Limited Brands (NYSE:LTD), the parent company of Victoria’s Secret and Bath & Body Works, has performed steadily in the recent months despite the apparel industry weakness. The company will sustain this growth momentum when it comes out with its Q3 fiscal 2013 earnings on November 20. In its October sales results, Limited Brands stated that its revenues and comparable store sales increased by 6% and 3%, respectively, during the third quarter. 
This growth is pleasing to see given that the U.S. apparel industry is going through a slump due to the prevailing economic weakness. The performance is attributable to Victoria’s Secret’s strong intimate product offerings that have offset the impact of weak apparel sales. However, the apparel market was highly promotional during the recently concluded quarter, which likely weighed on the brand’s margins. Limited Brands’ personal care brand Bath & Body Works, in all likelihood, continued to deliver steady growth during the third quarter, driven by a good customer response to its core product categories.
Our price estimate for Limited Brands $ 60, implying a premium of more than 5% to the market price. We will update our price estimate post the earnings release.
Edgy Retail Environment Will Weigh On Apparel Sales
The U.S. apparel retail market has been particularly weak this year due to cautious consumer spending and a change in spending patterns. Due to the impact of payroll tax increase, slow job growth, higher gasoline prices and higher healthcare costs, U.S. buyers have been extremely watchful of their spending on discretionary products. Moreover, some buyers have started diverting their spending to cars and houses to take advantage of low interest rates. As a result, they are holding back on other products such as apparel and accessories. This resulted in a weak back-to-school season for apparel retailers.
In response to this weak demand, U.S. retailers relied on deep discounts to win back customers, which weighed heavily on their growth. According to the Commerce Department, retail sales in August (excluding the automotive sector) increased by just 0.1%. In September, several apparel retailers such as Gap Inc (NYSE:GPS), Zumiez Inc, The Buckle Inc, and American Apparel Inc posted comparable store sales declines. The government shutdown in October slowed job growth and weighed on consumer confidence. Due to this, U.S. retailers reported only modest growth during the month.  Limited Brands’ own apparel sales remained weak during the quarter. In its October sales transcript, the retailer stated that its direct sales declined by 1% in Q3 primarily due to disappointing sales of Victoria’s Secret’s apparel. Here the term ‘apparel’ refers to clothing other than ‘intimates’.
However, Victoria’s Secret’s Intimates Will Provide Some Boost
Despite weak apparel sales, Victoria’s Secret’s comparable store sales increased by 4% in Q3 driven by strong performances from intimate products. The brand delivered similar results last quarter as the customers continued to respond positively to lingerie and PINK. The company launched a new line of bras – Body by Victoria bras – which was well received. In August,Victoria’s Secret’s comparable sales increased by 3% with strong results from bras and panties. Products such as Body by Victoria bra, New Victoria fragrance, PINK wear everywhere bra and fabulous bra received a good customer response.
The brand’s sports collection, closeup bra, PINK’s date push-up bras and Victoria fragrance helped its comparable store sales increase by a staggering 10% during October. It is clear that Victoria’s Secret’s strong footing in this niche market is helping it survive the edgy apparel retail environment. The brand’s product strength is attributable to its strong inventory management, which allows it to launch new collections in a timely manner.
Bath & Body Works’ Growth Will Remain Steady
Bath & Body Works has delivered good results over the past several quarters backed by its core product categories: the signature collection, home fragrance and soap & sanitizer. Last quarter, the brand’s revenues and comparable store sales grew by 7% and 3% respectively driven by higher conversion rates and average product prices.
Launching new products among these categories has been one of Bath & Body Works’ key growth strategies. During the third quarter, Limited Brands continued to introduce newness and innovation in its fragrance and launched its newest signature fragrance, Sweet & Sexy. It also introduced its fresh picked collection featuring newness across all the three categories. Alongside attractive product offerings, Limited Brands is also focused on providing its customers with a compelling in-store experience.  With these efforts, Bath & Body Works’ comparable store sales increased by 3% during the third quarter.Notes:
- Limited Brands Reports October 2013 Sales and Updates Third Quarter Earnings Guidance, Limited Brands, Nov 7 2013 [↩]
- U.S. retailers’ October sales rise, but holiday concerns remain, Reuters, Nov 7 2013 [↩]
- Limited brands’ Q2 fiscal 2013 earnings transcript, Aug 22 2013 [↩]