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Get Your Hands on Limited Brands

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Limited Brands (NYSE: LTD) is a $10 billion global enterprise which targets the high-end segment of the market. It appeals to all ages of men and women who are concerned with fashion and its value. The firm operates in about 2940 specialty stores throughout North America under the Victoria’s Secret and Bath & Body Works (BBW) brands. These are Limited Brands’ strongest businesses that bring in total of 84% of net sales. The company is known for affordable prices, good quality, and consistency in trends.

The company is expanding its international reach by acquiring Canadian retailer La Senza. One of the main revenue sources for Limited, Bath & Body Works, is exploring an industry trend of “ethical skin care.” It means that there is a surging popularity of products that claims to have not been animal-tested. This moral component serves an extra incentive to the consumers. This is important now because consumers are more reluctant to shop than they have been previously.

New Product Launch: Victoria’s Secret and Bath & Body Works Performance

The company’s long term growth fundamentals are strong. Victoria’s Secret launched new products such as Angel Gold fragrance, the flirt bra, Angel Fantasies bras and Vintage fleece. These products have received good consumer response, resulting in 4% store sales growth. The success was further improved by the strength in Body by Victoria collection, PINK bralettes and Heartbreaker fragrance.

In 2012, Victoria’s Secret same-store sales growth stood at 3%. The result was weak due to holiday season in the U.S. whereas, the entire fiscal year of 2012 stood at 7%. This indicates that the temporary weakness could not offset an otherwise good year for Victoria’s Secret.

Bath & Body Works U.S. stores constitute about 30% of Limited Brands’ value. In the fiscal year 2012, Bath & Body Works’ signature collections, soap and home product assortments helped the brand in giving strong comparable sales growth of 7%. The launch of new fragrance and an exclusive range of holiday collection and gifts helped company to perform well. It reported comparable-sales growth of 7%. Further, Bath & Body Works will relaunch its luxurious signature collection fragrance, Forever Red.

Let’s Dig Deep

A specialty retailer of women’s apparel, beauty and personal care products, Limited Brands, faces stiff competition with Gap (NYSE: GPS) and Hanesbrands (NYSE: HBI).

Gap is a global specialty retailer that offers clothing, accessories and personal care products for women, babies, men and children under the Gap, banana republic, Old Navy, Piperlime and Athleta brands. In the fiscal year 2012, the company has witnessed a growth in its revenues and comparable store sales with 6.5% and 5% respectively. The company’s plan to close 21% of its namesake locations and about 2% of its Old Navy locations by end of 2013. It shall reduce dependency on the over penetrated North American market. This shall allow Gap to refocus its efforts on penetrating a bigger piece of the fragmented $1.4 trillion global apparel business by expanding through multiple channels. Gap is working on the strategy that incorporates specialty, outlet, online and franchise locations that shall make all of its distinct brands accessible globally.

Management has shown the capital allocation discipline by using excess cash generated by the company to buyback share and increase the dividends rather than over investing in stores in the U.S. Due to presence of Fisher family’s presence with 35% of their stake in the common stock, this company can be run for the long term with the added bonus of not needing much leverage. Personally, I do not expect the price performance to be dramatic nor quick, but I believe that over the next 3-5 years, with a little bit of sales growth, it can be substantial.

One of the most cotton resilient stocks, investors can trade in Hanesbrands which is the well-known maker of inner-wear, outerwear and hosiery apparel. In 2010 and 2011, the company endured an incredible spike in cotton prices, which weighed on profits and margins but may offer a silver lining for investors willing to consider the stock. For the full year 2012, earnings per share went up by 7%, driven by strong performance of the inner-wear segment. One of the investor’s biggest concerns with Hanesbrands has been its debt load. But, the company is working hard to use higher cash flow to reduce its leverage.

For fiscal year 2013, the company is expected to have earnings of $3.25-$3.40 per share. The company expects the net sales to be $4.6 billion. This is one stock that is clearly not undervalued in the market, which would be a primary motivation for a buy-back. A dividend will provide some return to shareholders and is likely to boost the stock price a bit, but only if dividend is perceived by the market to be sustainable over a long period of time.

Let’s Conclude

We can see that there is nothing limited about Limited Brands. It sustained focus on cost containment, inventory management and merchandise initiatives that has kept it afloat in a sluggish retail environment. The company’s Bath & Body Works segment is gaining traction, driven by rise in store transactions, enhancement in the direct channel business and growth in new stores. Victoria’s Secret Stores is also performing well, and the company is continuously revamping its La Senza brand.

This firm is keen to enhance its retail footprint across the globe by expanding in Canada and other international markets. However, stiff competition in the market and erratic consumer behavior is still a matter of concern. Currently, I have a long-term neutral rating on Limited Brands, which translates into a short-term hold recommendation that also correlates with my long-term view.

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