Limited Brands - Growth & Income

A healthy dividend yield of 2.1% and a long-term earnings growth projection of 12% make Limited Brands Inc. ( LTD ) a viable option for investors seeking growth and income.

Earnings estimates for this Zacks #2 Rank (Buy) specialty retailer of women's intimate and other apparels have advanced since its fiscal third-quarter report in November, which marked the ninth straight quarter with a positive surprise. The company also raised its outlook for the full year. LTD has been focused on cost containment, inventory management, merchandise initiatives and its rational store expansion strategy.

Limited Brands Beats, Ups Outlook

On November 14, Limited Brands posted fiscal third-quarter earnings of 26 cents per share, which surpassed the Zacks Consensus Estimate by 4%. Net sales of $2,050.2 million dropped 6% year over year but topped the Zacks Consensus Estimate of $2,045 million. Limited Brands delivered comparable-store sales growth of 5% during the quarter, compared with 9% in the prior year.

Sales grew 7% at Victoria's Secret Stores & Victoria's Secret Beauty, but fell 2% at Victoria's Secret Direct. Total sales at Victoria Secret and Bath & Body Works & The White Barn Candle Co. both jumped 5% and 7%, respectively. However, sales at La Senza tumbled 11%.

Gross profit climbed 6% to $835.6 million, whereas gross margin expanded 470 basis points to 40.8%. Operating income advanced 6% to $197.4 million, whereas operating margin rose 100 basis points to 9.6%.

Management projects earnings of $1.62 to $1.77 for the fourth quarter and between $2.78 and $2.93 per share for the fiscal year. Previously, the company had forecasted earnings of $2.73 to $2.88 per share for the year. Limited Brands expects comparable-store sales to increase between 2% and 4% during the fourth quarter and 5% in the fiscal year ending this month.

Earnings Estimates Climbing

The Zacks Consensus Estimate for the current fiscal year edged up 1% to $2.92 per share in the past 60 days on the back of upward revisions from 19 of 20 estimates. This implies a year-over-year increase of 12.2%. For next fiscal year, the Zacks Consensus Estimate is up 0.6% to $3.27 in the same time, as 15 of 20 estimates were revised higher. The current estimate implies year-over-year growth of 12.3%.

Dividend Strength

Limited Brands has been actively managing its cash flows and returning much of its free cash to shareholders via dividends, while maintaining a healthy balance sheet and credit ratios that are necessary for an investment-grade rating. The quarterly dividend was increased 25% to 25 cents per share in January 2012, and currently yields 2.1%.

The company also paid a special dividend of $3 per share on December 26. Over the years, the company has steadily increased its dividend payout. Limited Brands' commitment toward enhancing shareholder returns reflects its sound liquidity position and well defined future prospects.

Valuation Stretched, Yet Lucrative

Limited Brands currently trades at a forward P/E of 16.19x, reflecting a 13.5% premium to the peer group average of 14.27x. Again, its price-to-sales ratio of 1.34 is at a substantial premium to the peer group average of 0.91. Given the long-term earnings growth projection of 12%, the PEG ratio stands at 1.35, above the benchmark of 1 for a fairly priced stock. The return on assets (ROA) for the stock looks impressive. It has a trailing 12-month ROA of 12.5% compared with 10.5% for its peer group.

The stock price has now started to correlate with the increasing trend in estimates. Currently, the stock price is in the range of $45.00-$50.00, and the consensus estimates for fiscal 2012 and 2013 are steadily moving upward.

Limited Brands is a specialty retailer of women's intimate and other apparels, beauty and personal care products, home fragrance products and accessories. The company conducts its business primarily through two reportable segments - Victoria's Secret and Bath & Body Works. The Victoria's Secret segment sells merchandise under the brand names such as Victoria's Secret, Pink and La Senza. Limited Brands, which competes with Gap Inc. ( GPS ), has a market cap of $13.67 billion.

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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 Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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