subject that I know is out there a bit just while we have the opportunity. The growth in store count in 2020 is expected to be substantially all outside of enclosed shopping malls, and we have a lot of flexibility in that plan..

So sales growth related to store count, comp growth, very strong growth, online are all drivers of growth. And again, managing the margin rates carefully and the expense structure carefully, and historically, that's resulted in a very strong overall financial result. .

Tiffany, I'd just add that 2 of the most important investments that we're making in the Bath & Body Works business are for the White Barn store remodels, which are driving high returns and investing in additional fulfillment capability to support the growth of the direct business, which has also been growing at above 30% rate.

So those investments will continue. Some of the sourcing pressure-related investments will moderate in the back half of the year as we start to lap the tariff implementations. .

Thanks, Tiffany. .

Your next question comes from the line of Edward Yruma with KeyBanc Capital Markets. .

Just real specifically back to the BBW sourcing comment. Help us understand exactly what the impact will be from tariffs, I guess, in the first half.

Are you seeing any other issues, I guess, with supply chain on the BBW side, maybe in the constituent components? And then finally, just kind of remind us how big of a business is the hand sanitizer business. .

Okay. Maybe we'll start with the last part of that first. The hand sanitizer business is about 5% of the total business. It is presently growing at a very high rate for reasons we would all understand..

With respect to tariff impact for BBW -- thank you. Yes. The impact in terms of year-on-year impact in 2020 will be a little more than $0.01 a share for the full year. So some pressure but not extraordinary pressure. And that'll moderate as we -- it's a little more weighted to spring than to fall. So some pressure on tariffs..

And there is just generally inflation in the supply chain. Generally, there's inflation in most world economies and inflation in the supply chain. The business has been able to largely offset that.

But there's -- to the extent that there's degradation in the merchandise margin rates at BBW, it's a function of the shift of business from -- or I should say, it's not really a shift, but the outpaced growth of direct.

So direct growing at a very fast rate and a lower merchandise margin rate for that business, even though the bottom line is similar to the store's profit rate, but some channel mix effect related to direct and then some cost pressure impact, tariffs being one driver of it..

And then consumers are strongly reacting to big days where there's a little bit of headline promotion, and the dollar results are very good. But the strength of consumer reaction on some of these big days has a little bit of pressure on the rate. So 3 drivers of a little bit of rate pressure in that business.

But overall, still very healthy dollar growth, margin dollars and operating income dollars. Thanks. .

Thanks. .

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

Stuart, you talked about the $2.5 billion of lease liabilities that's going with Victoria's Secret.

Can you talk about any remaining lease liabilities to Victoria's that will remain on the LB or BBW balance sheet? And then now that the business is going to be smaller from a revenue perspective at least, should we think about potential changes to the dividend policy in terms of how big the dividend is versus what the new BBW/LB capital structure should take in?.

Thanks, Ike. So BBW/LB will have some contingent liability exposure related to Victoria's Secret store leases and some office leases. That exposure in terms of a gross exposure is roundly or roughly $400 million.

The accounting literature requires us to book a liability that estimates the potential, what I'll call, net exposure related to that, and we'll go through a process to do the probabilities related to those, again, gross exposures. They run off over time as the leases run through their terms.

But in a gross way related to the $2.5 billion, which is the liability that is coming off the LB books, we've got contingent exposure of about $400 million, and we'll have an accounting exercise to do or an economic exercise to do that is what do we think our net exposure is related to that gross liability..

With respect to, Ike, the dividend policy and capital structure planning for Bath & Body Works, frankly, we've just got work to do. We've just signed this deal last week. We'll be doing analysis. We'll get input from outside advisers. We'll have the appropriate conversations with the Board. And when we know more, we'll tell you.

But the question is the right question. We need to take a look at it. We will take a look at it. And when we have something to report, we will. But it should get and it will get a fresh look, including a review and approval by the Board at the appropriate time. Thank you. .

Thanks, Ike. .

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

You issued guidance for the first quarter inclusive of Victoria's Secret. And I wonder if we could spend a moment on that.

Can you talk about what's embedded in your comp expectations for the consolidated comp down low single digits? What does that imply for BBW and VS specifically? And then also within that guide was a comment that BBW operating income would be flat to slightly up.

Can you share the building blocks behind that expectation?.

Okay. So on the comp guidance, Alex, with respect to the comp assumptions, within the total, it would be for the Bath & Body Works comp to be up mid-single digit and for the Victoria's comp to be up between mid- and -- or pardon me, down, pardon me, for the Victoria's Secret comp to be down between mid-single and high single-digit.

With respect to Bath & Body's operating income assumptions, do you want to comment, Amie?.

Sure. Yes. I think that's just a reflection, again, of some of the cost pressures we've talked about extensively here.

And of course, we're not planning the business to continue at this double-digit comp rate to mean the business is going to work very hard to chase back into what's working and maximize their opportunities from a cost -- or from a comp perspective.

But those cost pressures on what Stuart mentioned was a mid-single-digit rate in a lower-volume quarter, in the first quarter, will put some pressure on the operating income. .

And important to know, and you would appreciate this, Alex, I mean, management will be incented and is incented, including financially, to beat these numbers. That's what you would expect. And in fact, that's how it works. So we'll work hard to do better than this, but that's our current view. .

Thanks, Alex. .

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

This is Alex Straton on for Kimberly Greenberger. I just wanted to touch on the international component of the Bath & Body Works business.

Could you give us a sense of how large it is on a sales and stores basis and how you guys have been projecting that to grow maybe prior to the transaction announcement?.

Yes. In terms of its size, the operating income associated with it is about $30 million. I didn't bring all my detail on that international business. And it's growing at a very fast rate, number of doors -- somebody's got to hand me a piece of paper here so we can be responsive. Thank you. 200 -- about 200 -- ending the year with 266 stores.

Retail sales approaching $400 million. Our revenue, round numbers, these are '19 numbers, a little more than $40 million because it's all franchise. And the operating income rate, extraordinarily high, almost 70%..

So again, I just rattled off a lot of stuff. About 260 doors ending the year, growing about 20%. Retail sales growing about 30%. Our revenue, as you would expect, growing about 30%, a royalty-based model. And a very high profit rate business, delivering operating income in '19 of, in round numbers, about $30 million. So it's a terrific business.

We see a lot of additional potential growth in this business. It -- today, it's within that international segment. That's part of the LB reporting segments. And as we move forward, I think it'll be more apparent to folks what the value of this is to the business.

But hopefully, the profile I've just shared dimensions that for you, and we see a lot of future growth here. Again, retail sales in 2019 grew 30%. .

Thanks, Alex. .

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

I wanted to follow up on the BBW real estate plans. I guess a couple of components here. First, with the remodels, can you just remind us what you're seeing in terms of the lift in productivity there? And then I know you said there is a lot of flexibility.

But in the investor presentation, it does look like you're planning a bit of an acceleration in the BBW square foot expansion this year. If you could just speak a bit to that. And just bigger picture, where you see the white space opportunities in North America, and ultimately, where that square footage number or store count can go. .

Sure. So the lift that we see when we remodel a store to the -- what we refer to as the White Barn format, which is most typically the shop-in-shop format, is roughly 20%. And that lift sustains, meaning it's not a boom splat where you get it for a short period of time and then it reverts back to where it was before. It sustains in multiple years.

We've analyzed the heck out of this, or I should say, the BBW team, along with the real estate team, both have analyzed the heck out of this, and that lift persists and gets to a good financial outcome and allows us -- has allowed us to remodel a very large portion of the fleet. So that would be the perspective on the remodels..

With respect to the new store activity, as I mentioned in an earlier comment, substantially, all the new stores are off-mall, not in enclosed shopping malls, in power strips with a very strong economic profile. We -- of course, you would expect that we look at cannibalization, and we do.

But think of it as, as we close stores, we're closing stores in mid-tier or lower-tier malls. And then we're opening stores in power strips. Now about 45% -- a little more than 45% of the business' stores are not in enclosed shopping malls..

So it's a sound approach and strategy. We've gotten more experience. You might ask, well, why the acceleration? It's because the ones that we have done in the last 12, 18, 24 months have performed so well that we're pursuing it with more intensity..

And all that said, we got a lot of flexibility. So even in the 2020 plan that we shared, roundly, only about 25% of those leases are actually signed. So we've got a lot of flexibility should we see some dramatic change in the business. We're not expecting that, obviously. But should we see that, we've got a lot of flexibility..

