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

Hi. My name is Kimberly Greenberger, and I'm the softlines specialty retail analyst here at Morgan Stanley, and we're very pleased to host the management of L Brands today. L Brands is a $10 billion-plus market cap specialty retailer that generated nearly $13 billion in total sales in 2019. It operates about 3,000 stores worldwide across 70 countries. L Brands is a segment leader focused on women's intimate and other apparel, personal care, beauty and home fragrance products across 2 iconic brands, Victoria's Secret and Bath & Body Works. Today, we're joined by L Brands and Bath & Body Works, Chief Executive Officer, Andrew Meslow. Before assuming his role as the CEO of Bath & Body Works in February and CEO of L Brands in May, Andrew has served as the Chief Operating Officer of Bath & Body Works, where he led several areas of the business, including finance, merchandise planning and allocation, store operations and its e-commerce channel. Prior to that, he served as EVP and CFO of Bath & Body Works. In total, Andrew has 29 years of experience in specialty retail across various businesses, including Bath & Body Works, Victoria's Secret, Banana Republic an Ann Taylor. Andrew, thank you so much for joining us today.

Thanks, Kimberly. Thanks for having us.

We'll spend the beginning of today's session in a question-and-answer-style fireside chat, where we will explore some of the investor questions that we've gotten most -- in most recent months, then we'd love to take your questions. For those of you joining the webcast today via -- joining via the webcast today, please quickly Ask a Question button on the webcast to submit your questions. Lastly, before we dive in, I need to remind everyone that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And with that, we'll kick off the fireside chat. First, Andrew, starting with some bigger picture questions on the L Brand's business model, strategy and marketplace positioning. As I just mentioned, the L Brands portfolio, 2 businesses, Bath & Body Works and Victoria's Secret. Bath & Body Works is one of the largest specialty personal care and home fragrance businesses in the world. While Victoria's Secret is a specialty retailer of women's intimate and other apparel. As many of you know, management has laid out plans to separate the 2 divisions. Before we dive into the separation rationale, let's focus first on Bath & Body Works. As just earlier this year, the market thought the business would basically be operating as a stand-alone public company. So Andrew, can you discuss Bath & Body Works' position in the market? Who are Bath & Body Works' primary competitors? How is the business differentiated? And has COVID changed the competitive landscape?

