The Secret That Everyone Knows About

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

Victoria has the most known secret in the world. A better kept secret is that Limited Brands (NYSE: LTD) is the proud owner of Victoria's Secret and some other very well known brands such as Bath and Body Works, Pink, La Senza, and Henri Bendel. These stores are ones that women love to shop at and where men can do no wrong in buying a gift. 

Victoria's Secret and Pink

Victoria's Secret is the most desired brand of bras, panties, lingerie, sleepwear, and swimwear in the world. All other brands seem cheaper and less sexy than this one, even though the materials and looks are similar. This is much like the situation currently happening with Michael Kors purses and watches. Lucky for men, they do not have to go out and shop in-store to make purchases because Victoria's Secret operates a website with online ordering. This website adds hundreds of millions of dollars in revenue, illustrating the fact that a strong online presence is important in today's marketplace. 

Pink, which is a brand targeting high school and college girls, is also sold within Victoria's Secret stores. This is the highest growth area for Victoria's Secret, so a large focus has been placed on this brand. In a smart move, Pink added apparel with college logos from over 50 schools. This helps them target the age group as well as the specific colleges these women attend or are planning to attend. The number of colleges the brand features continues to grow, and they should land all major colleges within a few years. 

Pink offers sports branded clothing for the current season. The NFL collection had been popular months ago, and now the focus has turned to Major League Baseball. They have apparel for all 30 major league teams, so no one is left out. This is perfect for men who want to get their special lady a gift while supporting their team at the same time. This is a win-win-win situation for men, women, and Victoria's Secret. 

The Victoria's Secret fashion show is one of the most popular events in television each year. In these shows, they show off the new styles by using a select few of the most beautiful models in the world, as well as having live performances by some of music's top artists. It is more like a party than just any other fashion show, and the television ratings are around those of the Super Bowl. 

Bath and Body Works

Bath and Body Works focuses on providing customers with the personal care products that we all need. These products include skincare products, hair products, lotions, soaps, fragrances, candles, and many more. These are all very important for stress relief and overall care for your body. Who does not love a relaxing bath or long shower after a stressful day at work? A stop at one of these stores can result in fulfilling all of your bathing and personal care needs. 

La Senza

La Senza is like the Victoria's Secret of Canada. They have over 300 stores in Canada and another 300 in 30 other countries. La Senza says their focus is on providing customers with the highest quality lingerie. They also offer bras, panties, sleepwear and other products just like Victoria's Secret. Their products are high in quality while still being offered at affordable prices. 

Henri Bendel

Henri Bendel is a luxury retailer of handbags, jewelry, shoes, fragrance, and accessories. Their handbags cost about $250 to $300 and some are upwards of $400. Up until 2008, Henri Bendel was only found in New York City. They now have 28 stores in the most premier shopping destinations in the world. They have not expanded much since being founded in 1895, so chances are the number of stores will never exceed 50.

Competition

Hanes Brands (NYSE: HBI) and The Gap (NYSE: GPS) are two of Limited's top competitors. Hanes Brands designs and manufactures apparel. They make bras, panties, tees, mens underwear, kids underwear, casual wear, socks, and several other types. Hanes owns brands like Champions, Playtex, Wonderbra, and, of course, Hanes. You will find their brands all over the world and in just about every large retail store. They also operate 216 of their own outlet stores across the globe.

The Gap is a specialty retailer located in over 90 countries. They sell products such as denim, khakis, tees, sleepwear, intimate apparel, handbags, jewelry, and accessories. Their brands include Gap, Old Navy, Banana Republic, and Athleta. The Gap operates over 3,000 stores and have a little over 300 franchised stores. The Gap also operates a very successful website, which has proven to be very effective in gaining share in the online marketplace.

Hanes Brands and The Gap each share one flaw; they are not seen as the "sexy" brand. Victoria's Secret bras and panties are much more desired in the United States than Hanes or Gap's products. This is the same situation in Canada, with La Senza being the more desired brand. Women will pay up to fulfill their needs and feel good while doing it. The two items women definitely will not skimp on are underwear and bras. These are the two main items hugging your body that cause the most comfort or discomfort. A comfortable woman is a happy woman. 

It is for this main reason that I do not see Hanes or The Gap as a threat to Limited Brands in the marketplace. They will all share a space in clothing, but Victoria's Secret and La Senza will always be the most desired by women. Hanes and The Gap are very strong with male consumers and will continue to be. Luckily, men are not the focus of Limited Brands.

Financial Highlights

Limited Brands announced that net sales for January 2013 surged an impressive 27.4% to $986.4 million compared to January of 2012. Comparable store sales increased 15% at La Senza, 10% at Bath and Body Works, and 8% at Victoria's Secret. In the fourth quarter, comparable store sales increased 7% at Bath and Body Works, 3% at Victoria's Secret, and were flat at La Senza. It is important to note that Henri Bendel's financials are included in Limited Brands' total results. These are numbers investors like to see.

*Limited Brands reports 4th quarter and full year earnings on Feb. 27, 2013*

Current Share Price

Limited Brands is currently trading at $43.90. With earnings per share of $2.33, they are trading at a multiple of 18.8. This is cheap compared to the industry average of 19.58. They are currently trading 16.4% below their 52 week high of $52.50, reached in December of last year. With a beta of 1.5, Limited Brands is more volatile than the S&P 500.

The Dividend

Limited Brands currently pays out $1.20 annually and has a strong record of consistently raising its dividend. In fact, an increase of $0.05 quarterly was announced just two weeks ago. This $1.20 dividend means the stock yields roughly 2.7%. This is a very high yield compared to other companies in the space. Also, Limited has a great reputation for paying out special dividends. They paid out a special $1 dividend in 2010 and 2011, a $2 dividend in 2011, and a $1.25 and $3 dividend in 2012.

It is safe to say they will continue paying out quarterly dividends and that they will be raising dividends each year. A special dividend will likely continue as well, but I do not think it will be as large as the $3 it paid out this past December. This was paid out before 2013 as a last push to save investors on the tax hikes that were coming. 

2013 and 2014

Limited Brands sees strong earnings growth over the next two years. In 2013, they expect to bring in $3.27 per share. This is an increase of 13.5% from 2012 and 25.8% from 2011. In 2014, Limited is expected to make an impressive $3.71 per share. This is an increase of 13.5% from 2013 and 28.8% from 2012. 2014 numbers are very similar in growth to 2013. This is a positive, showing that Limited Brands is a very consistent grower. The chart below expresses their growth from 2010 to the projections in 2014. 

<img src="/media/images/user_15878/chartgo_7_large.png" />

Bottom Line

Limited is growing because of their strong brands and the recovering economy. Even with high expectations in 2013 and 2014, I think they can beat these numbers and raise guidance. This would cause an immediate boost and send the stock back into the $50's where it belongs. This stock is much too cheap at current levels and is a great value for any investor. I am initiating an outperform call on CAPS. Limited Brands is a STRONG BUY.


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