Bath & Body Works, Inc. (BBWI) Earnings Call Transcript & Summary

Good morning. My name is Misty, and I will be your operator today. At this time, I would like to welcome everyone to the L Brands 2020 Annual Meeting of Shareholders. I will now turn the meeting over to Leslie H. Wexner, Chairman and Chief Executive Officer of L Brands. Mr. Wexner, you may begin.

Yes, thank you. First, let me welcome, everybody to our virtual annual meeting. And remind -- I'm reminded to remind, I guess, everyone that this pandemic that we're experiencing has changed everything for everybody, so we're following the guidelines issued by the government, holding this annual meeting as a virtual meeting to protect the health and provide safety for all stakeholders, shareholders, associates in our communities. I hope everyone is staying safe, staying at home, washing their hands, keeping social distancing and doing all the things that we need to do to protect ourselves. We are an enterprise, and with that, we've -- I think we've provided a wonderful leadership, and we've had amazing support from our associates. So I'm very proud of how we have, in aggregate, responded to this crisis. About the agenda for today. I'll spend a few minutes going through the formal part of the meeting. We'll cover the matters described in the proxy. I'd like to introduce then our Board, talk a little bit about the state of the business and future direction. And we'll then turn over the meeting to the new Chair of the Board, Sarah Nash. Finally, Amie Preston, who's on the call will be coordinating questions, so that we can, at the end of the meeting, have an opportunity to use this platform to answer them. So please go ahead and submit questions. In the interest of ensuring that our meeting is efficient, we'll provide as many stockholders as possible with the opportunity to ask questions and our intention would be to answer them at the end of the meeting. Please note that we'll closely observe our rules of conduct. We're going to report earnings next week, so we will not be responding to questions that relate to that. So let's now begin the formal meeting. The polls are open and will remain open until the adjournment of the formal meeting. All stockholders entitled to vote at this meeting can do so on the virtual meeting platform if you have not yet voted or if you want to change your vote. Please remember that if you have already voted by proxy through the mail, telephone or Internet, it's not necessary for you to vote again. Sam Fried is acting as secretary of this meeting. He's present on phone, and he has a list of stockholders of the record date, and that record is available for inspection on the virtual meeting platform. We've also appointed Cheryl Chan of Davis Polk & Wardwell to serve as inspector of the elections. Based on the number of stockholders in attendance by proxy, a quorum is present. The items that have been submitted for your consideration are: a vote on a proposal to amend the certificate of incorporation to remove supermajority voting requirements; a vote on a proposal to amend the Certificate of Incorporation to provide for the annual election of directors; to elect 3 nominees proposed by the Board; to ratify the appointment of our registered accountants, Ernst & Young; to vote for a proposal to approve the 2020 stock option and performance incentive plan; to hold an advisory vote to approve our 2019 named executive officer compensation. All these proposals have been submitted by the company. And based on the proxies voted, sufficient votes have already been cast to approve the proposals to amend the Certificate of the Incorporation, to remove the super majority voting requirements, the proposal to amend the Certificate of Incorporation, to provide for annual election of directors, the election of 3 nominees, the ratifying and the appointment of Ernst & Young, the 2020 stock option performance incentive plan and our 2019 named executive officer compensation. Jeff Smith of Ernst & Young, our independent registered public accountants is present via phone at today's meeting and will be available for any questions during the question-and-answer period at the end of the meeting. I hereby declare the polls for voting at our 2020 annual meeting closed, and the formal meeting is adjourned. Now I'd like to introduce the members of our Board who are listening today. Patty Bellinger,, Michael Morris, Robert Schottenstein, Steve Steinour, Donna James, Sarah Nash, Anne Sheehan, and Abigail Wexner; Raymond Zimmerman and Gordon Gee did not stand for reelection, and Allan Tessler is retiring from the Board. At the conclusion of the meeting, I want to -- I'd like to remark about their contribution and the appreciation that I have for those 3 directors. When it comes to mind that I've known Gordon for more than 30 years. And Gordon is a good friend of the enterprise, and he's been a terrific director. Raymond Zimmerman and I have known each other for probably 40 years. And likewise, a good friend, a wonderful human being and a very loyal, and I think he, Gordon and Allan had a record of perfect attendance over all of the years. And last but not least, the retiring Lead Director, Allan Tessler. Allan is an extraordinarily capable