Limited Brands Maintains Focus In Sluggish Environment

Sep.18.11 | About: L Brands, (LB)

We maintain our long-term Neutral recommendation on Limited Brands Inc.’s (LTD), the owner of Victoria's Secret Direct and La Senza chains, with a price target of $40.00. However, the stock holds a Zacks #2 Rank, which translates into a short-term Buy rating.

Limited Brands sustained focus on cost containment, inventory management, and merchandise initiatives has kept it afloat in a sluggish consumer environment. This was quite evident from the company’s August comparable-store sales, which rose 11% compared with a 6% increase in July 2011 and a 10% rise in August 2010 on the heels of healthy sales at its Victoria's Secret Stores and Bath & Body Works.

Limited Brands, which competes with Gap Inc. (NYSE:GPS) and Hanesbrands Inc. (NYSE:HBI), said that net sales for August rose 11.4% to $702.4 million from $630.3 million posted in the same month last year.

The company’s Bath & Body Works segment is gaining traction, thanks to a rise in store transactions, enhancement in the direct channel business and growth in new stores. Victoria’s Secret Stores has been performing well, and the company is also revamping its La Senza brand both at home in Canada and internationally by improving product assortments, store operations and layout.

Limited Brands is also keen to enhance its retail footprint across the globe.Another driving factor is the travel retail concept. These are small Victoria’s Secret stores (of about 1,000 square feet) operating under a wholesale model, and primarily located in airports and tourist destinations. These stores provide significant a growth opportunity and are an innovative way to advertise.

Earlier, Limited Brands posted second-quarter 2011 results. The quarterly earnings of 48 cents a share beat the Zacks Consensus Estimate of 46 cents, and rose 33% from 36 cents earned in the prior-year quarter riding on an improving sales environment.

The better-than-expected results, prompted management to raise its fiscal 2011 earnings outlook. Management now forecasts third quarter earnings in the range of 17 cents to 22 cents and fiscal 2011 earnings between $2.35 and $2.50 per share. Previously, Limited Brands had projected fiscal 2011 earnings between $2.25 and $2.45 per share.

The quarterly net sales of $2,458.1 million climbed 10% from the prior-year quarter, and also came ahead of the Zacks Consensus Estimate of $2,437 million. Consumers who cut back their discretionary spending during the recession are now gradually loosening their purse strings.

Comparable-store sales for the quarter jumped 9% compared with 7% registered in the year-earlier quarter. Limited Brands now expects comparable-store sales for the third quarter to be up in the low to mid single-digit range and for fiscal 2011 to rise in the mid single-digit range.

Limited Brands is also actively managing its cash flows, and returning much of its free cash via dividends and share repurchase. During second-quarter 2011, the company bought back 8.2 million shares for $314 million. During fiscal 2011, the company expects to generate free cash flows of $700 million.

A specialty retailer of women’s intimate and other apparel, beauty and personal care products, Limited Brands,faces stiff competition from chain specialty stores, department stores and discount retailers on attributes such as, marketing, design, price, service, quality, and brand image. Competitors having a larger number of stores, greater market presence, brand recognition, and financial resources will likely continue to weigh on the company’s results.

Moreover, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn the company’s growth and profitability.

Considering the pros and cons stated above, and given the unrest in the global economic environment, we prefer to maintain a Neutral stance on Limited Brands.