Sure. Thank you. Thanks for the question Kimberly. Again, thanks for taking time for us this afternoon. it's an interesting question, a critically important question because I think it's important to know that Bath & Body Works is somewhat of a unique company in terms of what our business model looks like and what our competitive advantages are. In many ways, Bath & Body Works acts as a consumer packaged goods company in terms of the type of product lines that we have, in terms of that many, if not all, of our product categories are, in fact, use-up product categories where, again, we're shooting for customers to be using them every day, engaging with our products on a regular cycle. We also are really very much in control of our own supply chain in terms of what that looks like. But then there are other critically important aspects of us that are much more like a fashion specialty retailer in terms of that we -- while we control all of our product lines, we also control all of our own channels of distribution. And we believe that, that interaction that we gain with the customer directly, whether that's through our stores or through our website is a critically important differentiator, and that interaction is so much a part of the brand experience of Bath & Body Works and what makes our customer continue to return and shop with us, again, whether in-store or online. And then there are other aspects to keep in mind that we're very much a fashion specialty retailer as well. So while many of the goods that we sell are commodity-like. What makes our customer engage with us on a frequent basis is the fact that we're constantly changing. We're introducing new fragrances. We're introducing new packaging. We're introducing new look and feel to the store and the storytelling that we do within our store and on our website. And so that mix of lots of different elements does make us a little bit unique out there. So when it comes to thinking about our market positioning. Again, I think it's important to understand we're in 2 big market segments. Obviously, there's the bath, beauty, fragrance market, which at a total U.S. market size, is about a $75 billion business. Within that, we're really concentrated on the body care and the fragrance portion of that, which is about, I'm using round numbers here, about a $20-billion industry. And our market share within that, our body care and fragrance portion is about 10% of that addressable market. So that's a big portion. The other part that we play within there is the soap and sanitizer business, a sub portion of that $75 billion of about $3 billion and that's actually the market where we have the largest market share at between 25% and 30% of that addressable market. And the numbers I'm quoting are pre-2020. Those are 2019 numbers. So obviously, anybody paying attention knows that, that market, specifically, the soap and sanitizer market has changed dramatically here in 2020. So it will be very interesting to see at the end of the year, how much has that total market grown in addition to what has our share become within that market, but that's a big part. And then the other big segment we play in is the home fragrance market, which is between a $9 billion and $10 billion total industry. And our share within that sits right at about 20%. And certainly, again, those who have followed the company for a while know that, that has been the fastest-growing portion of our business on a longer-term basis over the last 5 to 8 years. That's been a significant growth driver. But as we've shared on earnings calls, it's also been a very important market here within the COVID time frame as well with everybody, like both of us spending time, more time at home than we have historically probably and a lot more attention being paid there. So that's kind of the markets that we play in today. The other part of your question was around competition. And again, I think, as I mentioned, we're a little bit tough to peg in terms of who is our -- is there a Pepsi to our Coke? And I think the answer to that is probably not based on how I described the mix of what we are in terms of both our business model around that CPG and retail mix as well as that category mix that I described is pretty unique out there. But at the end of the day, we really benchmarked ourselves against who are the best players out there en masse in terms of all the categories in which we play. And again, our differentiator there is all about the combination of the product experience, the shopping experience and then the overall brand experience, which is really the combination of those 2. So we spend our time making sure that our product is fragrance first. That's one of our important mantras. Everything that you find within our stores or on our website is going to lead with world's best fragrance. We think we have, not only the best fragrances, but the broadest selection of fragrances and our best customers are extremely loyal to fragrances. Whenever we discontinue a fragrance, Kimberly, whether, we've sold it for 6 weeks or 6 years, we -- our inboxes are flooded with complaints. Customer becomes very loyal to fragrance. It's a true emotional connection that he or she develops with a fragrance. And so that differentiator is always, first and foremost, of what we focus on. But then there's obviously the quality of the product. Does it do what we say it will do? Does it do it as well as anybody out there or better? Again, our goal is that our products are for everyday use. And so they need to perform at the customer is hopefully going to become loyal to one of our products and be coming back to repurchase it every 4 to 6 weeks from a use-up standpoint. And that only happens if it really is not only great fragrance, but a great performance overall. And then the packaging, especially on the home side of the business, over the last few years, the importance of decor and recognizing that the customer is truly proud to display our products, proud to give our products as gifts or to receive them as gifts. And so that packaging element, again, being in the -- in a lot of ways, a CPG company to get the customer to engage with a product, it has to look compelling. There has to be a reason for him or her to pick it up in-store or to click on it on the website and engage. And so it's that mix that, again, is how we really try to differentiate ourselves from the competition on the product side. And then we would say on the experience side is where we have, frankly, even a bigger leg up in terms of our store environment or our website experience. We work hard to make sure it's as compelling as anything out there. For example, right now, within the holiday time frame, obviously, Christmas 2020 is a very different Christmas than any of us have experienced probably in our lifetimes, if not longer. But figuring out the right balance between prioritizing safety, but still offering a very fun, festive celebratory environment, especially in our stores with our associates interacting with customers is such an important part of our DNA. And again, probably what we would describe as the deepest moat, if you will, from a competitive standpoint. Again, many other folks may sell products similar to ours, but not in an environment either in-store or online that we believe compares at all. Does that help answer your question?

That is perfect. And great, very comprehensive lay of the land, which I think is exceptional. I'm definitely, for one, very excited to see how those market share numbers and the overall market numbers look at the end of this year, but I suspect we'll all be overly using hand soap and sanitizer for a few years to come still. I wanted to talk about the Bath & Body Works customer for a little bit. Can you -- how does Bath & Body Works think about its target customer? How would you describe the typical customer? And has your customer evolved over time? And lastly, have there been any changes to your customer base or to serving this customer during COVID?

