Limited Brands‘ (NYSE:LTD) personal care product line Bath & Body Works enjoys good brand recognition in the U.S. The retailer operates these stores only in North America, but its direct-to-consumer business covers a few countries in the Middle East as well. Together, these two channels account for about 30% of Limited Brands’ annual revenues.  Apart from strong brand recognition, Bath & Body Works’ product diversity has boosted its growth and this is likely to remain one of the main strategies going forward. Additionally, the closure of underperforming stores has helped improve business economics for the company.
While considering the positives, it is important to note the potential risks that hinder Bath & Body Works’ growth. Firstly, the brand has a limited international presence, resulting in a lack of geographical risk diversification. Secondly, increasing competition in the U.S. personal care products market poses a threat. In this analysis, we will discuss the factors that are likely to influence Bath & Body Works’ future growth.
Improving Store Economics Through Consolidation And Wide Product Range
As of 2011, Limited Brands operated around 1,587 Bath & Body Works stores in the U.S.  The retailer has been closing its underperforming stores to improve profitability. While the store count has come down from 1,627 in 2009 to 1,587 in 2011, revenue per square foot has increased form $587 to $658 during the same period.  At the same time, revenues have increased at a moderate rate of 5% annually. We expect the company to continue with its successful consolidation strategy in the future.
Launching new products is one of the key growth strategies of Bath & Body Works. Limited Brands is particularly focused on introducing new fragrances and anti-bacterial products, which should result in an increase in the division’s revenue per square foot going forward. These products have performed well in the recent past. Following the success in Q3 fiscal 2012, Bath & Body Works’ signature collection, home fragrance and soap & sanitizer business continued to perform well in November. 
Potential Risks: Increasing Competition and Significant Dependence On The U.S Market
Bath & Body Works is facing increasing competition in the U.S. from brands such as Sephora andThe Body Shop. Additionally, despite a strong brand identity, brand loyalty is low within the personal care industry as consumers are more concerned about better bargain. A brand’s success largely depends on its ability to market, innovate and introduce new products. We believe that competition can further intensify in the future as more players enter this high margin business.
Despite Bath & Body Works’ strong position in the U.S. market, it has not expanded much internationally. The brand’s international presence is limited to 69 stores in Canada. Compare this to Limited Brands which operates around 1,600 Bath & Body Works stores in the U.S.  Although Bath & Body Works enjoys strong brand recognition in Canada and is expanding, its revenue contribution still remains low.
About 80% of Limited Brands’ total revenues come from the U.S. market alone, but the sluggish economy in the country has been a growth deterrent. Bath & Body Works faces a risk of slower revenue growth if the retailer doesn’t expand aggressively in international markets.
Our price estimate for Limited Brands Stands at $50, implying a premium of about 5% to the market price.Notes: