Is This Retailer a Good Buy?
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In an uncertain economy with budget conscious customers, retailers, especially specialty retailers, are finding it difficult to manage the ever increasing cost inflation and are juggling with the problem of raising product prices and falling volumes. Increasing commodity prices have become a major roadblock for almost all the retailers. But a specialty retailer for women has managed to work on this universal problem.
Limited brands (NYSE: LTD) posted sweet second quarter results which beat market expectations. Let’s understand what happened.
A Ride into the Quarter…
Looking at the revenue change over the previous year will not be useful since the previous year’s quarter included sales from Mast Global Fashions, a third party apparel sourcing division which contributed almost 10% of the total revenue, and was sold in November 2011. Excluding the effect, the results look appealing--all thanks to the increasing demand of customers, which is showing a positive trend.
Comparable store sales growth of 8% during the quarter speaks a lot about the company as well as the industry. A few months back retailers were experiencing negative comp sales but this has now taken a reverse gear. For Limited Brands, the metric has been increasing from the last three months, July being the highest at 12%, which is a clear indication of demand picking up in the market. The key segment driving the growth is Victoria’s Secret, which comprises almost 75% of the total revenue. Even the other segment, Bath & Body Works has been on the upside, showing growth potential in the long run.
After taking care of demand, a retailer’s next focus is obviously costs. And the retailer has done it again here. With significant decrease in costs, Limited Brands managed to widen its gross margin to 39.4%. Moreover, a pull back in the rising cotton prices and moderation of cost inflation look to boost the results further in the months to come.
Valuation
It is always better to know about the rivals before jumping into a potential stock. Looking at the trailing P/E, Limited Brands is much more expensive when compared to its peers. Limited’s P/E multiple of 20.76 is much higher than Ascena Retail Group (NASDAQ: ASNA) and Ann (NYSE: ANN), which have multiples at 15.89 and 19.74 respectively. However, forward P/E for all three players is lower than the trailing P/E, which shows analysts’ expectations for a bright future in the industry. The forward P/E for Limited Brands, Ascena and Ann is 15.36, 11.9, and 14.1 respectively.
Moreover, if we look at the stock price performance, the retailer has fallen weak against peers. Limited has returned 22.5% since the beginning of the year. This looks like a decent return, but again the peers have outperformed. With Ascena returning almost 27% to its investors, Ann has been leading with year-to-date performance of 36%. Hence, Limited Brands has been dull with respect to the other industry players.
The Takeaway
The company looks attractive with its strong results. Moreover, it has been making efficient efforts to reduce costs and expand its geographical footprint, especially in Canada. This seems to benefit it and help it grow its top line even faster. However, valuation shows it is more expensive than its rivals and has provided the lowest return to its investors. But a lower forward P/E incorporates the future growth potential of the company and the industry at large, which makes us think about it once again. The fact that it is expensive but has potential to grow makes me believe that we should stay on the sidelines for now till we get a better buying opportunity at a lower price.
justhimanshu has no positions in the stocks mentioned above. 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.