Yes. So great set of questions there as well. So again, Bath & Body Works is such a big brand that our customer breadth is extremely wide. So we, like every brand, has a target customer. And so for us, that target customer would be a female in her mid-to-late 30s, probably head of household and doing the primary shopping for the family. But the reality is, and I say this in a way that probably sounds cliché. But the reality is our customer is 8 to 88 in terms of that we offer things that we think are attractive and comfortable for really all ages. And so we need an edit point, and that is our edit point. But again, on an annual basis, in any given time frame, about 55 million unique customers who purchase from Bath & Body Works. And so when you're that broad, you basically need to be representative of the whole population in terms of what we try to do to be attractive. Your other -- one of your other questions was around how has that evolved over time. And so again, I've been with the brand for a little over 15 years now. And certainly, it has evolved. Certainly, we are even broader now, meaning more customers than we had 5, 10, 15 years ago. But I think even more importantly than that is that our customer engagement is significantly stronger and deeper than it was at any other point in our history. And we measure that, obviously, in multiple ways. There's measuring channel engagement. So whether the customer is shopping online, in-store or hopefully preferably both channels is obviously what we see, as I think all other retailers do the most productivity when a customer becomes adept at shopping in both those channels. For our business, obviously, a fragrance-based business and with that store environment, we think that the store is and will almost certainly continue to be the best representation for our customer to get the whole brand experience, but getting the customer comfortable shopping in both channels is something we spent a lot of time on over the last half dozen years and have made even more progress here inside of the COVID time frame. And then the other aspect of customer engagement would be the breadth of categories across, which he or she shops. And again, we've made lots of progress on that. If we were having this conversation 10 years ago, the vast majority of our business and our customers at that point really knew and loved the Bath & Body Works, primarily for our body care business and probably secondarily for our soap and sanitizer business and the home fragrance business a decade ago was really just getting started. And so now fast forward 10 years later, where those 2 businesses, the body care business and the home fragrance business are about almost equal in size and the customer engagement across both is where we see a lot of them. When a customer becomes loyal to both some of our body care forms and our candles or our wallflowers and home fragrance, that's when we see the customer value really accelerate dramatically. And so that evolution, if you will, has been critically important. I think the last part of your question was around how, if at all, has any of that changed inside of the COVID window? So and we mentioned this, I think, briefly in our third quarter earnings call. But obviously, with stores having been closed for, on average, about 90 days back in late Q1 and early Q2, there was a tremendous shift at that point out of stores that historically, 80% of our customers would have been primarily store customers with that channel being down, direct saw explosive growth. So we've seen more than double the number of customers year-to-date in direct than we had this time last year. But even as stores have now reopened and been reopened, for the most part, for about 150 days, we've seen that performance that I was describing earlier of dual channel, where the customer is continuing to engage in online, but also coming into stores, especially to experience newness, new launches, new seasonal fragrances, et cetera. And so we've seen very nice continued depth of customer engagement even beyond what I just described over the prior 5 years has really been accentuated or accelerated here in the COVID time frame. We're still, as we sit here now in early December, we're still trying to get back to seeing the same number of customers in total that we would have by this time last year, again, because of that 90-day closure. But the pace at which since we've reopened that we've been acquiring customers has been very, very encouraging. And so I am confident that we'll finish the year with seeing at least as many customers as last year and as I just described, the engagement for each customer across category and across channel is that much deeper.

Great. You touched on a couple of things already in the session. In terms of just the -- why a customer might choose to come to the store and then also why customers might choose to shop online. And obviously, with COVID, we understand why a lot of customers are choosing to shop online. But looking at the business over the last 5 years, Andrew, I'm marveled at how Bath & Body Works' store revenue continue to grow while your e-commerce was in hyper growth mode. And we don't see that a lot across the retail space. Oftentimes, e-commerce growth is coming at the expense of store revenue growth. And that just hasn't been the case at Bath & Body Works. So maybe you can share with the audience what the secret sauce is on driving customers into the store. What do you think is it that keeps those customers coming back again and again and again, where they may not do that in an apparel store or in a store selling other categories?