So we believe the real estate strategy is a good one, and it's further shifting the business to locations outside enclosed shopping malls. Thanks. .

Thanks, Mark. .

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

Stuart, could you just provide some greater detail about the nature of some of the dissynergies as well as some of the TSAs associated with this transaction? How should we think about maybe the shape and the time frame of them potentially offsetting the dissynergies here? I believe some of the TSAs go out about 5 years.

So just some color there would be helpful. .

You're welcome. So the first thing I'd say is we're going to work like heck to minimize the dissynergies, which is what you would expect us to do. And so the areas of the business that have the longer terms in terms of the length or duration of TSA are those that have greater scale and/or complexity.

And so the longest TSA and the one that's the most complex is the TSA related to technology..

And we'll work carefully in partnership with Sycamore on the Victoria's business to, over time, migrate systems and separate systems at logical points that minimize the economic cost. And so the specific amount of dissynergies is to be determined.

But unlike perhaps some other transactions that we may have read about, we don't have to separate all these systems on day 1, nor is it our intention to do that. But in fact, what we're going to do is share many systems for a meaningful period of time. And again, at logical points of separation, we will separate the systems.

And we believe from that, that we will incur less onetime cost and less dissynergy than we would expect or that we otherwise might incur..

Apart from that, there are opportunities through a simpler go-forward business, the Bath & Body Works business specifically. The amount of corporate overhead and complexity will be substantially reduced.

And so there are going to be some dissynergies related to the subjects that we talked about and offsetting that, and we'll work out the dollars as we learn more. And we've done some initial work on it but not yet ready for -- hadn't been finalized and more to do before we get more specific about it.

But there will be opportunities to simplify this business from a multidivisional business now to a single business called Bath & Body Works. And from that, there will be opportunities to offset some dissynergies with reductions in corporate and other overheads. Thank you. .

Thanks, Kate. .

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

Just trying to work through the go-forward free cash flow. It seems like it should be relatively strong.

Have you thought about what CapEx for the BBW business on a stand-alone basis might be?.

Yes. We've given some thought to it. In round numbers, I would say -- and this is driven by the investments in real estate, but in round numbers, I would say, between $300 million and $350 million. And again, that reflects the majority of that related to the remodeling of stores and the opening of new stores that we've talked about.

We'll have more work to do on it, but we've done some initial work on it, and it's in that range. .

And with that said, a lot of that is very flexible. And so on the real estate CapEx, we have an ability to make adjustments to that quickly. In our own history, back in the great recession of 2009, we took our CapEx from $500 million or $600 million run rate, this is for the whole LB company, down to about $200 million in the span of about 12 months..

So if times get tough, we can hit the brake pretty hard. The profile for BBW will be lower, obviously, than the LB total. That's why you're asking about it. And again, ballpark number, $300 million to $350 million would be a good starting assumption. .

Thanks, Bill. .

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

Stuart, curious if you could maybe talk a little bit more about the international opportunity at Bath & Body Works, how fast you want to move and which countries might you be targeting.

And even just higher level, is there anything that you feel like BBW was getting held back from doing as part of the combined entity with VS that now you'll be able to do better as a separate entity?.

Thanks, Paul. With respect to kind of the last part of that question first, the short answer, Paul, would be no. Do I think that Bath & Body works being part of L Brands has, in some way, restricted the pursuit of growth internationally? The answer is no. As you know that we're pursuing that on a franchise basis. It's not capital constrained.

I think we have strong relationships with our franchise partners globally. It is a big opportunity for us. It's been broad-based. As we tighten up our communication about Bath & Body works over the next few months, we'll really hone in on that opportunity in framing that opportunity, Paul..

But again, for the last part of your question, I wouldn't say it's been constrained in any way because of the -- it's formed being part of L Brands, but it is a big opportunity.

And frankly, we were -- if we go back 3 or 4 years, Paul, we've been surprised in a good way, a positive surprise about consumers' reaction to Bath & Body Works in different major regions of the world.

But I think we owe the capital markets a fuller articulation of that opportunity, and that'll be part of our work over the next few months as we really expand and tighten up the communication of growth opportunities for Bath & Body. Thanks. .