lawyer, director, investor, good friend and has put in so many years of conscientious dedicated service to the company and has seen the company grow and expand, and his insight and understanding as well as Raymond's and Gordon's will be missed. I will -- I hope they continue to remain connected to the business and available for consultation. Truly remarkable. Now turning to the update on the business. I think in my career, I think I've thought at different points of time that I've seen almost everything. But until I saw this pandemic and the challenges, the hardships that it's put on the global economy, the global society and virtually changing the lives of everyone on the face of the earth, truly unprecedented. And as we see some states begin to approve the opening of retail businesses, we're seeing continued restrictions. They vary state by state, city by city. And it's a speculation to know when we will be back in full operation, just very -- the amount of uncertainty is beyond anything I think the world has ever experienced. Our primary priority number, probably it's first, second and third is the health and safety of our associates and our customers. And so obviously, we would follow all local, state federal guidelines, but most importantly, we are reminding ourselves going through this, the last several months, the safety and health of our associates and our customers is the top priority. As we began in this period that is unique probably in the history of the world, global pandemic, global economic knock-on effects from this lockdown of the world, I think we've taken smart and appropriate measures. We suspended the dividend. We furloughed most store associates and others who cannot work from home. We reduced the pay of our senior leaders. The Board members and myself suspended all cash compensation. We deferred normal merit increases in compensation and taken substantial actions to reduce inventory, dramatically reduce capital expenditures and make sure that inventories match the situation that we're in. Significant actions. None of these were easy. All -- each was unique in its own and the combination of all of them created just a very unique group of activities that we've taken carefully but quickly. The decision to furlough associates, approximately 65,000 people, is the most difficult decision I've ever made or we've ever made, but we had to take these actions. We must control the things that we can control. And priority of protecting the company so that we could weather the storm and as we come out of it, we can be in the best shape possible. We're managing our payables very carefully. And at the end of April, we had more than $900 million in cash as well as a $1 billion availability under an asset-backed loan facility. One of the things I learned early on in my career is never run out of cash. Our Board and leadership teams have been working diligently, carefully and collaboratively. And so that when we have gone through this and then we look back at this specific situation, we can feel good about what we've done, and we can open our doors, and we can continue to deliver the best brands in the world and with wonderful merchandise to an increasingly loyal customer base. Now let me briefly talk about the -- pardon, our dogs are in the room and they voted. We recently announced a go-forward strategy and terminated the agreement with Sycamore Partners. Our Board determined that it was in the best interest of the company, our stockholders and associates to focus our efforts entirely on navigating through this environment, facing the challenges and opportunities we have and focusing on success rather than being engaged in costly and distracting litigation with a prospective partner like Sycamore. And as part of that strategy, very important piece of it, Bath & Body, we're establishing as a stand-alone public company and are taking the necessary steps to prepare the new Victoria, the new PINK, the new Victoria's Secret Beauty also to operate as stand-alone companies. The Victoria team has been very active in improving not only the quality of fashion, but the quantity of inventory, managing expenditure, all expenditures, examining all costs and being in the best possible position, changing the mix of merchandise, brand marketing, and again, carefully managing inventory. So as we emerge from the pandemic, and we get back to normal, or the new normal, the Victoria brand can be in the best possible position. Stuart Burgdoerfer, who has worked in the company for years as Chief Financial Officer and knows the business from inside out and outside in. Stuart, very effective, very knowledgeable, very experienced in retail, and he will lead the new Victoria's Secret team. The Victoria's Secret brand has unparalleled brand awareness and customer loyalty. And we believe that the merchant leaders of the business are creating the foundation for significant improvement in profit and growth. The team that is building Bath & Body has built an extraordinary record. 