Limited Brands (LTD), parent of Victoria's Secret and Bath and Body Works, is going on a $500 million shopping spree repurchasing stock; however, it's putting the charges on an overloaded credit card. Limited floated a $1 billion 6.625% noncallable 10 year bond and will use half for stock repurchases. The company already owes $2.5 billion; its balance sheet is highly leveraged with an eye popping 170% debt/equity ratio. Compare that to Ann Taylor (ANN), The Buckle (BKE), Aeropostale (ARO), and Chico's FAS (CHS), all of which have no debt. Saks (SKS) comes in at a 31% debt/equity. I used to think Macey's (M) and Nordstrom (JWN) were crazy high at 134% and 137% respectively; they don't look so bad after Limited.
Certainly, $500 million dollars buys a lot of Limited stock. Once the spree is over, Limited will be left with a heaping $3.5 billion debt load, a drag on its cash flow for years to come. Last year, Limited paid $209 million in interest; with their additional debt, they will now be shelling out $275 million. Last year, interest expense came to 16% of operating income. If operating income stayed the same, interest would rise to 21%.
In the past, Limited appeared investor friendly because it increased its dividends, made two special dividends last year, and repurchased shares. No more. Adding more debt on to an already highly leveraged balance sheet solely to buy back shares is too risky for my tastes. After the added debt, EV/EBITDA will be one of the highest in the retail industry. I'd be less concerned if Limited was planning to use the borrowed funds for a major expansion.
Fifteen calls and e-mails to Limited Brand's investors relations went unanswered. Not a fan of escalating debt, I sold my shares.
Disclosure: I am long BKE.