Good morning. My name is Brad, and I will be your conference operator today. At this time, I would like to welcome everyone to the L Brands Third Quarter 2020 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, Senior Vice President, Investor Relations and Company Affairs at L Brands. You may begin.

Thank you. Good morning, and welcome to L Brands' third quarter earnings conference call for the period ending October 31, 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 statement found in our SEC filings and in our press releases. Joining me on the call today are Andrew Meslow, CEO of L Brands; and Stuart Burgdoerfer, Interim CEO of Victoria's Secret and CFO of L Brands. All results we discuss on the call today are adjusted results and exclude the special items described in our press release. Thanks, and now I'll turn the call over to Andrew.

Thanks, Amie, and good morning, everyone. The third quarter of 2020 continued to be an unprecedented time for the world, the retail industry, and certainly our business. Our first priority continues to be the safety of our associates and our customers. Our new operating models in our stores are focused on providing a safe environment while also providing an engaging shopping experience. Additionally, we remain focused on the safe operations of our distribution centers, fulfillment centers, and call centers while maximizing our direct businesses. We delivered record results in the third quarter, and we could not have done so without the hard work and dedication of all associates across our business, in our stores, distribution and fulfillment centers, call centers, and our home offices. I'd like to express our deep appreciation for their dedication and their efforts. In the third quarter, we significantly exceeded our internal expectations, driven by record results at Bath & Body Works as well as an improved performance at Victoria's Secret. As we look to the remainder of the year, we have a cautious view of the fourth quarter, given the high level of uncertainty around the pandemic itself and the potential for further restrictions. While we are optimistic about our Christmas product assortment and our continued strong execution in both stores and online, we do expect significant challenges in generating store channel sales growth. Our typical holiday volumes are about three times larger per week than the average week in the third quarter historically. And the current capacity limitations that range from 25% to 50% of normal capacity will not allow us to see the same number of customers on peak days that we have in prior years. The situation remains fluid, as additional capacity limits have been recently announced and further restrictions may occur. Additionally, the hours which stores are permitted to be open are fewer than last year, and we will be closed on Thanksgiving Day this year versus open in prior years. We also have additional constraints in our direct channel fulfillment and shipping capacities. As a result, we will be taking action to spread our big promotions, which historically have occurred on single days over a longer time period. We have also added additional registers to stores in both businesses. We expect continued increased cost pressures in the fourth quarter as a result of higher store selling costs, safety, equipment and supply costs, increased fulfillment expense and higher parcel carrier surcharges in the direct channel. We believe that all of the factors mentioned above have the potential to lead to a very wide range of financial outcomes for the fourth quarter, the higher end of which would approximate last year's operating income results. We will continue to stay close to our customers and leverage the speed and agility that we have in the business to optimize our fourth quarter results. Thank you, and back over to you, Amie.

Thanks, Andrew. That concludes our prepared comments. At this time, we'd be happy to take any questions you might have. [Operator Instructions] Thanks, and I'll turn it back over to the operator.

[Operator Instructions] Our first question of the day will come from Matthew Boss of JPMorgan.

Great, and congrats on the continued momentum. Maybe Andrew, to start, can you elaborate on the balance that you cited that you're seeing between the category drivers at Bath & Body Works today? How would you rank multiyear market share opportunities across the box? And while I understand the cautious view for the fourth quarter given the factors that you mentioned, have you seen any material slowdown in trend to date?

Sure. Thank you, Matthew. So on your first question, as we mentioned in our prepared remarks from last evening, we did see continued strong balance of performance across all our categories. And so I think there has been understandably a lot of attention paid to the tremendous growth that we're seeing in our soap and sanitizer business, and we certainly count ourselves fortunate to be a major player in that category and have been for many years. As a reminder, historically, that category, the soap and sanitizer business has been about 14% of the total business in 2019, as an example. And as we've talked about on this call throughout the course of the year, that penetration has grown significantly. In Q1, it was about a quarter of the business. Q2, a little over a quarter of the business. And in Q3, it was still at about 21% of the business, up from the mid-teens last year. So significant growth, still doubling in terms of absolute volume in that business. But as we called out in the remarks, we're also seeing very strong performance from all of our other categories. So again, our two other big categories of home fragrance and body care, each of them grew by more than 30% in the third quarter as well. So strong and balanced business across the board, and that's true in our stores channel and in our direct channels. On your second part of your question around the multiyear opportunity. Again, I think it's important to understand that even before the pandemic, Bath & Body Works has, for years, been experiencing nice consistent growth really across all of our categories. And our market share opportunity is still large. While we have big market share in all of our categories, each of those categories themselves, meaning the soap and sanitizer category, the home fragrance category, and the body care category, are experiencing growth at the industry level. And we continue to see the opportunity for us to gain share in each of those. In terms of your last question around trend, I would say that consistent with what we talked about on the last earnings call, certainly, as stores have been open longer, we have seen some normalization of the sales trend in our stores channel. And that continued, certainly from the end of the second quarter through the third quarter. But still, even at the end of the quarter, we're performing quite nicely at double-digit comps. Our direct channel, as you can see from our results, has continued to deliver very consistent results regardless of when -- whether or not stores were closed back in the early part of Q2 or here through the end of Q2 and early part of Q3 as all stores have reopened. Hopefully, that helps with your question.

