Limited Brands (
), a specialty apparel retailer focused on lingerie, beauty and
personal care products, competes with retailers like
Abercrombie & Fitch
), AnnTaylor (
), and J.Crew Group (JCG). Some of its popular brands include
Victoria's Secret in the lingerie business and Bath & Body
Works in the personal care segment.
Despite fewer promotional discounts than offered in 2009,
Limited reported a 10% year-over-year increase in comparable store
sales during Q3 2010, a trend that continued into November. As a
result, Limited Brands' stock price increased by nearly 10% (to
$35). It was after Limited Brands' special dividend of $3 that the
price fell to its current level of around $31.
We currently have a $30.63 price estimate for Limited Brands'
stock, in line with current market price. We estimate
Victoria's Secret brands is the largest value driver for Limited
Brands, contributing more than 52% of company value while Bath
& Body Works contributes nearly 34% to the stock price. We see
an upside to Limited Brands' stock from Bath & Body Works
stores in the scenario discussed below.
Bath & Body Works Going Strong
We've previously written about the potential upside to our stock
estimate from Victoria's Secret stores. (Is Victoria's Secret the
Key to Limited Brands Upside?) However, the Q3'10 and November'10
strength was not limited to any one brand. The company reported
encouraging trends across both of its main brands (i.e. Victoria's
Secret and Bath & Body Works).
Bath & Body Works had a very good quarter with comparable
store sales rising 6%. The increase in sales was driven by rising
transactions as traffic to Bath & Body Works stores increased
and its customer conversion rate remained high. Rising 'spend per
transaction' as compared to last year also boosted sales.
Operating income in Q3′10 for the segment doubled from the same
period last year driven by strong top line sales, improvements in
the merchandise margin rate and leveraging of expenses. Continued
improvements in the company's merchandise margin rate has been
driven by cost reduction and lower promotional activity.
Inventory levels have also declined for the 14th consecutive
quarter, signifying ongoing improvement in margins and the
efficiency with which the business has been run.
Profit Margin Improvement Could Trigger Stock
We currently project a slight increase in Bath & Body Works
EBITDA Margin in 2011 and flat EBITDA margins thereafter. However,
if Bath & Body Works continues to improve its margins, as has
been the case in Q3, there could be a potential upside to Limited
Brands' stock. To demonstrate the company's stock price sensitivity
to this metric, we estimate that a gradual rise in Bath & Body
Works' EBITDA margin, reaching 24% by the end of our forecast vs.
our base case estimate of 19%, there could be more than 10% upside
to the $30.63 Trefis price estimate for Limited Brands'
complete analysis of Limited Brands' stock is