Limited's Q4 Earnings Disappoint: Little Downside Risk Remains

Limited Brands (LTD) reported 2009 4th Quarter earnings last Thursday in-line with guidance, excluding a $0.63 per share impairment charge to write-down La Senza goodwill and intangibles; the market reacted with a 13% sell-off for the mid-cap stock, closing at $7.74, down 23% YTD. The stock has sold off from a 52-week high of $22.16 in September during one of the weakest consumer environments in decades and as margins continue to come under pressure. However, downside risk in the stock is limited (no pun intended), and the company is positioned to weather the storm.

Citi Investment Research analyst Kimberly Greenberger, CFA, reiterated her Buy recommendation with a $10.00 price target and 37% expected total return, in her report released on Thursday. The report (Positives Outweigh Negatives; Reiterate Buy) stated the following:

Covenant easing, further CapEx & SG&A cuts, stringent inventory control, secure dividend, strong FCF & conservative guidance offset lower EPS guidance in our view. Management is doing all the right things to manage through.

Management has continued to implement cost-saving initiatives to decrease SG&A expenses which were down -6.1% this quarter. Inventory management also continues to improve, as the company reported on their quarterly conference call that inventories are down 34% per square foot over the past two years.

According to the Seeking Alpha conference call transcript, the company reported the following:

We continue to reduce capital expenditures. From a high of $749 million in 2007 to $479 million for 2008 and now to a target of roughly $200 million in 2009. We also are focusing on cash and liquidity. Free cash flow in 2008 was $475 million and we ended the year with $1.2 billion in cash. Finally, as we discussed in our press release we also proactively renegotiated our covenants on our term loan and revolving credit facilities.

Limited has restructured their borrowing facilities during this difficult credit environment, in lieu of more favorable terms. The company restated their $1B credit facility and $750M term loan, and terminated the $300M credit facility. Strong cash balances and free cash flows have allowed the renegotiation of their credit terms for more favorable conditions. Limited’s strong liquidity position and cash flows should allow them to navigate without the use of their $1B credit facility though.

Margins have reflected the difficult operating environment recently, but should level-off. Fiscal year 2008 ROE was 17.9% versus 24.9% in 2007, and ROIC was 11.4% versus 17.9%. According to estimates for 2009, the stock is selling at a 7.4 P/E multiple and 1.0 times P/B. The dividend also looks secure, making the 7.8% yield very attractive. Don’t expect the company to make drastic strides in sales or margin growth in the upcoming quarters, but at these price levels downside risk is mitigated.

Comments

[Marcap:]

I think the potential for any significant increase in Limited Brands shares is low, at least within the short haul. While it's balance sheet does show a good current ratio, it is filled with Goodwill and other intangibles virtually wiping out Shareholder Equity. And even though the company's P/E ratio is great at 4.44 to 1, the company in my opinion, should not be paying a $0.60 dividend with its long term debt load, and negative Net S/H Equity positions.

I have no position in Limited Brands, long or short.

Feb 27 10:15 AM

[107Sid:]

The Victoria's Secret concept is "tired" and has become almost a parody of itself. Bath & Body, while generating great returns on investment is not well poisitoned to prosper in a recessionary environment. It is does not provide the consumer with compelling value.

Mar 01 06:02 PM