Well, it's a great question and a critically important one. One that we obviously spend a lot of time working on to ensure that what you just described as our track record is something that we're able to maintain on a forward basis. But I think there's no silver bullet or secret sauce, if you will. It's a combination of a lot of different things, some of which we've already highlighted, but I think it's worth reiterating that part of it is that we are in a use-up business. So there is the need. Unlike apparel where, again, the first 15 years in my career were in the apparel brands, Banana Republic and Ann Taylor. And there, if you will, the holy grail was always fine, they're perfect fit. And if you could find a fit, get it, extend it across multiple fabrications across multiple color ways and try to drive customer loyalty into that fit. And then it was about quality, but the problem there was if you really did that and the customer ended up buying 4 or 5 pairs, he or she may not need to replace those. If you've built a really great pants, you might not need to replace those for a couple of years. And the reality is the better our product is in terms of the quality of our fragrances, the quality of our packaging, the performance of the product itself, the better that is hopefully, the more frequently the customer is using it and therefore, driving that need for repeat purchase. And when he or she is coming back to our stores. It's not just to replenish, but it's always the #1 or #2 thing we always hear is, why did you come in today? It's I wanted to see what's new. So there's a reason to get off the couch, which is, "Oh, I'm out of shower gel. I need to go get it." But then why did I go to the store as opposed to go online, perhaps, which is part of what you were probing on. It's I wanted to see what's new and different. And in a lot of ways, that store experience that I talked about earlier in terms of the engagement with the associate and the look and feel of the storytelling of the store itself is a differentiator. And again, we were traveling last week on Black Friday, spending time in a lot of stores and comparing and contrasting what the traffic levels look like this year versus last year. And obviously, it's been well documented and understandable that traffic is down. But one of the challenges we had given ourselves was while we need to operate in a very safe way, we also want to provide a very compelling and a very festive atmosphere in our stores. And I didn't see that everywhere. I'm not going to call out others, but there was a lot of more, what I'll call vanilla marketing out there, a lot more subdued. And maybe that's appropriate. But for Bath & Body Works, we felt no -- yes, we're going to focus on safety, but we also really want to provide a respite, a place that the customer, in feeling safe, comes and wants to spend time in the store. And so I think that's frankly, even more accentuated here inside of this holiday and any other time frame. So those are the aspects I would say that's allowed us to do that. I would say it's important to understand we do still sell newness very well online as well. So it's not only that we sell newness in-store and replenishment online, we sell a healthy mix of both in both channels. But I do think it's that keeping the stores relevant by that focus on being different, the fashion aspect of being the specialty retailer that we are that I mentioned earlier. And then the last piece I would add on to that, that again, I think is different about that Bath & Body Works that the much of the rest of the retail landscape is that we've also been reinvesting into our stores. So the quality of our real estate portfolio here in 2020 is significantly better and healthier than it was 5 years ago as a result of the real estate initiative, the White Barn remodel strategy that we embarked on here over the last half dozen years. And so that, again, part of the cycle that you described with stores, feeling like direct is coming -- direct growth is coming at the expense of stores, my sense is that's become a little bit of a vicious cycle. And so then businesses stop investing into their stores. The experience becomes less compelling. There's less of a reason to go to the store. We've really actively fought against that inertia or that gravity to make sure that we're providing still a very, very positive customer experience in our real estate stores. We believe that our -- the look and feel of our store portfolio today is the best that it's ever been, and our intent is to absolutely keep making those reinvestments.

Fantastic. Okay. Great. So now that we've covered the overview of Bath & Body Works, let's talk about the potential separation of the businesses between VS and BBW. Can you walk us through the separation rationale as well as how easy or difficult it is to separate the 2 businesses? What are the potential paths to separation? Or outright sales, stock split, shareholder dividend, et cetera. And if you can talk about when -- if you have a view on timing and care to share that, that would be great as well.

