Limited Brands' Balancing Acts - Analyst Blog

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Limited Brands Inc. ( LTD ) is persistently trying every means to make its way in this sluggish economic environment by adopting optimum inventory strategy, better expense management, merchandise initiatives and prudent capital spending with an aim to generate healthy cash flows and augment its financial position. The endeavors undertaken helped the stock to gain a firm foothold in the market, well reflected by a 22% rise in the share price, so far in the year.

The Company Counts Upon

Limited Brands' 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 brandboth at home in Canada and internationally by improving product assortments, store operations and layout.

Limited Brands is keen to augment its retail footprint across the globe by expanding aggressively in Canada and other international markets. Another driving factor is the travel retail concept. These are small Victoria's Secret stores (of about 1,000 square foot) operating under a wholesale model, and primarily located in airports and tourist destinations. These stores provide significant growth opportunities and are an innovative way to advertise.

Limited Brands is also actively managing its cash flows and returning much of its free cash to shareholders' through share repurchases or dividend. In fiscal 2011, the company returned more than $2.3 billion to stockholders via share buyback and dividend.

Riding on Positive Comps

Limited Brands has sustained its growth momentum. The company's comparable-store sales for February 2012 rose 8% following an increase of 9% in January 2012 and a 12% jump in February 2011. For March, management now expects comparable-store sales to rise in the low single digits.

Comparable-store sales for February increased 10% at Victoria's Secret Stores & Victoria's Secret Beauty, 7% at Bath & Body Works & The White Barn Candle Co. and 1% at La Senza. Sales at Victoria's Secret Direct climbed 5%.

Healthy Quarterly Results

Limited Brands posted better-than-expected fourth-quarter 2011 results on the back of an improving sales environment witnessed across its Victoria's Secret and Bathand Body Works chains.

The quarterly earnings of $1.50 per share beat the Zacks Consensus Estimate of $1.46, and rose 19% from $1.26 earned in the prior-year quarter. The company posted net sales of $3,515.4 million that rose 2% from the prior-year quarter, and comfortably beat the Zacks Consensus Estimate of $3,492 million.

Limited Brands posted a comparable-store sales growth of 7% during the fourth quarter of 2011 compared with 9% in the previous quarter and 10% in the prior-year quarter.The company now expects comparable-store sales to increase in the low-to-mid single digits in the first quarter and between 2% and 4% in fiscal 2012.

But Guidance below Expectation

Management guided earnings for the first quarter in the range of 35 cents to 40 cents and for fiscal 2012 between $2.60 and $2.80 per share.

However, the guidance failed to impress the analysts covering the stock, who were expecting much more from the specialty retailer of women's intimate and other apparel, beauty and personal care products. Consequently, the Zacks Consensus Estimate witnessed a fall, since the company's earnings release.

The Zacks Consensus Estimates for both the first and second quarters of 2012 fell 5 cents to 40 cents and 49 cents, respectively, in the last 30 days. For fiscal 2012 and 2013, the Zacks Consensus Estimates dropped 9 cents and 14 cents to $2.83 and $3.21, respectively, in the last 30 days.

Challenging Economy and Competition

The economy is still not out of the woods, and whether 2012 will mark the complete resurrection is tough to say, unless some concrete steps are taken. Cuts are deep and wounds not completely healed. Each and every company is vying to survive the downturn, and trying every means to reach the helm.

Limited Brandsfaces 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. The La Senza brand has been facing the headwinds, witnessing a fall of 3% in comparable-store sales during the fourth quarter of 2011.  

Moreover, the company's customers are sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, sluggishness in the housing market, and high unemployment and household debt levels, which may affect their spending.

Closing Commentary

Given the pros and cons, we reiterate our long-term "Neutral" recommendation on the stock with a price target of $50.00. Moreover, Limited Brands, which competes with Gap Inc. ( GPS ) and Hanesbrands Inc. ( HBI ), holds a Zacks #3 Rank that translates into a short-term "Hold" rating.


 
GAP INC ( GPS ): Free Stock Analysis Report
 
HANESBRANDS INC ( HBI ): Free Stock Analysis Report
 
LIMITED BRANDS ( LTD ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: GPS , HBI , LTD

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