2019 was the best year ever. And recently, Bath & Body had a milestone of achievement in becoming a $5 billion brand. Constantly bringing newness in merchandise, creating loyal customers, driving traffic to stores, to their online business and are delivering a remarkable not only 40 quarters of growth but 40 quarters of superb earnings, really industry-leading performance. And it remains a category-dominant brand in the personal care and home markets with accessible price points, brand elasticity, a foundation of the brand, which will allow the business not only to respond quickly, but to grow and it benefits from having an incredible high-speed sourcing and logistics model. I just couldn't be prouder of that business. In addition to appointing Stuart as the interim CEO, we're completing a number of other changes today. Andrew Meslow, who's been with the enterprises just short of 20 years, was recently promoted to be the CEO of Bath & Body Works. And Andrew has been with the business, with Bath & Body, and before that he was with Victoria. But he's been driving the business and helped create a great business, but again, best-in-class profitability. As of today, I'll be stepping down as CEO and Chairman, and Andrew will be appointed CEO of L Brands and join the company's Board of Directors. We'd be more confident in Andrew. And I know the business will be in terrific hands. Andrew has a deep and broad understanding of the business, as does Stuart. And so the 2 of them, I think, are a remarkable team. And Sarah has just been appointed as Chair of the Board. And Sarah has brought some fresh perspectives and I think insights to the Board. And Sarah and I were talking, I think it was yesterday, and I think we've known each other for more than 30 years. So when I met Sarah as a banker at JPMorgan, where Sarah was Vice Chair. And so she has a broad understanding of business and businesses and a long history of continuity of relationships with the business, and she's worked carefully and thoughtfully with Allan. So the transition of the Board Chair and the Lead Director responsibilities are just terrific. The handoff is -- the baton is passed cooperatively, completely and I'm looking forward to Sarah's leadership of the Board. In commenting about myself, and I'm sure people might wonder about how I feel about this, the changes and the change in business and changing my responsibility. And I think everybody expects me to be, I don't know, sad, but people are sympathetic to the situation. And Abigail, she just keeps asking me how are you doing, how are you doing? And I've been asking myself that question. And when I look in the mirror, I see a person who's very content and happy. And I've been thinking about that. And I think the reflection and if there's a lesson that I've learned from the experience of starting with a business, with a store and seeing it grow from 1 to 2 to 10 to 100 to 500 to 1,000, and we've probably created and spun-off a dozen different businesses and created a global enterprise, iconic brands, world-leading brands, and we've been inventive in so many ways over the history of the business. And I've always thought of myself as being incredibly lucky. And I think the -- if there's a lesson in all this, the teachers that I've had, the people that I've met, the trips around the world, probably 150 trips at least maybe 200 trips to Asia, every state in the union, creating so many businesses and knowing so many people, having hopefully impacted a significant number of lives and seeing the business grow, not only to be large and successful, but to be a really good company. And so proud even in the current circumstance. The funds that have been raised in stores for Feeding America, for the American Red Cross, associates helping associates, just remarkable group of people. So I've always felt that I've been lucky to work with what I think is the best -- are the best people in the world, and not just those that are in the immediate circle that I touch. When we visit stores, talk to people in all parts of the business really inspire. And I think what puts me in such a happy mood, contended mood, if you will, is that I have a real appreciation and gratitude. So I've been very, very lucky to have a career that I have, the family, the wife, the community relations that I've had it's like, when I look in the mirror, what I feel is a gratitude. And I was thinking about this subject of gratitude. And one of my favorite people was a German theologian, a man I wish I had met. And I think I've read everything that he's written and everything written about him. And his name was Dietrich Bonhoeffer. He spent most of his life, he was a German national, a religious leader and -- but a very righteous man. And as World War II is beginning, Hitler arrested him, put him in prison. And he was the antithesis of what Hitler was in terms of his righteousness and his virtue. Sadly, 2 days before the end of World War II, Hitler remembered him and a handful of others that he'd imprisoned for this whole period of the war and made sure that they were executed. So a tragedy. But Bonhoeffer wrote that it's only with gratitude that life can become rich. And I really believe that. Gratitude, I believe, is the greatest virtue. And I believe, as Cicero said, it's the parent of all others. And so I take this changing role in the business and in my career with really the most sincere gratitude to so many people that made life so rich for me. So with that, Sarah, why don't you take it from here?

