Is Victoria's Secret the Key to Limited Brands Upside?

Limited Brands ( LTD ), a specialty apparel retailer focused on lingerie, beauty and personal care products, competes with retailers like Abercrombie & Fitch ( ANF ), American Eagle ( AEO ), AnnTaylor ( ANN ), Gap ( GPS ), 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.

Part of the surge stems from the company's Victoria's Secret brand, which is reportedly generating strong bra sales during early holiday shopping. The success is driven in part by high demand for Miraculous bras, a product reintroduced in November after strong sales towards the end of 2009. The company also reported a high conversion rate of store visitation to purchases.

Victoria's Secret US stores constitute roughly 32% of our estimated $30.63 value for Limited Brands stock.

Should these trends continue, a jump in store revenue per square foot could provide upside to our price estimate, which stands close to 12% below the current market price.

Victoria's Secret a Large Driver

On the heels of a steady decline in Victoria's Secret US store revenue per square foot (RPSF) between 2006 and 2009, we project a 7% increase in 2010 and a nearly 3% annual growth rate between 2010 and 2013. Should increased consumer spending spur a 5% RPSF growth rate, there could be 2.5% upside to our $30.63 price estimate, still leaving the stock below market price. The chart above examines the impact of changes to Victoria's Secret RPSF on LTD stock.

We recently analyzed the impact of increased consumer spending on American Eagle Outfitters' stock value and believe that specialty retailers like Limited Brands and American Eagle would be key beneficiaries from an uptick in retails spending . (See Strong Q4 Retail Trends Could Lift AEO )

Strong bra sales at Victoria's Secret stores could point towards a recovery in high-end retail spending, as the brand caters towards luxury consumption. Still, some experts suggest the industry's retail spending improvement is rather a release of pent-up demand, referred to as "frugality fatigue". With an estimated 67% of holiday shopping still unfinished, the answer to this riddle will have a large impact on Limited's outlook.

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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