Thanks, Andrew.

The next question comes from Ike Boruchow of Wells Fargo.

Let me add my congrats. Just really a phenomenal quarter. So I guess my question is actually now around Victoria's Secret. I guess maybe, Andrew, has the thinking changed on how to handle your ownership of the brand? And I guess, it's really two questions. It's first, is it fair to say that the asking price for the brand has moved up given the material EBITDA improvements that you've been making over the past six months and the inflection that the team is now driving? And then two, is there actually a chance that given the success the new team is having in managing the brand and making these key strategic changes that maybe ultimately you decide that you don't want to sell the business, and you actually feel like you're creating a lot of value with the improvements you're making?

Thanks. We're going to go to Stuart.

Thanks for the kind words about the quarter. We've been working hard, as you recognize, to stabilize and begin the turnaround at Victoria's Secret. We had a very strong quarter in a lot of ways, including financially. I can -- in response to your question about do we think we've increased the value of the business? Absolutely we do. As businesses are valued off of historic and forward-looking EBITDA and cash flow, we made material progress on those measures in the third quarter, and we would expect that the business is worth meaningfully more than it might have been in the recent past. We're at the beginning. We've got a lot more to do. There's a lot of additional growth and opportunity in the business. But there's no doubt that the third quarter was an important inflection point in the business. With respect to the second part of your question, the Board has been clear about the strategic intent for Bath & Body Works and Victoria's Secret, and that is to ensure that both businesses are valued appropriately, including the appropriate valuation of Bath & Body Works, which we believe will be enhanced through a separation of the businesses. We continue to be on a path after we get good visibility to the full Q4 results to work with our advisers that we hired back in August, JPMorgan and Goldman Sachs, to work with those advisers and to begin a process in earnest to pursue the options for the separation of the two companies.

Thanks, Stuart, and thanks, Ike.

The next question will come from Alexandra Walvis of Goldman Sachs.

I had a question on the negotiations with landlords. You mentioned that you achieved a combination of rent waivers or abatements relating to closure periods, some rent release and rent deferrals. I wonder if you could share a little bit more color on the size and scope of those waivers, abatements relief and so forth that you've achieved. And then second question is on -- also on real estate. You had fewer projects for Bath & Body Works in 2020. I'm just wondering how you're thinking about the number of projects going forward.

Thanks, Alex. So we'll start with Stuart, and then go to Andrew.

Alex, with respect to the negotiations with developers and landlords and property owners, as we indicated in our remarks, we made substantial progress on those discussions in the third quarter. They are very important discussions. Fundamental discussions. And as would be the case in any important negotiation, there was a lot of compromise and probably on both sides of it. Both parties, if you will, are probably a little unhappy about the results, if you will. With that said, the outcomes of those negotiations did not have an overly material effect on the third quarter, and their effect on the fourth quarter is still subject to a full papering and finalization of those negotiations. We will provide more updates after we conclude the fourth quarter about the specifics and the impact on Q4. Again, if the Q4 impact will be more significant than the Q3 impact. And again, the element of that in Q3, we would comment as not being overly material to the total result. So more to come, good progress. And full accounting of it, if you will, we'll be in a better position to do that after the fourth quarter, after all the deals get fully signed off and fully executed from a legal standpoint. But very good progress.

Thanks, Stuart. Andrew?

