Limited Brands (NYSE:LTD), the parent company of Victoria’s Secret and Bath & Body Works, has delivered inconsistent performance in the past few quarters. While it posted solid results during the weak holiday season, the prolonged winter and weak consumer spending weighed on its Q1 fiscal 2013 results. Nevertheless, the situation improved for the retailer in the second quarter despite weakness in overall retail spending.
The upcoming Q2 fiscal 2013 earnings will reflect comparable store sales and revenue growth of 2% and 5% respectively.  That puts the company in the league of the few retailers besides Gap Inc (NYSE:GPS) to realize positive comparable store sales growth during the quarter. This performance can be attributed to strong customer response to Victoria’s Secret’s intimate products and Bath & Body Works’ core merchandise categories. However, the company’s apparel business remained weak due to low demand at the start of the back-to-school season. As a result, Victoria’s Secret’s direct-to-consumer sales declined by 11% in July 2013. 
Although Limited Brand’s international operations are small, we’ll look forward to any update on its future expansion plans. 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. Its stores in London have generated strong sales and have inspired openings at other locations in the U.K.  The retailer’s initial stores in the Middle East and Hong Kong have also delivered promising results.
The Second Quarter Was Tough For Apparel Retail
The recently concluded quarter (May-July) was particularly weak for apparel retail in the U.S. due to the weak macro-economic environment. Initially, the spring season turned out very cold and wet, which resulted in reduced demand for clothing that suited warmer and drier climate.  Moreover, U.S. consumers have been extremely cautious about spending due to the payroll tax increase and higher unemployment rate. U.S. employers have slowed their hiring pace outside the farming sector.  The worst affected was the teenage segment where the unemployment rate rose to 23.7% in July.  According to the National Retail Federation, average spending by a family this season will decline by about 8% as compared to the preceding year, and this hurt back to school spending. 
Due to this weakness, retailers such as Aeropostale (NYSE:ARO) and American Eagle Outfitters (NYSE:AEO) saw substantial sales declines. Even retail giant Wal-Mart (NYSE:WMT) is finding its difficult to match its previous year’s levels as it faces economic headwinds in the U.S.
But Limited Brands Survived With Strong Products
Limited Brands has a strong brand image in the U.S. and has been timely in launching new products with changing seasons. Historically, this has helped the company garner compelling customer response, thus driving its store traffic. During Q2 fiscal 2013, the company saw impressive growth in sales of Victoria’s Secret’s swim collection featuring retro-ruffle-trimmed suits, floral printed bandeaus and gold-chain detailing.  The brand’s new launches such as Body by Victoria Bra collection and Victoria fragrances also drew good response.  In addition, the strong adoption of the relaunched Angel card program also helped. This program allows customers to save a sum of $15, $30 and $75 on purchases of $100, $150 and $250 respectively. 
It is encouraging to see that Victoria’s Secret’s young brand PINK has started making material contribution. During May, PINK products based on multiple themes played a vital role in Victoria’s Secret’s comparable store sales growth of 4%.  Limited Brands launched PINK a few years back to primarily targets college girls. Since about 25% of the U.S. female population between 15-34 years falls under the college going age group and Victoria’s Secret’s presence is limited in this demographic, the growth potential is significant.  The company opened 21 PINK stores last year and plans to increase the store count by 50 in fiscal 2013. 
At Bath & Body Works, the main product categories i.e. signature collection, home fragrance and soap & sanitizers are likely to remain the primary growth drivers. The brand has performed steadily in the last three quarters registering comparable store sales growth ranging between 3% and 7%. The ongoing strength in the business is evident from the fact that Bath & Body Works grew its comparable store sales by 6% in July even though the retail industry was highly promotional. 
Our price estimate for Limited Brands $ 60, which is slightly ahead of the market price.Notes:
- Limited Brands Reports July 2013 Sales And Raises Second Quarter Earnings Guidance To $0.60 Per Share, Limited Brands, Aug 8 2013 [↩]
- Limited Brands’ July Sales Transcript [↩] [↩] [↩]
- Limited Brands Q1 fiscal 2013 earnings transcript, May 23 2013 [↩]
- Spring 2013 Recap: Cool temperatures dominate the U.S., Climate.gov, Jun 12 2013 [↩]
- Retailers boost July sales with heavy discounts, promotions, Reuters, Aug 8 2013 [↩]
- Teen Retailers Could Be In for Rough Back-To-School Season, The Wall Street Journal, Aug 6 2013 [↩]
- On heels of historically high back-to-school season, 2013 spending expectations decline, National Retail Federation, Jul 18 2013 [↩]
- Limited Brands’ May 2013 earnings transcript, Jun 6 2013 [↩] [↩]
- Victoria’s Secret Angel Card [↩]
- Data available with the U.S. Census Bureau [↩]
- Limited Brands Q4 fiscal 2012 earnings transcript, Feb 28 2013 [↩]