Thanks, Paul. .

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

If I can just start, the direct business for BBW has been growing so strongly, as you said. So just wondering if you could talk about what investments you're making in omnichannel capabilities. And I know that you recently re-platformed the Victoria's Secret e-commerce business.

And I'm wondering if things similar needs to be done at BBW or if you're happy with the tech underlying the e-commerce platform. .

Yes. The short answer is we're pretty happy with it. The most important thing to note about the direct business for Bath & Body, in my view, is that the front end -- the technology in the front end is outsourced. It's provided by a third party. And the fulfillment model, distribution and flow, is also outsourced.

So it's more of a variable model, a capital-light model. We are making significant commitments with our partners on it. But we're -- on an overall basis, we're pretty pleased..

There are 2 initiatives that the business is pursuing. They're both in pilot stage. One is buy online, pick up in store. This is for Bath & Body in a pilot stage.

And then the other is, for now, probably a couple of years in total, a lot of refinement given the importance of it, is a pilot that the business has pursued with respect to a loyalty program that is now in about 300 -- roundly 300 stores.

And so in terms of initiatives, buy online, pick up in store, something in front of us and further refinement and then rollout of the loyalty pilot that's been going on now for probably 18, 24 months. But overall pleased, and again, an outsourced model. .

Thanks, Jamie. .

Your next question comes from the line of Adrienne Yih with Barclays. .

A couple of clarifying questions.

Is the mid-single-digit BBW comp for the quarter, is that what you're running quarter-to-date, same thing for the Victoria's Secret side? And then what was the BBW segment free cash flow in 2019? And then my third kind of clarifying question, sorry, is I don't understand -- or maybe the trajectory of a mid-single-digit comp, you had some deleverage with some investments in Q1.

How does that look past Q1? Do we start -- should we think about that mid-single digit being the breakeven comp?.

Yes. So 3 questions. First is on comp results so far in February, we're not going to comment on that. I don't mean to be unhelpful, but we're comfortable with the guidance we've given and that's all I'll say about that.

With respect to free cash flow, we've got more work to do, obviously, on the capital structure of the Bath & Body Works business, which we've mentioned. And I don't want to kind of shorthand that and give pieces of it without providing the whole picture. You know the profitability of the business.

It was asked and answered about the CapEx, but we're doing more work on it..

And in terms of the overall cash flow characteristics of Bath & Body, they're terrific, obviously, by the way. But in terms of a full assessment of it, which, ultimately, I think, we'll get to the question of dividend policy, you appreciate that, that should be done in a comprehensive way, which we will do.

And when we're ready to talk about it, we'll talk about it. So that would be my views on BBW free cash flow. And we'll get to it as soon as we can, but we want to do it thoughtfully. And you can appreciate, hopefully, we've been busy with some other things..

And then thirdly, with respect to the mid-single-digit comp, getting to breakeven-ish -- or not a lot of growth, I should say, year-on-year growth, not breakeven, not a lot of year-on-year growth in operating income, Amie mentioned that it's a smaller quarter.

And so as you think about leverage on fixed and variable costs, the result that you're asking about for Q1 doesn't translate through all the quarters just based on the relative size of the quarter. So that would be my additional view on your third question. Thanks. .

Thanks, Adrienne. .

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

Just 2 quick follow-ups. One, you mentioned the loyalty program pilot. I didn't realize it was already in 300 stores. I would love to get some feedback on how that is performing and how much more that customer involved in loyalty program is spending, how much more they're frequenting your stores.

And then as it relates to technology investments overall, I'm just wondering if -- as a result of the separation, if you expect to accelerate investments in technology to further what is already very strong growth of BBW, particularly online, and where you see those opportunities aside from, for example, the BOPIS investment that you -- the pilot that you mentioned.

.

Yes. So with respect to the loyalty program we mentioned about, it's in just shy of 300 stores. The business is pleased with the overall results and is evaluating the rollout timing to the balance of the fleet. So that -- those would be the headlines. It is a points-based or rewards-based program based on her spending.

It involves a mobile app and provides her, in addition to value of points in financial reward, it gives her the opportunity to participate in some exclusive events and new products and so on. So it's got some texture on it beyond just "a discount, if you will.

