Limited Brands (NYSE:LTD) is the parent company of Victoria’s Secret and Bath & Body Works, which are two of the strongest brands in their respective segments (intimates & beauty). In the recent past, while the U.S. retail industry has been weak, Limited brands has performed steadily with its strong product offerings. The company has continually offered products in line with prevailing trends and seasons. As a result, it has earned a huge pool of loyal customers, which has helped its steady growth.
The retailer’s ability to remain on top of changing fashion trends is attributable to its disciplined inventory management. Limited brands aims to maintain a balance in its inventory by keeping its inventory growth slower than its sales growth. This helps the company in launching new products in a timely manner and operate with fewer discounts. Going forward, if Limited Brands continues its good inventory planning, it can maintain its product strength and increase its brand loyal customer base.
Victoria’s Secret and Bath & Body Works are quite popular outside the U.S. as well. Therefore, with continued international expansion, Limited brands is not only reducing its dependence on the sluggish U.S. economy, but is also opening up new revenue channels. Within the U.S., the retailer’s relatively young PINK brand provides a viable expansion option due to its limited presence and huge target demographic.
Our price estimate for Limited Brands $ 60, implying a premium of more than 10% to the market price.
Disciplined Inventory Planning
Limited brands has been on top of its inventory management, with a firm focus on its inventory growth rate and semi-annual sales. The most recent semi-annual sale completed in June 2013 was a big success for the company, which helped its comparable store sales increase by 7% in Q2 fiscal 2013, despite the edgy retail environment. What’s even more pleasing to see is that Limited Brands finished its semi-annual sale with an increase of just 3% in inventory per square foot at cost, indicating a clean inventory position. Although the figure increased by 6% for the second quarter, it was mainly attributable to new launches such as Body by Victoria Bra, Victoria fragrance and sweet & sexy signature fragrance. Also, the company started stocking old and latest products for the January semi-annual sale.  
Since the customers have responded well to these products so far, Limited Brands is planning to take inventory per square foot at cost up to high-single digits in the third quarter. However, to maintain a balance in its inventory, the retailer will bring it back to mid-single digits by the end of fall season.  Therefore, we believe that Limited Brands is well positioned to drive its sales in the remainder of the year. Even as the U.S. retail market is going through a slump, the company registered positive comparable store sales growth during the months of August (3%) and September (1%).  
The importance of proper inventory management is evident from the fact that apparel retailer Abercrombie & Fitch (NYSE:ANF) has struggled in the past due to an imbalance in its inventory. Even the retail giant Wal-Mart (NYSE:WMT), which is considered as the pioneer of modern supply chain management, had to cut several supply orders due to inventory backlog. 
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.  It is also adding the brand’s products in the existing Victoria’s Secret stores. Since its introduction in the U.S., the 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 Gilly Hicks are still small and PINK comes from the lingerie giant, its success in the U.S. is more or less ensured. Also, about 25% of the U.S. female population between 15-34 years fall under the college going age group, which is the target demographic for PINK. 
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. Notes:
- Limited Brands Q2 fiscal 2013 earnings transcript, Aug 22 2013 [↩] [↩] [↩] [↩]
- L Brands, Inc. – Analyst/Investor Day, Seekingalpha, Oct 16 2013 [↩]
- Limited Brands Reports August 2013 Sales, Limited Brands, Sept 5 2013 [↩]
- Limited Brands Reports September 2013 Sales, Limited Brands, Oct 10 2013 [↩]
- Wal-Mart Cutting Orders as Unsold Merchandise Piles Up, Bloomberg, Sept 26 2013 [↩]
- Data available with the U.S. Census Bureau [↩]