Alex, thanks for the question. So to your point, in 2020, Bath & Body Works is working on approximately 56 real estate projects. That is down materially from our historical run rate over the last few years of closer to 200 projects annually. As a reminder, we made the decision to reduce that number back early in the first half of the year based on the onset of the pandemic and out of an abundance of caution to make sure we were managing cash flow and capital spending overall. The decision to reduce the number of deals this year was not driven by any change in the performance that we've seen associated with those remodels over the last several years, of which we continue to be very pleased with that progress. So all of that said, as we look forward to 2021, it is still critically important for us to read the results here of the all-important fourth quarter to help influence any go-forward capital investment strategy around real estate. And we have a very flexible and agile pipeline as it applies to our real estate portfolio. All of that being said, we'll provide more directional guidance on our next earnings call, but I would expect that the 2021 count would be up from the number of projects that we've executed against here in 2020.

Great. Thanks, Andrew. Thanks, Alex.

The next question will come from Lorraine Hutchinson of Bank of America.

So I think you were very clear on your store capacity constraints for holiday. I wanted to ask about e-commerce. When we think about fourth quarter e-commerce, have you been able to secure additional fulfillment capacity there? And are there any constraints on growth in that channel in the fourth quarter?

Great. Thanks, Lorraine. We'll start with Andrew.

Lorraine, thank you for the question. So we have been able to secure significantly more capacity for -- I'm speaking now for Bath & Body Works, and I'll let Stuart speak to Victoria's Secret. But in the case of Bath & Body Works, we have dramatically increased our capacity as we've moved through the year 2020 to the point where in the third quarter, we were able to be looking at about 2.5 times the amount of capacity that we had last year. And that's obviously what allowed us to run the growth that we ran of well over 100% in the direct channel in Q3. As you can imagine, as we move into the fourth quarter, what we're up against from a historical sales and capacity is significantly higher than what we saw through the first three quarters of the year. So while we will have significantly more capacity available year-over-year in Q3, it almost certainly won't be at the same level of growth as what we were able to achieve in the first three quarters of the year. Hopefully, that's helpful.

Thanks, Andrew. Stuart?

Lorraine, with respect to Victoria's Secret and capacity, we do have some additional capacity versus what we had a year ago, but there is some impact related to the pandemic and the operation of our fulfillment centers that nets off some of the increase that is associated with the second facility that we opened this year. So there is some net increase in unit capacity, but not as great as we would have expected given the need for social distancing within our centers to ensure that we have a safe environment for our associates. Additionally, that's a comment about units. We've experienced significant average unit retail growth, both online and in stores at Victoria's Secret. And so that does provide further upside, units. So we feel like we can generate meaningful growth in the fourth quarter given the larger denominator and absolute value it will moderate to some extent. And we'll manage the balance, ensuring that we keep all involved safe, provide the right experience for consumers. And again, importantly, a big source of growth through pricing increases, average unit retail increases that we realized in Q3 and we would expect to continue in Q4.

Thank you, Stuart, and thanks, Lorraine.

The next question will come from Susan Anderson of B. Riley.

Nice to see the improvement in VS in the quarter. I'm curious, can you talk about the performance of PINK? I think you noted that there was double-digit comp in the logo shop. I'm curious what changed this quarter versus the previous quarters where I think it had struggled and where you're seeing that strength come from?

Susan, it's Stuart. So first, I would want to comment on the strength in the bra and panty businesses in the quarter. In addition, as you mentioned, the logo shop collections have done well. And I think it's a combination of merchandising execution, meaning a specific improvement in the assortments, along with work that Amy Hauk has done in evolving the positioning of the PINK brand. And as it relates to the PINK Logo shop, obviously, a strong endorsement of that work on the brand in combination with advancement in the assortment and strong selling both in stores and online. So I think it is a combination of factors and certainly a positive signal for the business. But again, I'd also want to highlight strong performances in the bra and panty categories at PINK as well.

Thank you, Stuart, and thank you, Susan.

The next question will come from Roxanne Meyer of MKM Partners.

Great, and congratulations on the exceptional third quarter. You've laid out what clearly are capacity constraints in stores in terms of managing the traffic flow as well as online. Is there a way to frame -- I know you gave kind of how you think about peak performance in the fourth quarter being equal to operating income maybe last year. But is there a range of top line that we can expect mathematically in terms of how high is high based on the constraints that you have?