So generally pleased with it and determining the best way to roll it out to more stores and ultimately, nationally..

With respect to tech investment, otherwise, in BBW, as I mentioned, a lot of the online platform for this business is outsourced. But to the extent that the company needs to invest in things like the buy online, pick up in store functionality, we won't be constrained there.

We don't have a specific game plan there in terms of the CapEx profile of that given that we're just in what I'll call a manual test mode right now. But there is opportunity there as you would appreciate. And the business will have plenty of cash flow to invest in that as that opportunity reveals itself.

And to some extent that we may do that working with our partners, meaning third parties, and some of that work we may do internally. Thanks. .

Thanks, Roxanne. .

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

For Bath & Body Works, could you talk a little bit about the difference in performance of enclosed mall stores versus strip centers? And then maybe some comments on the longevity and flexibility of the lease terms for both. .

Yes. So the first thing is that our stores perform well in both in-malls and off-mall. So the first thing I'd want to register and register it clearly is they perform well in both types of venue. Apart from that -- or I should say, in addition to that, the conversion rates are extraordinarily high off-mall, which you would expect.

It's more of a destination occasion. The good news about Bath & Body Works is based on its merchandise offering and the nature of the experience with customers, Bath & Body is a destination, both in-malls and off-malls, but the conversion rates are very high off-mall..

And lastly, occupancy costs as a percent of sales are lower off-mall than they are in enclosed shopping malls. So the off-mall format is very strong financially. But again, both types of store, if you will, are doing well, good growth, good profitability. The off-mall opportunity is a big one. And as you heard earlier, we're pursuing it aggressively..

As a general matter, our lease terms are 10-year leases. As you know, we've talked about consistently in many of our stores based on -- these are in lower-tier malls.

We have a lot of flexibility on month-to-month terms, and we get to that place just based on the strength of our business and the provisions in our leases related to occupancy levels and whether named tenants are doing business in those malls. So a lot of flexibility on -- in many situations. Generally, at 10-year lease terms. Thanks. .

Thanks, Lorraine. .

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

I guess, Stuart, since you mentioned earlier, to Ike's question, some of the Victoria's secret lease liabilities that will remain with LB after the transaction. Could you step back a minute, are there any other areas besides leases of liabilities that stay with LB? Just in case we missed anything.

And then maybe even bigger picture, how would you frame the downside that LB retains with this deal versus how much opportunity L Brands has to participate in the upside if the results do turn a corner? The obvious math, you keep 45% of the business, but do you participate linearly in the upside if the EBIT turns?.

Yes. So a lot in that question. A lot in that question. So our downside is limited for reasons you would understand. We have the exposure related to lease liabilities that's been asked about, and again, on a gross or aggregate basis, around $400 million.

There are provisions on how much debt can be put on the business that -- on the VS business that were negotiated and agreed. So we've got, I think, good protection there in terms of how that might be managed..

With respect to capital contribution requirements, there are essentially none of significance. And there's a lot of upside in just doing the math of what this business could be worth. If we all thought about what this business was worth 5 or 6 years ago, and the capital markets were ascribing no value to it, if not negative value to it.

And so it was important to us to retain a stake in that potential value creation, and at 45%, that's a meaningful stake. So there is some downside. We've framed it or bracketed it for you. And there's a heck of a lot of upside that potentially could be very, very significant.

If you just went back and did math off of what the business had done at its peak, if you even took half of that in terms of its potential, the upside is very significant. But at this time, we felt it was important to have the value of Bath & Body Works realized in the marketplace, to have new input and ownership perspective through a private format.

And we believe that those results have the potential to deliver a lot of value to shareholders. Arguably, they already have delivered value to shareholders if one looks at the share price move between early January and what has happened since then. So that's how we thought about it. Thanks. .

And Michael, I just want to clarify one point. That $400 million does not necessarily stay on our balance sheet. That would be... .

Yes. That's the gross number and we'll book an estimate of the portion of that we think could be a probability-based assessment of what our exposure is, so that $400 million is a gross number. .

So that'll be... .

It won't be on the balance sheet. It'll be meaningfully less than that. .

Yes. Great. Okay, guys. That concludes our call for today. Thank you for your continuing [indiscernible] L Brands. Thanks. .

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..