Sure. I'll actually hit that one first. In some ways, it's the easiest move. Timing-wise, as you can hopefully appreciate, and I think as we consistently talked about on earnings calls and other interactions with investors. Any potential investor or buyer is going to want to see a strong holiday from both businesses and certainly, to assess the value of the Victoria's Secret business, one needs to understand just how healthy is the business, how far along are we in the turnaround. So from a timing standpoint, that would just say that what we and that team are focused on is delivering the best possible fourth quarter that we can. And then coming out of that, we would expect to be ramping up pretty significantly with our internal management team as well as our external advisers, JPMorgan and Goldman Sachs, that we've hired to help us look at options. So that's timing-wise, meaning it's really kicking off fresh into the new year. And again, depending on what the market looks like and what our performance has done, we are still absolutely committed to trying to separate the 2 businesses within 2021 from a timing standpoint. In terms of the rationale, again, I think the board has been very consistent for well over a year now that we believe that these 2 businesses will be best positioned as 2 separate businesses. Our business models are quite different. Our approach it's quite different. And again, as of a year ago, especially the trajectory of the 2 businesses are very different. And so the strong perspective has been that shareholders will be best served by unlocking the value that we believe exists in Bath & Body Works as a stand-alone, while also doing all the work that we've been doing around turning around the Victoria's Secret business to maximize value there as well. In terms of your question around the difficulty, again, the reality was a lot of heavy lifting had been done back at the end of last year and the early part of this year, while we were still moving down the path of the potential sale with Sycamore. So a lot of the structural work behind the scenes had -- have been done there. When that deal we ultimately walked away from, we then spent even more time back in the late summer, kind of Q2 time frame, doing more streamlining and setting up of the businesses to incorporate different pieces that used to be corporate-owned or by our old sourcing group mast that we've now moved into the individual business units. And so again, the reality is a lot of that structural and organizational work, Kimberly, had -- has now occurred. And so ultimately, the difficulty fact or, I believe, will be relatively low once we come into the new year and figure out which of the options we want to pursue, which is a good segue to that. I think the last part of your question, which is what are those options? And without being, I believe I would just say, anything and everything is on the table. Meaning, again, we've hired external advisers. We think they're the best in the business. They will help us understand what are the pros and cons of any of the different options that are out there. And we'll go with the one that is the right combination of unlocking the most value with obviously not creating a level of complexity that puts the deal itself at risk. So hopefully, that's not -- it's not super specific, but the reality is that's because we're still in a position of keeping all of our options open.

Great. Well, we will all stay tuned for news on that front. But I wanted to move to some of the recent financial results. The -- L Brands delivered a really impressive revenue snapback here in the third quarter with a 14% growth in revenue year-over-year. I think that's the best number I've seen in my sector so far. Obviously, led by that 55% growth rate at BBW. So can we start with the drivers of the Bath & Body Works result? This was obviously sort of outsized growth. I think Bath & Body Works has been seeing some of that now for the last quarter or 2. This could certainly, I guess, continue for some time with COVID. But where do you see the long-term revenue growth trajectory landing in this business?

For Bath & Body Works first?

Yes.

So, yes, to your point, 2020 for us and for every other retailer out there has been a very choppy year. So for Bath & Body Works, prior to Q1 of 2021, we had had, prior to that, 40 consecutive quarters of revenue growth. And so that was something that we were proud of and that level of consistency back to the business model and how we utilize the business model is something that we've relied on quite a bit. Obviously, closing all the stores for half of the quarter made Q1 a very challenging one. But then to your point, Q2, we saw a nice snapback. And again, what's I think another relatively unique aspect of our business is because it is use-up and because it is everyday use, the customer, and we see this -- we saw this with the 90-day closure. But frankly, this is something we've observed even if, let's say, a market as very challenging weather or blizzard or flooding or something like that, where stores end up having to be closed for 4 or 5 days. Back in my apparel days, that would have just been lost sales. Customer doesn't come back and buy what he or she would have bought while the stores were closed. In this business, interestingly, we actually see quite a bit of that. So I definitely feel like late in Q2 and early in Q3, some of the tremendously high-growth we were experiencing was that catch-up purchasing, buying what she had not been able to buy when the stores were closed. And while a lot of business shifted online, still opportunity to restock, if you will. And then there's, obviously, as we talked about earlier, the segments, categories that we operate in, in terms of soap and sanitizer and home fragrance, I think both of those we could easily say have been COVID-enhanced as opposed to COVID-impaired from the standpoint of those are categories that are even more relevant to customers now than they were 6 or 12 months ago. And so the pace of purchase there, we definitely see as higher, again, either because of, as you mentioned, the new habits that we hopefully have all formed around cleanliness and utilization of soap and sanitizer as well as on spending more time in the home and wanting to make the home even more personalized and a place that feels pleasant to be in more frequently, whether as an office or as a school or whatever purpose they may be serving. But I think what maybe is not as well as understood is that even our body care business, I would consider to be COVID-enhanced from the standpoint of people are even more focused on self-care, even more focused on affordable luxuries. And again, our body care business is absolutely that. It's a lot cheaper to buy a new fine fragrance mist or a new body lotion and try something different than it is to spend on a lot of other categories out there. And so we've seen in other recessionary time frames that our categories actually tend to do better so I think all of those things have certainly helped to see the big acceleration. But then as we think about the longer term, there's nothing about what we're seeing that I would say is a huge spike that will all go away for all the reasons we've discussed. Again, these are categories that were growing pre-COVID. I would expect that they would continue to grow post-COVID. I'm sure 2021 itself will be, in some ways, the inverse of 2020. If 2020 has peaks and valleys, 2021, we'll almost certainly have some peaks and valleys of its own. Whether that's when the vaccine comes and we see truly back to differentiated shopping behavior, but also when we start to lap some of the very impressive growth in Q3. That will be challenging for sure. But if I'm thinking more about 2022 and beyond, again, the 10-year track record of either the 5- or 10-year track record of BBW prior to 2020 was top line compounded average growth of between 8% and 9%, with stores delivering in kind of the mid-single digit range and direct delivering in the 20-plus range. I think from a modeling standpoint, that's very much the sweet spot that we would be intended to go back to.

