Limited Brands’ (NYSE:LTD) first quarter results suffered due to prolonged cold weather, cautious consumer spending and weak response to new product launches. The retailer’s comparable store sales (CSS) growth stood at just 3%, and its gross margins declined due to increased promotional activities and introduction of free shipping. Victoria’s Secret started the quarter on a positive note, but its growth slowed due to a weak response to new products and delayed spring resulting in lower demand for its apparel. On the other hand, Bath & Body Works performed steadily throughout the quarter, on the back of strength in its existing categories and new products [Read: Softer Victoria's Secret Sales Means Muted Limited Brands Results In Stores].
What may happen next?
Due to lower revenues from shipping and handling, the current fiscal year might not turn out to be too good for the company’s direct-to-consumer business. On the other hand, more product categories at Victoria’s Secret stores are likely to drive the brand’s same store sales growth. Limited Brands’ disciplined inventory control will help it in timely launch of latest products, thus driving the store traffic. Additionally, its continued expansion outside the U.S. will open up new avenues for growth.
Direct-To-Consumer Growth Might Remain Weak In Fiscal 2013
Although Limited Brands’ direct-to-consumer business has seen healthy growth over the past few years, fiscal 2013 may see a slowdown. Victoria’s Secret‘s direct sales increased at an average annual rate of 5% during the last three years, but declined by 6% in the first quarter of fiscal 2013, primarily due to the introduction of free shipping and the impact of prolonged cold weather.    While the weather impact will fade away, lower shipping and handling revenues will continue to weigh on the channel’s growth this year. That said, the business should be back on track as Limited Brand’s product offerings, brand identity and customer reach remain strong.
Limited Brands’ direct-to-consumer business constitutes about 20% of the company’s value according to our estimates.
Disciplined Inventory Control Will Help
Limited Brands maintains tight control over its inventory for timely launch of new products, which results in better comparable store sales. In the last quarter, Victoria’s Secret launched its spring collection with prevailing trends such as seductive prints, neon, embellishments and novelty fabrics, which helped it register healthy CSS growth of 5% in February.   In the subsequent months, the demand for spring clothing fell drastically due to prolonged cold weather.  While this could have easily led to significant inventory hangover, the company stayed in control of the numbers.
Limited Brands offered compelling discounts on its products as it planned to enter the second quarter with optimum inventory levels. Although this did weigh on its Q1 comparable store sales growth, it will help in timely launch of the new seasonal collection. Limited Brands’ inventory per square foot (cost) was up by just 3% in Q1 fiscal 2013, as compared to the previous year.  The retailer plans to keep its inventory increase under control during the second quarter, even as it looks to re-launch a number of products . Superflous inventory on the account of merchandise mix imbalance or low product demand has severely impacted retailers such as Urban Outfitters (NASDAQ:URBN) and Gap (NYSE:GPS) in the past.
More Product Categories At Victoria’s Secret Will Complement CSS Growth
Over the past few years, Victoria’s Secret has expanded its offerings outside its core lingerie products. Now the brand also offers shoes, evening wear, swimwear, sportswear, loungewear, accessories, handbags, luggage and fragrances. During Q1 fiscal 2013, it added more categories to its beauty products, which played a vital role in the comparable store sales growth. 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 CSS should improve going forward. Few 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 again aid the growth in its comparable store sales.
International Expansion Provides Revenue Growth Opportunities
Currently, most of Limited Brands’ operations are spread across the U.S. However, the retailer has started expanding internationally and the response has been compelling so far. At the end of Q1 fiscal 2013, Victoria’s Secret operated 26 stores in Canada. These stores have performed quite well, thanks to the brand’s popularity in the region. The retailer plans to add eight more stores by the end of fiscal 2013.  Although Victoria’s Secret is at a nascent stage in the U.K., its stores in London have generated robust sales and inspired its entry in other lucrative locations such as Manchester, Leeds and Sheffield.  Additionally, the brand’s initial stores in the Middle East and Hong Kong have also delivered promising results. The performance of Bath & Body Works’ 72 stores in Canada and 43 stores with a franchisee partner have been pleasing too. As Limited Brands continues the expansion of both its brands outside the U.S., new revenue sources will open up, which will sustain the long term growth of the company.
Our price estimate for Limited Brands Stands at $50, which is slightly below the market price. However, we are in the process of updating the model.Notes:
- Limited Brands’ SEC filings [↩]
- April Sales Transcript, Limited Brands, May 2013 [↩]
- L Brands’ Management Hosts Pre Recorded March 2013 Sales Conference, Apr 11 2013 [↩]
- Limited Brands Hosts February Sales Conference, Seekingalpha, March 7 2013 [↩]
- Victoria’s Secret Launches First Spring 2013 Swim Collection And Angels And Artists Swim Video Series, Fashion + Lifestyle, Jan 6 2013 [↩]
- Prolonged Cold Puts Retail Sales In Deep Freeze, Cnbc, Mar 31 2013 [↩]
- Limited Brands Q1 fiscal 2013 earnings transcript, May 23 2013 [↩] [↩] [↩]
- Data available with the U.S. Census Bureau [↩]