Thank you, Leslie. What unbelievably heartfelt words let me say how very honored I am to be named as Chair of L Brands during this very important time in the company's history. L Brands truly has iconic brands that have resonated with our customers for decades, and I'm confident that they will continue to do so for years to come. Like all retailers, the company faces an extremely challenging business environment, but my fellow Board members and I are taking decisive actions that we believe are in the best interest of our company and our shareholders to address these challenges and best position our brands for success. While our business environment will inevitably be different coming back from the COVID-19 pandemic, we will remain true to our commitment to delivering world-class brands and merchandise to our customers. I look forward to continuing to support the growth and success of L Brands while delivering value to our shareholders. Now I'd like to turn it over to Amie Preston to facilitate questions. Thank you.

Thanks very much, Sarah. So we have a few minutes to take questions. We do have a Board meeting that is starting shortly. If we don't get to your questions before we run out of time or if you have additional questions after this session, please feel free to reach out to our Investor Relations group. Their contact information is on our website. We've also received a few questions that will be addressed on our earnings call next week, so we're not going to be responding to those questions at this time. So the first question is the carpenter union pension funds with combined assets of $70 billion have a collective ownership position of 121,400 shares of the company's common stock. As long-term investors, we appreciate the company's actions to address employee and customer safety issues related to the COVID-19 pandemic. We would like to acknowledge our strong support for the addition to Anne Sheehan to the Board. In the 2020 stock option and performance incentive plans, the minimum vesting period for options is set at 1 year. Currently, the company uses a 3-year pro rata vesting schedule for options. For long-term compensation, the vesting schedules are quite short. Could you or the Chair of the Compensation Committee speak to the company's thinking in setting vesting schedules for option grant? And I think we're going to send that question to Sam Fried, who is our General Counsel and Board Secretary. Sam? Okay. Sam may be having problems here. So let's go to Stuart.

So the perspective on this is that the Board considers and values impact from all stakeholders and shareholders on compensation matters. This input, obviously, will be passed along. And the Board and the Compensation Committee specifically, try to be very thoughtful about considering and accounting for shareholder interest in the design and execution of the Comp & Ben programs. Thank you.

Thanks, Stuart. So next question. The recent dramatic growth in the size of passive mutual funds corporate ownership interests in the U.S. corporations raises important public policy and Corporate Governance issues. Currently, BlackRock holds 7% and Vanguard owns 9.3% of the company's outstanding shares. Does the Board see this growing passive ownership concentration as a positive or negative development as regards to long-term corporate planning and performance? And I think Stuart is also going to take that question.

Yes. It's a complex subject, obviously. The headline from the company's perspective is that we value all shareholders. Obviously, index funds reflect the decisions made by active owners, but bottom line is the company values all shareholders and shareholder interest. Thanks.

Thanks. And I think we have one more question to take, and that question is, are you going to try to find another buyer for Victoria's Secret? Stuart?

Sure. So our focus at Victoria's Secret, there are 2 main things that we're spending our time and energy on. The first is to strengthen and improve the business itself, strengthen and improve the business. And then separately, as communicated in our earlier communications in relation to the Sycamore transaction. And strategically, the second thing we're focused on is establishing Victoria's Secret as a stand-alone company. So job one, improve the business; job two, establish it as a stand-alone company.

Great. That concludes our annual meeting. Thank you for joining us, and have a great day.

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