Fantastic. And those are really nice historical numbers. So I'm sure everyone would welcome a sustainable growth rate in the high single-digit range. Gross margin was also a really nice bright spot in the third quarter. You talked about lower promotions this year, Andrew, and you talked about some selective price increases. And you've just seen, obviously, very robust demand. So I'm wondering if you can talk about the sustainability on -- of gross margin, of the gross margin improvement you've delivered this year. And do you think that the pricing changes you've made are sustainable pricing changes as well?

Yes. It's great question. Even in our third quarter call, we were trying to guide towards that we probably should not expect that same level of gross margin improvement even here in the fourth quarter as what we had seen in Q2 and Q3. And again, there are lots of reasons behind that, specifically in the fourth quarter. It's about the fact that while we've been less promotional in the 6 months since we've reopened stores, both in terms of frequency of promotion and in depth of promotion, because of the challenges around capacity in Q4, we're going -- we already have been adding days, so being more frequent with promotions in order to combat, trying to have such high peaks on individual days. So we're spreading it out. Still aren't having to go deeper. So that depth of promotion aspect is something that, again, we're hopeful that we don't have to go back to some of the same level depth of promotions that we had even over the last few years. But I think it is inevitable as we move into 2021 and certainly into the longer term, that the frequency of promotion will probably go up from what we've been able to do here in 2020. And part of that, historically, what have -- why have we been promotional? Obviously, some of it is to drive business to drive traffic. But oftentimes, it's also to drive trial. When we have new fragrances, new categories, new collections, the best way that we have to get customers to engage with those product lines is via promotion. As you know from following our business closely, we are a multi-unit business. We don't want to or try to sell individual items. We sell in baskets of 4, 6, 8 items at a time. And so continuing to do that in order to drive trial because if you come in and you're buying shower gel, and you know that you love Japanese cherry blossom and your spouse loves ocean, but there are a couple of other new ones. We want to encourage you to not just buy those 2, but to buy 2 or 3 additional and engage with some of those new fragrances, as an example. And so I do think that, that gross margin line over time, 2020 will probably have been a little bit of an outlier on that front. But I do think it's one that continuing to use our speed model and to use our very solid inventory management. That is something that we, over time, still would want to see creep up. How that translates to operating margin? Again, I think this year will be a somewhat unique year on that front with quarters that are very, very different then where they've been historically. But we've been very consistent, and I would still believe it's appropriate to say that modeling Bath & Body Works' operating margin in the low 20s on a long-term basis feels appropriate to us that we believe, and all of our work would indicate that at that level, that helps us strike the right balance between driving growth and really reinvesting into the business and doing so in a very healthy way.

Great. That's very clear on BBW. We also saw a pretty nice level of operating margin improvement at Victoria's Secret this quarter, it hit an 8.5% margin. It's the best result in the third quarter that Victoria's Secret has had in a number of years. And we don't have to spend a lot of time on this, but what were the like quick highlights on that kind of improvement and the key drivers?

