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Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Welcome to Limited Brands, Incorporated, fourth quarter and year end 2006 earnings release conference call. [OPERATOR INSTRUCTIONS] Today's conference is being recorded. If you have any objections you may disconnect.
Now I'll turn the call over to Mr. Tom Katzenmeyer, Senior Vice President of Investor, Media, and Community Relations. Thank you. Sir, you may begin.
TOM KATZENMEYER, SVP, INVESTOR, MEDIA, COMMUNITY RELATIONS, LIMITED BRANDS: Thank you and good morning, everyone. Again, this is our fourth quarter and year-end conference call for the period ending Saturday, February 3, 2007. Just as a reminder everything that we say today is subject to our Safe Harbor statement that's in our SEC filings. Everything you need for the call and for this report is out on our website. We did that after the close yesterday. So you can access that. If you can't by those means you can call our office and we'll fax those materials to you. We have a lot of ground to cover today.
This is who is with me. Martyn Redgrave, EVP, CAO, and CFO; Sharen Turney, CEO of Victoria's Secret; and Mark Weikel from Victoria's Secret is also with us today; Neil Fiske, CEO of Bath & Body Works; and Jay Margolis, President of our Apparel Group. Jay's in New York, but we'll go out to him also for comments and questions. Stewart Bergdorffer, our EVP of Finance; and of course the ever charming Amy Preston is here with us this morning, our VP of Investor Relations. We are going to go right to Martyn and the other CEOs will cover some territory here, then I will be back in a few minutes for the Q&A session. With that I will turn it over to Martyn.
MARTYN REDGRAVE, EVP, CAO, CFO, LIMITED BRANDS: Thanks, Tom, and good morning, everyone. First of all I want to explain that all the results that I'm going to be discussing -- or we will be discussing on this call will exclude the 2005 fourth quarter one-time items which totaled $0.29 per share and are detailed in our press release. Also, as a reminder the 2006 fourth quarter consists of a 14-week time period versus 13 weeks in 2005. So we're very pleased with our 2006 full-year results. Total sales increased by 10%, and our operating income increased by 23%. Earnings per share for the full year were $1.68 versus $1.33 last year. And excluding the impact of the 2006 incremental stock option expense, $0.05 per share, this represents earnings per share growth of 30%.
We drove this profit growth with significant increases in operating income across all three of our segments, while at the same time making incremental investments in marketing initiatives and technology that will [Inaudible] growth. Taking a minute to look at this future growth and specifically 2007, we remain focused on the six key strategic imperatives that we presented at our Investor Relations update meeting in November. So before I get into the detail of our fourth quarter results I'd like to take a few minutes to discuss these imperatives as a frame for our 2007 plans.
The first imperative is organic growth through comp store sales and sales productivity in our current brands and our current footprint. Over the past 10 years we have increased overall sales productivity by 5.2% per year compounded. In 2006 sales per square foot increased by 8.4%. We remain confident in our ability to continue to deliver increased sales productivity, and we're planning mid single-digit comps in 2007. We also will continue to close unproductive apparel stores and convert express stores to the dual-gender format, which is a strategy that has resulted in significant gains in sales productivity. Apparel square footage, for instance, is projected to decline by about 12% in 2007.
Our second imperative is expanding our brand footprint and entering into new channels and geographies. As we announced in November, based on the favorable returns from the tests of our larger Victoria's Secret store formats, in 2007 we will begin a plan to increase the square footage of our average Victoria's Secret store by about 50% per store. Specifically, in 2007, we plan to open 35 new stores and remodel another 105 stores to the new larger store size. And that will drive a total square footage increase for the brand of between 8 and 10% in 2007 versus a 2.5% increase in 2006.
Now, it's important to understand that we are not anticipating a positive impact on profitability in 2007 from these initiatives. As we ramp up the real estate and store reconstruction activity and have to recognize the related accelerated depreciation, write-offs, and, of course, the impact of store closings during a remodel period, we expect that those costs will offset the incremental profitability that will be generated from the new stores and reconstructed stores. We do expect that this activity will begin contributing to profitability in 2008.
At Bath & Body Works we plan to open roughly 55 new stores in 2007 primarily in specialty center locations resulting in square footage increase of about 3% compared to 1% in 2006. In addition, our acquisition of La Senza expands our presence into Canada and the international space. We plan to open 32 new stores in 2007 for a per-square-foot growth of 12%. Total square footage growth of 12%. Importantly, this acquisition also provides us with an operations platform in Canada and a franchising network in 34 other countries as we begin to think about international expansion for our brands.
Given the contraction in apparel square footage, all of our real-estate activity in 2007 nets to flat square footage year-over-year versus a 3.6% decline in 2006, and this excludes the impact of the La Senza acquisition. Our third growth imperative is the incubation and growth of new concepts like PINK, Intimissimi, White Barn Candle Co., C.O. Bigelow's, and accessories concepts at Henri Bendel and Diva London. These concepts are in various stages of growth from an aggressive expansion of PINK that you all know about to new tests and evaluation phases that we're in for the Diva London concept.
Our fourth growth imperative relates to our investment in infrastructure to support our future growth. We are very focused here on two primary initiatives. First is the enterprise-wide multiyear project to standardize and upgrade our technology in three areas. Shared services, customer relationship marketing, and supply chain. This project, which began in late 2004, will continue into 2009. EBW was the first brand to implement the new supply chain systems in July of last year, and Mast, our production and sourcing business, will -- for apparel and intimate apparel, will implement their systems this summer.
Second is our initiative to support the growth of our direct businesses through the construction of a new distribution center and the development of new front-end technology. This activity, which began late last year, will continue into 2010. Our fifth growth imperative is talent. We believe we have some of the best merchants in the business and have great confidence in our brand leadership. We will continue to invest in growing and retaining this talent.
Finally, our last growth imperative relates to our capital structure. As you are aware we are making incremental investments back into our business to support all of the growth imperatives that I have mentioned. We will continue to return excess free cash flow to shareholders through dividends and share repurchases.
With this overview in mind I will now turn to the review of results for the fourth quarter. Earnings per share were $1.08 in the quarter versus $0.98 per share last year. Excluding the impact in 2006 of some stock option expense of approximately $0.02 per share, this represents earnings per share growth of 12%. Comps increased 8% in the quarter, and total sales increased 15%, $4.025 billion. The extra week in the quarter accounted for approximately $171 million, or 4% of our incremental sales. Gross margin decreased 20 basis points to 40.1%. This was driven by a decline in merchandise margin that was partially offset by buying and occupancy expense leverage. Total SG&A dollar spending increased by 18% which de-leveraged by 60 basis points.
This incremental spending was driven primarily by the following factors. About a quarter of the increase relates to our increase in store selling costs, which were flat as a percentage of sales. Another quarter of the increase can be attributed to identifiable incremental payroll costs associated with that extra week in this year's quarter. Another 15% of the increase relates to incremental investments in the two major technology initiatives that I had mentioned earlier. Another 15% represents the increase related to higher incentive comp expense this year which is both tied to our improved performance as well as the recognition of the incremental stock option expense related to our adoption of FAS 123R. The remainder of the increase relates to miscellaneous items that are not individually significant, including the incremental cost of recording La Senza's SG&A. So in total, fourth quarter operating income increased by $63.6 million.
By segment, the results were Victoria's Secret operating …