Our price estimate for Limited Brands (NYSE:LTD) stands at $60, implying a premium of about 10% to the market price. We believe that the company still holds some value for the investors due to strong market positioning of its popular brands – Victoria’s Secret and Bath & Body Works. Limited Brands has been focusing on improving its store productivity and expanding its younger brand PINK in the U.S. The retailer is also adding more product categories to its stores and has seen success with the launch of its new products. Additionally, firm inventory control, appealing marketing campaigns and international expansion support our optimistic outlook for the company.
Store Consolidation And Expansion Of PINK Are Driving Growth In The U.S.
Victoria’s Secret has a large footprint in the U.S. market with over 1,000 stores. In order to improve the brand’s overall store productivity, Limited Brands has been closing the stores that do not attract sufficient traffic. This has worked well for the retailer as its revenue per square feet has jumped from $581 to $817 over the last three years.  This improvement in the store productivity was accompanied by healthy growth in the brand’s overall revenues. The company plans to shut down another 18 Victoria’s Secret stores in 2013, and we expect this trend to continue in the near future, although at a slower pace.  The brand’s EBITDA (earnings before interest, taxes, depreciation and amortization) margins have also benefited from higher store efficiency, increasing from 20.1% in 2009 to 25.8% in 2012.
As of 2012, Limited Brands operated around 1,571 Bath & Body Works stores in the U.S. Historically, it has been closing the brand’s under-performing stores to improve its revenue per square feet and EBITDA margins. While the store count came down from 1,627 in 2009 to 1,571 in 2012, revenue per square feet jumped from $587 to $724. Simultaneously, the margins increased from 23.4% to 28.4%. We expect the company to continue with this strategy at least in the near future, which will further help aid these figures.
Limited Brands is also looking to expand Victoria’s Secret’s relatively young PINK brand in the U.S. A few years back, the company launched PINK to primarily targets college girls. About 25% of the U.S. female population between 15-34 years falls under the college going age group.  Since Victoria’s Secret’s presence is limited in this demographic, there is a large scope for expansion. During the last two years, the retailer has opened only 21 PINK stores, but plans to increase the store count by 50 in fiscal 2013. 
Increase In Product Categories & New Product Launch
Victoria’s Secret has expanded its offerings outside its core lingerie products over the past few years. 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 as well. During Q1 fiscal 2013, it introduced new categories in its beauty products, which played a vital role in its comparable store sales growth.  Also, the company is increasing the number of locations offering Victoria’s Secret beauty products and accessories. In 2012, the brand had 108 locations operational and it plans to add another 70-100 stores this year.  It is also adding full line merchandise of PINK to its existing stores, which should again aid its comparable store sales growth. By the end of fiscal 2012, about 20% of Victoria’s Secret stores had PINK products in them. 
Launching new products is a key growth strategy for Bath & Body Works as well. The brand is particularly focused on introducing new fragrances and anti-bacterial products, which seem to be resonating well with the customers.  Bath & Body Works introduced Forever Red, a luxurious fragrance near the Valentines season, and received positive customer response. Additionally, its mainline product categories such as signature collection, home fragrance and soap & sanitizer have delivered strong results in the last few quarters. 
Currently, most of Limited Brands’ operations are spread across the U.S. However, the retailer has started expanding internationally and the response has been encouraging so far. At the end of Q1 fiscal 2013, Victoria’s Secret operated 26 stores in Canada which are performing 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 locations such as Manchester, Leeds and Sheffield.  Additionally, its initial stores in the Middle East and Hong Kong have also delivered promising results. As Victoria’s Secret continues to expand outside the U.S., new revenue sources will open up and help the company sustain its long term growth.
Bath & Body Works has 72 company operated and 43 franchise stores in Canada, and plans to add another seven retail and 15 franchise stores in the current fiscal year.  Although there haven’t been any such plans, we believe that the brand has enough potential to expand beyond North America. Once it happens, Bath & Body works can become a big business for Limited Brands.
Appealing Marketing Of Victoria’s Secret
One of Victoria’s Secrets’ strengths is its successful advertising strategy backing its strong brand identity. In a business that sells image and lifestyle, advertising is of high importance. The retailer spends a substantial amount on advertising every year. Victoria Secrets’ fashion show is a big driver of sales and a key element of its advertising strategy. Last year, the company organized a successful holiday fashion show featuring popular celebrities such as Rihanna, Justin Bieber and Bruno Mars. Victoria’s Secret’s angels (fashion models) are the most recognizable and popular of the brand’s marketing campaigns. Earlier this year, it launched a swim catalog for its spring collection featuring popular model Candice Swanepoel in retro styled Push-up Bandeau.  It also featured attractive swimsuits inspired by old Hollywood. Additionally, music artist Rihanna featured the swim collection in her music videos to add more appeal to this campaign.  Such collection-specific campaigns will help Victoria Secret in maintaining strong brand image and healthy sales growth.
Disciplined Inventory Control
Limited Brands maintains tight control over its inventory for timely launch of new products, which aids its comparable store sales growth as well. 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 comparable store sales 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 maintained the necessary control.
Limited Brands offered compelling discounts on its products as it planned to enter the second quarter with optimum inventory levels. Although this weighed on its Q1 comparable store sales growth, it will help in timely launch of the new seasonal collection. Limited Brands’ inventory per square feet (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 . Excess inventory on the account of merchandise mix imbalance or low product demand has severely impacted retailers such as Urban Outfitters (NASDAQ:URBN), Abercrombie & Fitch(NYSE:ANF) and Gap (NYSE:GPS) in the past.Notes:
- Limited Brands’ SEC filings [↩]
- Limited Brands Q4 fiscal 2012 earnings transcript, Feb 28 2013 [↩] [↩] [↩] [↩] [↩]
- Data available with the U.S. Census Bureau [↩]
- Limited Brands Q1 fiscal 2013 earnings transcript, May 23 2013 [↩] [↩] [↩] [↩] [↩] [↩]
- 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 [↩]
- Prolonged Cold Puts Retail Sales In Deep Freeze, Cnbc, Mar 31 2013 [↩]