Shaking off industry weakness, Limited Brands (NYSE:LTD) managed to post positive growth during Q2 fiscal 2013. Its comparable store sales and revenues increased by 2% and 5%, respectively, due to strong performance from Victoria’s Secret’s intimates and beauty products, and Bath & Body Works’ merchandise. Encouraged by these results, the company raised its outlook for the third quarter when most apparel retailers are slashing their guidance.  Going forward, Limited Brands’ comparable store sales and overall revenues will find strong support from better inventory planning, existing brand strength and continued expansion in the U.S. and international markets.
Recap Of Second Quarter Results
Limited brands’ revenues and comparable store sales grew by 5% and 2%, respectively, during Q2 fiscal 2013. The figure for comparable store sales growth isn’t bad given that it was on top of 8% growth the retailer registered in the same quarter last year.  Additionally, the operating income jumped 16% despite a decline of 10 basis points in gross margin due to buying and occupancy de-leverage associated with real estate investments for global expansion. 
At Victoria’s Secret, sales increased by 6% mainly due to PINK’s continued expansion in the U.S. However, low store traffic, tough comparable period (10% increase last year) and lower demand for apparel led to just 1% rise in comparable store sales.  Slump in apparel demand also dragged the direct channel’s revenues down by 6%. Overall, the response to the brand’s core product categories such as lingerie, PINK and beauty remained strong. At Bath & Body Works, revenues and comparable store sales grew by 7% and 3% respectively.  The brand continued its strong performance backed by its key categories – signature collection, soap & sanitizer and home fragrance. Despite low store traffic and weak consumer spending during the quarter, average product prices and conversion rates grew showing the brand’s popularity. 
The company now expects third quarter and full year comparable stores sales to grow in low single digits and revenue growth to remain 2-3 percentage points higher. 
So what is Limited Brands doing right?
Good Inventory Planning
Limited brand has been on top of its inventory management, which has allowed it operate with fewer promotions. The company’s recently completed semi-annual sale in June was a big success as it had properly planned its inventory for the season. Limited Brands’ comparable store sales increased by an impressive 7% during the month.  The retailer finished its semi-annual sale with an increase of just 3% in inventory per square foot at cost, indicating a clean inventory position.  The figure increased to 6% by the end of the quarter as the company launched new products such as Body by Victoria Bra, Victoria fragrance and sweet & sexy signature fragrance, and started stocking old and latest products for the January semi-annual sale.  Semi-annual sales are important seasons for Limited Brands as they not only aid its comparable store sales growth, but also assist it in managing its inventory levels.
The customer response to the new products has been good so far, and it should help the company maintain its momentum in remainder of the year. With new product launches, Limited Brands is planning to take inventory per square feet at cost up to high-single digits in the third quarter, but will bring it back to mid-single digits by the end of fall season. We believe that the retailer will need minimal promotional activity going forward, which will aid its comparable store sales growth.
Continued Global Expansion
Most of Limited Brands’ expansion in the U.S. is coming from its young brand PINK, which was launched only a few years back. The retailer opened about 40 PINK stores in the U.S. last year and is planning to add another 50 this year.  Moreover, it is also adding the brand’s products in the existing Victoria’s Secret stores. Since its introduction in the U.S., this brand has performed very well due to attractive product offerings and limited competition from known players. We believe that since American Eagle Outfitters‘ (NYSE:AEO) Aerie and Abercrombie & Fitch‘s (NYSE:ANF) Gilly Hicks are still small and PINK comes from the lingerie giant, its success in the U.S. is more or less ensured.
Success in international markets has encouraged Limited brands to continue its expansion. Victoria’s Secret currently operates 27 stores in Canada, and is planning to open another seven stores during the next two quarters.  Also, the brand’s stores are doing well in the U.K. and the Middle East, which will likely nudge it to further expand in these regions. Limited Brands has several stores scheduled to be opened in the Middle East in fiscal 2014. Victoria’s Secret’s beauty and accessories business currently spans across 143 stores in international markets, and this figure is likely to go up to 200 by the end of 2013. Bath & Body Works’ 77 stores in Canada and 45 franchise stores in the Middle East continue to deliver robust growth. The company plans to add two and 10-15 brand stores respectively to these regions during the second half of the year. 
Our price estimate for Limited Brands $60, which is slightly ahead of the market price. However, we are in the process of updating the model in light of the recent earnings.Notes: