A Supermodel Stock with Attractive Fundamentals
Liz is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Victoria's Secret is synonymous with sex appeal and intimate apparel. Therefore, parent company Limited Brands Inc. (NYSE: LTD) is a supermodel stock because it has attained "celebrity status" (definition of a supermodel) with the Victoria's Secret brand. Certain proof flows from the glossy red lips of supermodel extraordinaire Heidi Klum (do I have your attention now?) When Heidi smiles her megawatt smile and gushes that "being a Victoria's Secret model was always my dream," the brand is doing something right. Which brings me to the most salient question of all, just how appealing are the fundamentals? Let's turn on the lights and take a look.
To acquaint you more intimately with LTD, this international company markets five brand names: Victoria's Secret, Bath & Body Works, Pink, La Senza and Henri Bendel. They operate 2,639 specialty stores in the US, another 600 company-owned and franchised outlets in internationally, as well as their catalog business. They cater primarily to women with intimate apparel, apparel, and beauty products, and are unique in that they strive to develop an emotional connection to their customer base. They're quite successful at this as Heidi would attest to on the catwalk and women of all shapes and sizes would attest to at home (see my post on How Do You Put A Price On Love).
LTD continually upgrades their marketing and brand loyalty programs which gives them a leg-up on the competition, a partial list of whom would be V.F. Corporation (NYSE: VFC), Warnaco (NYSE: WRC), Maidenform (NYSE: MFB), Jones NY (NYSE: JNY) and Hanesbrands Limited Brands has a market cap of $13.3B, net revenue of $10.3B (ttm) and a ROE (ttm) of 162.65%. Relative to competitors in the specialty apparel industry LTD is on the bigger size, sitting just below V.F. Corp with a market cap of $16.5B, but ahead of Hanesbrand at a $2.75B market cap, Warnaco at $1.7B, Jones New York at $804.7M and Maidenform at $484.8M. The average market cap for the industry is $292.68M.
If we limit our focus to dividend paying stocks, we'll leave HBI, MFB, and WRC behind. Looking at annual dividend yield (ttm), LTD is at the most impressive at 2.16%, ahead of VFC (1.91%) and JNY (1.97%). I also like LTD's aggressive dividend history and commitment to shareholders, for example paying out a regular annual dividend (which was increased 25% to $1/share in January 2012) in addition to quarterly dividends. And in June of this year, the company paid its 150th consecutive quarterly dividend. The prudent question to ask would be whether LTD's dividend payout ratio of 142% (overwhelming VFC at 33.06% and JNY at 71.43%) is sustainable. A quick check on cash and cash equivalents shows +105% (ttm). Things look promising except for debt levels, with debt/equity of +1315%. This concerns me a bit and demands closer inspection. While I love LTD's dividend growth rate 5-year average of 10.76% versus 5.53% (VFC) and -18.61% (JNY)) I'd like it to continue into the future. A few more observations would be an LTD P/E of 17.4, edging out VFC at 17.8 and JNY at 36.7. Further, its 52-week stock price performance is up 25.99% (as of 7/27) and while strong, does fall slightly behind a 28.27% increase for VFC (JNY is -18.8%.) Overall I like the fundamentals and hope that I've given you a taste as to why I've got my eyes on LTD. VFC is also a stock to consider, but given a choice between the VFC brands such as The North Face, Timberland, and Smartwool, I've gotta say that I have stronger feelings for Victoria's Secret.
Specialty retail is an extremely competitive and fickle business, with many products made overseas (cogs can inflate and margins shrink), brand names falling in and out of favor (unanticipated) and new fashion trends emerging (giving competitive advantage and killing sales.) So sure, the love could fade in the long-term. With that being said, if you feel an attraction for the majority of the fundamentals then I say to go for it. Love plus Limited Brands historical strength in increasing shareholder value (consistent dividends), a wise and aggressive approach to marketing that gets consumers into the store and broadens the brand's reach (Victoria Secret and Victoria Secret Pink for younger women), state-of-the-art promotion and special events to drive loyalty and habitual purchase, and a prudent management of retail assets (closing 373 unprofitable stores since 2007) should make you feel more secure. So with the lights on and LTD fundamentals scrutinized, I'd say let's give it a go!
CoachLizzy is long LTD. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.