What Will Drive Growth at This Retailer?

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After significantly outperforming the S&P 500 from 2009 to 2012, Limited Brands (NYSE: LTD) stock price has been in consolidation mode for the last year. The company has focused on long term investments during this period. Limited Brands plans to increase its online sales through in-store POS ordering and mobile POS systems. It also has plans for square footage growth and more product categories to drive sales in the long term. Now, let’s discuss these points in detail.

Square footage growth and International expansion will drive long term growth

Limited Brands has strong growth plans for the long term, and it will increase its overall square footage by 3% in this year. It will open 49 Pink brand’s free standing stores this fiscal year, which are believed to be an underpenetrated brand in the US. The company's La Senza brand will reposition itself in Canada and target the young customer base with value products. Victoria’s Secret will add 8 more stores to its present 26 stores in Canada.

The company's stores in the UK and the Middle East have given lucrative results, and the company plans to increase penetration in these markets. Limited Brands also has plans to increase its franchise locations globally from 488 to about 600, and it can be a major source of revenue. Its store growth plans in the US and international markets will drive the company's long term growth.

Increased product categories of Victoria’s Secret will make the brand stronger

Victoria’s Secret built its brand around its core lingerie products, but it has now added a few more product categories to its brand. It has expanded its product portfolio and introduced other categories like shoes, evening wear, accessories, handbags and fragrances.

Victoria's Secret's beauty category is growing the fastest among all categories and brings 20% of the total sales of the brand. Its other apparel categories like swimwear, sportswear and loungewear also have strong growth opportunity. It has closed down a few stores, but its revenue is expected to grow with increased product offerings of the brand.

Share buyback and increased dividend per share is a positive signal for the investors

The company believes in returning back to the shareholders through share buyback and dividend. It has a share repurchase program in place, and it has already bought back 1.2 million shares worth $54.7 million in the first quarter of this fiscal. It has $184.2 million left under its current authorized program.

It has also increased its dividend per share, or DPS, from $0.25 to $0.30 in the last quarter from the same period last year. Its increased DPS, along with the share buyback program, is a positive signal for the investors.

Peer analysis

In the specialty women’s apparel segment, the other two major players are The Wet Seal (NASDAQ: WTSL) and Bebe Stores (NASDAQ: BEBE).

Wet Seal has focused on long term strategic initiatives to improve its margins. Its online sales are 6% of the total sales, and it has opportunities to make it more than 10% in future. It will integrate its omni-channel network to drive its online sales. It will focus more on integrated programs and organize contests and in-store promotions.

It has also entered into partnerships with musical artists to show more connect with the teen customer base. It has plans to increase its stores base to drive long term growth. It will increase its West Seal brand to 700-750 stores from its current 465 stores.

Bebe Stores has gone through a tough phase in the last quarter. It reported negative 8.6% comps and its sales declined by 6.7% in the third quarter in fiscal 2013.

It has taken some strong initiatives to turn its numbers positive. It has developed a better and refined inventory management process to save on inventory costs. It will look for better vendor relationship management for quick turnover to reduce pressure from in-house core products. It has gone back to its core customers and will try to set the trend and not to follow it. It will come up with visual messaging across various channels to promote its products value and quality.

<table> <thead> <tr><th> </th><th> <p><strong>P/S ratio</strong></p> </th><th> <p><strong>Op. margin</strong></p> </th><th> <p><strong>1 Yr. Fwd. P/E</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Limited Brands</strong></p> </td> <td> <p>1.66</p> </td> <td> <p>13.71%</p> </td> <td> <p>14.91</p> </td> </tr> <tr> <td> <p><strong>Wet Seal</strong></p> </td> <td> <p>0.78</p> </td> <td> <p>2.28%</p> </td> <td> <p>21.74</p> </td> </tr> <tr> <td> <p><strong>Bebe Stores </strong></p> </td> <td> <p>1.0</p> </td> <td> <p>-16.49%</p> </td> <td> <p>N/A</p> </td> </tr> </tbody> </table>

Source: Google Finance and Yahoo! Finance

Limited Brands reported the highest operating margin of 13.71% and a P/S ratio of 1.66 among the three mentioned peers. Wet Seal has the lowest P/S ratio of 0.78, but the highest 1-year forward P/E of 21.74. Bebe Stores has a negative operating margin of 16.49% and P/S ratio of 1.

Conclusion

Limited Brands has long term stores growth plans. and it will increase its square footage growth across the brands in the US and global markets. It has increased its product categories and increased its product portfolio of its Victoria’s Secret brand. This will help it to attract a broader customer base and drive comps growth. It has increased its dividend from last year and has a share buyback program in place. So, I recommend a Buy.

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Ash Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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