Revenue per square feet (RPSF) is a measure of a retailer’s store productivity, and the growth in this metric is a good indicator of comparable store sales growth. Apart from the store expansion, growth in RPSF plays a vital role in a retailer’s sales growth. Limited Brands‘ (NYSE:LTD) Victoria’s Secret‘s U.S. revenue per square feet increased from $581 in 2009 to $817 in 2012, driven by the sustained strength in its brand image, strong marketing, new product launches and the consolidation of underperforming stores.  We believe that this figure can cross $1,000 over the next five to six years growing at a compounded annual growth rate of about 3%.
In addition to these factors, the improvement in the U.S. economy and expanding product categories at Victoria’s Secret stores will complement the growth. However, growing competition in women’s intimate apparel can act as an offsetting factor. Victoria’s Secret U.S. stores segment constitutes about 50% of Limited Brands’ value according to our estimates. Therefore, our price estimate is very sensitive to the change in the brand’s revenue per square feet.
Victoria’s Secret’s Fundamentals That Will Drive Its RPSF
Strong Brand Image And Marketing:
Victoria’s Secret is one of the biggest brands in the U.S. lingerie market. While most brands in intimate apparel business focus on just comfort and fit, Victoria’s Secret also emphasizes on glamor. This has helped the brand in developing a unique image for its product. In a business that sells image and lifestyle, advertising is crucial. Victoria’s Secret utilizes annual fashion shows and its supermodels to associate its brand image with beauty and class.
Victoria’s Secret’s collection-specific marketing campaigns have boosted its brand image. It recently came out with a new swim catalog featuring model Candice Swanepoel and shot by famous fashion photographer Russell James, on the beaches of Turks and Caicos, and Miami.  Additionally, well known music artists such as Rihanna featured in the swim collection music videos, supporting the success of this campaign. Such campaigns have been successful in the past and are likely to strengthen Victoria’s Secret’s brand image in the future as well. This could attract more customers to its stores resulting in better revenue per square feet.
Successful Launch Of New Products:
Victoria’s Secret’s strong brand image and tight control over its inventory have translated into successful product launches. During the holiday season, it introduced new products such as Angel Fantasies bras, Angel Gold Fragrance, The Flirt bra and vintage fleece. These products received good customer response, resulting in 4% comparable store sales growth in November. In the spring season, launch of products such as Bandeau Bikinis, Demi Bikinis, Fabulous Push-up Bikini reflecting popular trends such as seductive prints, neon, embellishments and novelty fabrics helped Victoria’s Secret’s results.   Its comparable store sales increased by 5% in February, which was higher than Limited Brands’ overall comparable store sales growth of 3%.  What’s interesting to see is that the brand reported solid results on top of a 10% increase in comparable store sales registered in February last year. 
Expansion Of New Product Categories:
Over the past few years,Victoria’s Secret has expanded its product offerings outside its core lingerie products. Now the brand also offers shoes, evening wear, swimwear, sportswear, loungewear, accessories, handbags, luggage and fragrances. We expect Victoria’s Secret to continue to add different categories in the future.
With increased product offerings at the existing stores, the brand’s revenue per square feet should improve going forward. Several years back, Victoria’s Secret launched a new lifestyle brand PINK, which primarily targets college girls. Since Victoria’s Secret’s presence is limited in this demographic, there is a huge scope for expansion. About 25% of the U.S. female population between 15-34 years falls under the college going age group.  Apart from opening exclusive PINK stores, Victoria’s Secret is adding full line merchandise of PINK to its existing stores, which should aid the growth in its revenue per square feet.
The U.S. economic growth has been slow since the recession and is not likely to reach the pre-recession rates any time soon. Nevertheless, a gradual improvement in consumer confidence and lower unemployment should help Victoria’s Secret comparable store sales. Inflation is another factor that drives revenue growth for same sales volumes and will aid growth in the brand’s revenue per square feet.
Going forward, the U.S. annual GDP growth rate and inflation rate are expected to be around 1.4% and 2% respectively.   This gives a nominal GDP growth rate of about 3.4% for the long term. Going forward, the apparel sales will continue to shift online due to growing usage of Internet and proliferation of mobile devices. As a result, we make a conservative assumption that Victoria’s Secret’s revenue per square feet will increase by 2%-2.5% annually, on the account of these macroeconomic factors (we break out Victoria’s Secret’s online sales separately in our pricing model). The remaining can be attributed to the brand’s growth fundamentals.
The Significance For Limited Brands
We currently forecast Victoria’s Secret’s revenue per square feet to reach $1,020 by the end of our forecast period. However, if a faster than expected recovery in the U.S. economy along with the factors mentioned above drive its RPSF to $1,200, there could be 5%-10% upside to our price estimate. On the contrary, increasing competition from online & physical retailers as well as apparel retailers such as Abercrombie & Fitch (NYSE:ANF) and American Eagle Outfitters (NYSE:AEO), can force Victoria’s Secret to offer more discounts on its basic products. If this limits the figure to $900, there could be 5%-10% downside to our price estimate.
Our price estimate for Limited Brands Stands at $50, which is in line with the market price.Notes:
- Limited Brands’ SEC filings [↩]
- Victoria’s Secret Launches First Spring 2013 Swim Collection And Angels And Artists Swim Video Series, Fashion + Lifestyle, Jan 6 2013 [↩] [↩]
- Victoria’s Secret Celebrates The Swim 2013 Collection With Angles Alessandra Ambrosio, Candice Swanepoel And Karlie Kloss, PR Newswire, March 13 2013 [↩]
- Limited Brands Hosts February Sales Conference, Seekingalpha, March 7 2013 [↩] [↩]
- Calculated using the data available with the U.S. Census Bureau [↩]
- On road to zero growth by 2050, Market Watch, Dec 4 2012 [↩]
- Federal Reserve Formally Targets 2% U.S. Inflation, Forbes, Jan 25 2012 [↩]