So we want to be really thoughtful, Roxanne, on this subject. We know that you're trying to build models and come up with your own views. But as we expressed in our written remarks and Andrew's comments to introduce the call this morning, there is a lot of uncertainty. And what we're comfortable sharing is that the higher end of our forecast ranges that we think we can approximate the last year's operating income. As you appreciate, there's a lot of variables, in revenue, in margin, in the expense structure. And we really don't want to deal with certain aspects of the P&L given the uncertainties that we've talked about. So there are constraints. We've outlined them. And we will also, by the way, work like heck to maximize the business, obviously, in the quarter. But we're really going to reinforce that the view is at the higher end of our internal ranges. We would be about at last year's operating income level. Thanks.

Thanks, Roxanne.

The next question will come from Simeon Siegel of BMO Capital Markets.

And really great results across the board, congrats. Andrew, can you speak to your merch margin expectation at BBW in 4Q? I understand the spreading out, the promotional cadence, but just any help thinking through why promotions would be up when demand is clearly so strong. And I think we're talking about supply constraints. And I guess conservatism, obviously, can be an answer. And then, sorry, Stuart, I don't know if I missed it. Did you say how you're approaching go-forward inventory receipts for both brands?

Thanks, Simeon. Andrew, you have the start.

Sure. So thanks for the question, Simeon. I think it's important to understand how we got to the margin improvements that we saw in Q3 and then talk about how we might see that play out slightly differently in Q4. So in the third quarter, we were able to increase margins across the board by combination of both fewer days of promotion, deep promotional activity year-over-year, down relatively substantially, order of magnitude about half as many big deep promotional days in the third quarter versus the third quarter prior year. But then we were also able to increase the price point on many of those promotions. And so the combination of those two things as well as not having to have an end of third quarter fall sale the way we have historically because we saw such good response to our collections and sold down to the point where we were actually putting some of our holiday product on the floor late in the third quarter, those were the drivers of the improvement in Q3. As talked about in our prepared remarks, we also did testing in the third quarter to understand how to lap some of the very large days that we've got in the fourth quarter from a promotional standpoint and attempt to regain the sales and margin dollars associated with those big days. And in doing those tests, we affirmed that the best way to do it is to try to take the pressure off of those peak days, spread them out across multiple days, but also have them at higher price points than we have historically. So really the issue of why we would expect fourth quarter margin rates to -- margin rate improvement to moderate and probably more closely approximate last year is that combination of more days. We're going -- in the third quarter, there were fewer days of big promotion, in the fourth quarter there will end up having to be more days of big promotion in order to spread out that volume. As Stuart mentioned earlier, obviously, we're going to continue to be very nimble. We're going to continue to drive to the best possible outcome. If we're seeing better product acceptance and are able to either reduce the number of promotional days and/or raise those promotional prices the way we were in the third quarter, we'll obviously do that. But as we go in and look at the magnitude of those big days, that's our going-in assumption.

Thanks, Andrew. Stuart, on inventory.

So Simeon, as an overall comment -- and Andrew may have something to add for Bath & Body. But as an overall comment in terms of how we're approaching inventory receipts, the first thing I would say, which may be a blinding statement of the obvious is that we're approaching them with a heck of a lot of intensity. The additional points I'd want to make is really beginning with the onset of the pandemic, particularly for Victoria's Secret, given the store closure plans, but just otherwise trend in the business, we began planning this spring very conservatively with respect to inventory receipts. And the fortunate outcome of that is that through that better inventory position, where we don't have to have broad-based -- as many broad-based promotions, along with better assortments, better selling effectiveness online and in stores, it's really giving rise to the significant margin rates improvements that we experienced in the third quarter and that we would expect in the fourth quarter. With that said, where we've got sales trend, you can be sure that we're chasing like heck. And the good news is that we have supply chain partners, manufacturing partners that we have long-standing relationships and a very clear mind about how to move quickly and with agility the best we can. So overall, had a very conservative position with Victoria's. It's paying big dividends to the company. In combination with, again, better merchandise, better assortments, better presentation, better marketing, better selling. And where we got trend, we're chasing like heck. And Andrew, you may want to comment on the BBW side of it.

Sure. Thanks, Stuart. I would echo a lot of Stuart's commentary around appreciation for the supply chain and the tremendous flexibility and agility that all of our internal and external partners have been able to accommodate us with -- so far this year. We talked about, on the last quarter call, that originally at the onset of the pandemic, Bath & Body Works also cut back receipts pretty dramatically but then ended up needing to chase back into many of those receipts through Q2, and that trend continued in Q3 of chasing to the upside. As we enter our fourth quarter, as we've shared in our prepared remarks, we feel good about our overall inventory position. We feel very fortunate that our supply chain has been able to weather the pandemic and has figured out how to operate both in a very safe way, but also increased capacity and output relative to our sales increase. The reality, as I shared earlier, is we did exceed our expectations from a sales and a sell-through on our seasonal goods in the third quarter. So as I mentioned in the prior answer around margin, we were able to cut back and not do a fall end-of-Q3 sale this year based on that sell-through. That obviously has allowed us to be very, very clean from an inventory standpoint as we come into the fourth quarter. It also allowed us to get an early read on some of our holiday goods at the end of the third quarter. And we're pleased -- as we mentioned in our prepared remarks, we're pleased with the early product acceptance that we're seeing to those holiday assortments, and we believe our overall inventory levels are positioned appropriately as we now head into the fourth quarter.

Great. Thanks, Andrew.

The next question will come from Omar Saad of Evercore.

Great quarter. Andrew, I wanted to ask follow-ups on BBW. I'm trying to think about the stickiness of some of the categories that obviously have been so strong during COVID. Maybe you could frame the growth, new customers coming into the franchise versus greater spend from existing customers. I'd also like to hear your views on the stickiness of soaps versus home fragrance versus body care. And lastly, as part of this, does the vaccine news -- the positive vaccine news affect the way you plan for beyond the pandemic next year and beyond?

Thanks, Omar.

Thanks, Omar. So on your first piece, I'll get to maybe the stickiness second. But on the customer piece, as we shared on the last earnings call, coming out of the first six months of the year, based on the stores closure for about 90 days in the first half of the year, we had seen fewer customers year-to-date through the first six months. The good news is, in the third quarter, we saw substantially more customers year-over-year in both channels, stores and our online channel. But that does still leave us year-to-date, as we exit the third quarter, down slightly low single-digit customers fewer than last year at this point, again, driven by that approximately 90-day period where the majority of our stores were closed. In terms of the profile around the customers, as you would expect, we've seen tremendous growth out of our direct channel customer file, on the order of magnitude about double last year. And within that, we've seen very nice growth amongst new customers, new to the brand and new to the channel. And we're seeing nice improvement in the number of customers who shop both in stores and online. Directionally, those -- that number of customers is up over 70% year-over-year. And as a reminder, those are our most productive customers, who spend about three times more than a single channel customer does spend. Within the customer mix, we're also seeing very nice, as you would expect, growth in our soap and sanitizer customer base, and that has allowed for more cross-category shopping of customers as well. And similar to the cross-channel mix benefit, cross-category mix benefit is also significant, meaning that a customer who shops multiple categories is more valuable than a customer who only shops single category. As to your question then around stickiness and around how, if at all, the vaccine would impact our planning for next year, I guess, at a high level, all of us are hoping and praying for a vaccine to come as soon as possible so that, first and foremost, all of our friends, family, associates can live in a safer world going forward. Certainly, we would expect that, that will start to have some impact on customer shopping behavior. But I do believe that some of what we've experienced so far this year is probably here to stay in terms of how customers behave. For example, some of the growth and movement to the direct channel, I think, has been an acceleration of a multiyear trend that we had already been observing, and so I would expect that to continue. When you think about our categories, I think the good news is for Bath & Body Works, the categories that we play in were, again, super strong and relevant before the pandemic. In a couple of cases, I think they've actually been enhanced by the pandemic, specifically soaps and sanitizers; and to a lesser extent but still material, our home fragrance business as well, with people spending a lot more time in their homes. But I would expect that those, again, were strong categories before and will continue to be strong growth categories at the industry level and for our business going forward. And I do think that some personal habits will have changed on a relatively permanent basis in terms of customers' focus on hand washing and overall safer lifestyle choices when it comes to keeping clean going forward. So long-winded answer to say nothing about what we're seeing would have us have any less confidence in the long-term prospects of the business.

Great. Thanks, Omar.

The next question comes from Janet Kloppenburg of JJK Research Associates.

Congratulations on a great quarter. For Andrew, I wanted to clarify that your promotional strategy is to match last year's is understood over more days. But it is -- within your EBIT guidance, is it also assumed that your promotional levels will be shallower year-over-year? In other words, the depth of discounting will be lower. And Stuart, I was wondering on the Victoria's Secrets business, if you now feel confident that you understand the direction that the brand needs to move in to recapture top line and margin and if you're able to go forward with a defined strategy, or if you're still in a bit of a test-and-learn period.

Thanks, Janet. Andrew?

Janet, thank you for the question. So on the promotional strategy, the short answer is it's a mixed approach. So on some days, within the fourth quarter, our promotion level will be the same as last year because those are big shop-wide deals that we'll be doing and expecting to be at a similar depth of promotion just spread out over more days. A specific example there would be our Black Friday promotional strategy, that is a shop-wide deal, would extend over more days than it did last year. But in other cases where the promotional strategy is around a sharp price point around an individual item, in general, we are planning for those price points to be up versus last year. But again, the impact then being the spread of those prices over more days than what were in the last year time frame. Hoping that helps.

Janet, thank you. What I would say is with respect to the PINK and the Victoria's brands and the categories intimate apparel and sleep and lounge, apparel and beauty. I think through John's leadership, Amy's leadership, Greg's leadership, we have developed pretty clear points of view about the future direction of the brands and the significant categories. With that said, we'll continue to learn and evolve. But I think the merchant leaders, the merchant CEOs, have developed points of view that are resonating with consumers as evidenced through the results and the ability to improve margin rates meaningfully while still delivering very healthy volumes. But I wouldn't want to suggest from that comment that we won't continue to listen and learn and evolve because we will. But I think we're off to a good start. We do have points of view. We're executing against those points of view. But it's still early days and there's more to do, and we'll continue to evolve as we move through the next sequence of time.

Thanks, Janet.

The next question will come from Kimberly Greenberger of Morgan Stanley.

Great. Excellent execution here. Andrew and Stuart, I understand, obviously, both businesses seem to normalize through the third quarter, and you're not offering 4Q guidance today for very understandable reasons. But one of the things that might be just helpful to help us think about it is if you could share the two brands, maybe their exit rate, how were things looking as the business normalized in October? And then, Andrew, you talked about holiday volumes in-store at three times the third quarter average, I think. And if you are hindsighting holiday this year, what sort of level of store productivity would you think would be a very solid performance coming through the holiday season? Is it running at 70% or 75% or 80% of last year's levels? I'm just wondering how you might grade it. And then lastly, Stuart, if you could just help us understand the expansion of 870 basis points in gross margin between the components, merchant margin expansion, buying and occupancy leverage. And were there any of the expense savings that contributed?

Kimberly, so I'll take that last question. The total company gross margin rate expansion, of the 870 basis points, was roughly equal between merchandise margin rate and buying and occupancy leverage. A little bit more weighted to merchandise margin rate expansion. Then we'll go to Stuart for -- you had another question for Stuart, right?

She was asking about exit rates, and I think some of the assumptions on BBW store expectation.

Productivity.

So on exit rates, sorry, for Victoria's, and I think the same is true for BBW, Kimberly, the kind of most recent selling trends, year-on-year change, are on an overall basis consistent with Q3 in total. So that -- I know you're curious about current trend of business and our perspective on what we're comfortable sharing. And again, it happens to be the case for both businesses is that the current run rate of the business is similar to the overall Q3 total. As Andrew commented on earlier, however, we all know that the fourth week in November in size and significance dwarfs everything else, but the business is running pretty consistent. So that's what we'd offer there.

On the second part of your question, Kim, that sounded like a pretty coy way to try to have us give something resembling guidance. But I'll attempt to offer a response without going into detail on that. But at the end of the day, with the capacity constraints that we've articulated, and I know, as you appreciate, the reality is the situation around capacity and regulations outside of our control is a very fluid one with different states and municipalities changing perspectives on that on a frequent basis. But if we just use our overall view, which prior to any of those jurisdictional changes, we had gotten comfortable in both businesses running between 40% and 50% of max capacity to last year. And again, some jurisdictions will require us to operate with less than that. But if you think about that as a cap, if you will, on traffic, on the biggest days of the year, because again it's only on the biggest days of the year where that max capacity does come into play, but with traffic on those biggest days of the year, being down 50-plus percent based on those capacity constraints, even with the big improvements we're seeing in both businesses around conversion and around average dollar sale, you can understand that we will not be able to hit the total volumes that we saw on those biggest days from last year. Thus, the strategy to spread them out. And without going into more detailed guidance, hopefully, that's a helpful model.

Thanks, Kimberly.

Our next question will come from Mark Altschwager of Baird.

Great quarter. I wanted to ask just some bigger picture questions on margins. So Andrew, starting on BBW, it looks like operating margins this year are on pace to be kind of mid- to high 20s. How are you thinking about potential normalization in fiscal '21? Or maybe if you don't want to give specific numbers, I guess, just any learnings from 2020 that would impact the prior framework, such as the business could operate at structurally higher margins versus the roughly 23% the business was at over the last several years. And then for Stuart, a pretty remarkable recovery in the VS margin this quarter. It would seem like the business is now well on the way to breakeven this year. And if we carry forward the Q3 inflection to next year, the brand would seem to be nicely profitable again. But obviously tough to extrapolate one quarter. So just understanding that there's a lot of near-term uncertainty, any high-level thoughts you can share on where the brand is from a run rate profitability perspective today.

Thanks, Mark.

Mark, so to your question around Bath & Body Works and how we're thinking about operating margin rates as we move out of this very unique year and, frankly, probably need to think about as we lap this year next year. So I would say it's likely that both 2020 and 2021 will be somewhat unique in terms of what that operating margin profile looks like, especially in different time periods throughout the year. But if we're talking about a more long-term basis for the business, we've been very consistent in saying that we believe this is a business that can and should operate in the low 20% range from an operating income rate of sales. And there's nothing that we're seeing today that would make us have a different perspective on that on a go-forward basis.

Stuart?

Mark, what I would say about Victoria's Secret is based on the third quarter results, we're ahead, Mark, of where we thought we would be. And I say that not in a hopefully a boastful way at all, but just we're ahead of where we thought we would be. And with that said, we got a lot more to do. So we've made good progress. Strong quarter, happy about that, proud of the effort of so many people to make that happen. But it's one quarter, as you point out in your question. However, strategically, as you know from your following of us and others in the industry, similarly situated businesses with brand power and in strong categories and within our own history can be mid- to high teens operating income rate businesses; they can. If you look at lots of players over long periods of time when performing really well and executing really well, that's where you can be. Now we're a long way from that. We've just finished one solid quarter. So we got a lot of work in front of us, but there's a lot of opportunity. And so we're taking it one week at a time and one month at a time and trying to do the right stuff with respect to the merchandise assortments, the customer experience, the brand positioning, the quality of the team, and the culture of the business. And we're off to a good start, but we got a lot in front of us. But I would say the potential is, when executing well, that this should be a 10% to 15% operating income rate business, and that's potential that we should be able to realize in the next several years, next year or two, if we really execute well. A lot in front of us, but that's the potential. Thanks.

Thanks, Mark.

The next question will come from Dana Telsey of Telsey Advisory Group.

Nice to see the improvement and the continuation of strength of Bath & Body Works. Stuart, on the Victoria's Secret turnaround. Obviously, you mentioned that there's significant guidepost to watch for. As you think about going through 2021, what should we be looking for, whether it's in lingerie, in PINK and the KPIs that we should lean towards? And as you think, Andrew, about BBW and going through 2021, how are you thinking about the category penetration and its potential movement from what happens in 2020?

So with respect to Victoria's Secret and guideposts in 2021, what I would say, Dana, is a healthy revenue line. And what I mean by that is revenue growth or revenue outcomes that don't come with healthy margins are a sign of a problem, and you know that from all the work that you have done and that you do. So for us, it is a healthy balance between unit volume; average unit retail pricing; good, better, best execution; ultimately, again, coming through a healthy top line with very healthy margins; along with continued execution on the profit improvement plan that we started to implement or put into action, I should say, in August. So it's those healthy revenue and margin metrics, it's strong execution from a brand standpoint and a merchandising standpoint, along with good channel mix and healthy margin characteristics. So those would be the guideposts. Thanks.

Andrew?

Dana, thanks for the question. So again, from a current focus, we are really heads down on trying to deliver the best possible fourth quarter. But certainly, as we are working on the product development pipeline looking out into 2021, at a high level, we would expect that we will see moderation in what have been tremendous growth rates in our soap and sanitizer business, and a more balanced growth that we would look for across the portfolio as we move into 2021. So we would expect to see, probably on a relative basis, higher growth out of body care and home fragrance relative to the growth we would expect out of soap and sanitizer. But I think it's fair to assume that on a mix basis, again soap and sanitizer, which had been just under 15% of our business historically, we would expect to maintain at least around the 20% of the business even as we move into next year and beyond, if that's helpful in terms of your modeling.

Great. Thanks, Andrew. Thanks, Dana.

The next question will come from Oliver Chen of Cowen.

On the Bath & Body Works division, nice job in all the momentum. The digital connection between the online and mobile experience and in-store, could you highlight what's happening there and opportunities you have and/or progress you made and how that may be important in fourth quarter as customers are looking at all these channels together? And then on the product mix at BBW, does that have material margin implications we should know about over time?

Thanks, Oliver. So on your first question, again, we've been very pleased with our ability to scale up our direct business through the year from a capacity standpoint, but also from a capability standpoint. And I think maybe what you're probing on is, obviously, more and more customers, how they experience any brand, Bath & Body Works, Victoria's Secret or any other brand tends to now be, first and foremost, through a mobile device. And so we are very pleased with how well our brand translates on mobile devices in terms of the look and feel, brand projection that we give on those devices. And our ability to service orders through mobile or through any digital platform has, again, continued to be very stable and continue to be something that we're proud of, and we will continue to make investments into those capabilities as we move into future years as well. In terms of the product mix and any material impact that, that has on margin, the short answer there would be not a material one. All of our categories that we operate in are high-margin categories. The soap and sanitizer business, specifically within that, is about at the average of our overall margin profile. So nothing that, that growth or change would have as an impact to our overall rates.

Thanks, Oliver. We're going to try to squeeze two more questions.

The next question comes from Marni Shapiro of Retail Tracker.

Congrats on a great quarter, and the stores look fantastic for the holidays. I have two very quick ones. On PINK, I'm curious if you could talk a little bit about the age of the consumer coming in. Are you seeing a younger shopper come in for the bras and panties, like the lightly lined sports bra and things like that? As just these stores have closed, they had a pretty big footprint and owned that sort of first bra and panty experience. And then if you could just remind us, I know you've rolled out pickup in store. I'm curious if you've had -- if it's meaningful at this point for you guys?

So Marni, we'll go to Andrew first for BOPIS.

Marni, yes, as we talked about on the last quarter call, we were able to launch the buy online pick up a store capability earlier in the year, and we have been using that, I would say, sporadically, throughout Q3 to really help with any times we had capacity constraints or store closures on a rolling basis. We have not rolled it out broadly to stores that are able to be open and operating in a fully open capacity. Really, the learning around the capability has been interesting. It certainly appears to have some level of -- some small level of incrementality. But really, it's most important for us as, what I'll call, an insurance policy when or if we have stores that are unable to operate, keeping them open and able to operate in that buy online pick up in store manner, especially in our off-mall locations, is a very nice safety net to now have as a capability.

Thanks. Stuart?

Marni, so as you know, the target customer, if you will for PINK is that college-age young woman. And with that said, the brand appeals to a range of ages. And I would say that Amy is and the team are doing a good job really executing to target the business through the projection of the business, the merchandise itself, to that college-age customer. And again, understanding that there is an age range around that customer. But we feel -- she feels like we're doing a good job of targeting that college age customer. So that's what our comment would be. Thanks.

Thanks, Marni.

The last question for today will come from Carla Casella of JPMorgan.

I have a cash flow question about the store closures. Have you spent the -- the lease breakage cost that you talked about earlier in the year, has all of that been spent? Or do we have a catch-up for that in the fourth quarter?

Carla, it's Stuart. There's a little bit of catch-up in the fourth quarter and that's where it will be concentrated. But Carla, we feel very good about our cash projections and our liquidity. But there is some catch-up in the fourth quarter, but a lot of moving pieces, as you understand, and we feel very good about our cash and liquidity position.

Thanks, Carla. Go ahead.

I was going to say, the international debt that you have been carrying in the international facilities, does that go with the U.K./Ireland business? Or is that related to China or the other international?

It largely relates to China, and we may end up paying that off in the near-term here, Carla. Thanks.

Thanks. That concludes our call for this morning. We'd like to wish you all a happy Thanksgiving, stay safe and healthy. And thank you for your interest in L Brands. Thanks.

Thank you all for your participation in today's conference call. At this time, all parties may disconnect.