So I think some of it is similar to what I just described for Bath & Body Works. [indiscernible] as frequent promotions and that's indeed [indiscernible] I think the other aspect of it was a little bit more unique [indiscernible] secret so that [indiscernible] recent history of the [indiscernible] is the importance of inventory [indiscernible] Bath & Body Works has a very tight supply chain and [indiscernible] just turnaround in terms of speed and agility. Yes. Aspects of that, but certainly not seeing the Bath & Body Works [indiscernible] really [indiscernible] the last few years, the [ absolute ] business trend. [indiscernible] have for repurchase at each season and assume some level of turnaround. And so the reality is [indiscernible] from a neutral standpoint relative [indiscernible] sales [indiscernible] so getting very, very tight around the [indiscernible] set of COVID, really paid dividends. [indiscernible] So that coupled with this work that's been done around [indiscernible] assortments as well. [indiscernible]

Andrew, there's -- we were just losing you -- your audio in and out a little bit there. I'm not sure if there's something going on with the connection. Maybe if you want to just lean in a little bit or talk slightly louder.

Yes. I'll turn off my video because sometimes that helps too.

Okay. Great. And we are -- we only have about 3 minutes left. So I did want to squeeze in a couple here that are coming through the webcast. On the call, Andrew, are -- on the presentation today, Andrew mentioned constraints on direct channel fulfillment and shipping capacity. Now that we're through Black Friday, does he still believe that L Brands is capacity-constrained in the direct channel?

Yes. So I don't think I'd mentioned that earlier, but we did certainly talk about that on our earnings call. Bottom line, any company's ability to ramp up fulfillment capacity and shipping capacity here in Q4 to the same extent maybe that we were able to, in prior quarters, was going to be challenging. And then I'm sure everybody's been watching anxiously the same headlines that we are around shipping capacity from UPS and FedEx and then the other players out there. But to the point of the question, I would say at a high level, and Amy will keep me honest here from divulging any material nonpublic information. But so far through the holiday time frame, we've been pleased with our ability to fulfill and to ship. But there are still several very, very important weeks that everyone's shipping cutoff is in kind of mid-December, and we're sitting here on December 2. So call it another 2 weeks of really high volume that we need to clear and make sure that, that both fulfillment and shipping network continues to stay very, very productive.

Excellent. And lastly, Andrew, is there anything we didn't talk about today or a key message that you'd like to leave the audience with, particularly as we sort of turn the corner to next year and the prospect of Bath & Body Works as a stand-alone company? Any kind of key investment highlights you want investors to keep in mind as we look for that evolution?

Well, I appreciate the question, [indiscernible] but some of your questions were good and allowed us to get most of [indiscernible] such as out there [indiscernible] dig into more deeply that we sometimes get asked about is the nature of our real estate portfolio and specifically the mall versus non-mall portion. I know that sometimes that gets a fair amount of attention. So I think what's interesting to think about for the total Bath & Body Works' portfolio mix, if you will, is we'll finish this year with the direct business, representing somewhere around 30% of the Bath & Body Works business, up from about 20% of the business last year. So that other 70%, obviously being stores-based. And as we've talked about, about 55% of the store portfolio is in malls. And about 45% in nonmalls, but that ratio continues to shift, and we're committed to, over time, we're continuing to open more off-mall locations and certainly keeping an eye on what are the viability of mall locations and so paring that back. So not impossible to think that over the next couple of years, that will be more of a 50-50 and then at some point, even skewed the other direction off-mall versus mall. At which point, you'll basically for simplicity, be able to think about the business as kind of 1/3 of the sales coming out of malls, about 1/3 coming out of off-malls and about 1/3 coming out of the direct or the online channel. So again, I think that's a model maybe that isn't as well understood as it could or should be.

Fantastic. This has been a great session. Thank you for providing such a nice overview in helping us to understand the Bath & Body Works business more deeply today, Andrew. It was a real pleasure, and thanks to everyone for tuning in today. On behalf of Morgan Stanley, we wish you a fabulous rest of the conference and a happy and healthy holiday season.

Thanks so much. Take care. Thank you for the time.