The parent company of Victoria’s Secret and Bath & Body Works, Limited Brands (NYSE:LTD) registered steady growth in its Q3 fiscal 2013 results, despite a challenging retail environment. The retailer’s revenues rose by 6% year to year to $2.17 billion and its comparable store sales increased by 3%, on top of 5% growth in the same quarter last year. This growth was evenly spread across both the brands as their product offerings were well received through both the stores and the Direct Channel. Limited Brands now expects moderate year-to-year growth in its fourth quarter sales, given the relatively weak outlook for U.S. retailers in this year’s holiday season.
Since we had discussed Limited Brands’ Q3 growth in our pre-earnings note, [See Here] we think it worthwhile to cnsider how it is likely to perform in the near future. The company continues to have a firm grasp over its inventory and merchandising, which should allow it maintain the strength of its product offerings. With more focus on intimates, Victoria’s Secret’s is well poised to drive itself through the slump in apparel sales. Although Direct Channel growth is expected to slow in the next quarter, due to the absence of shipping and handling revenues, it should be back on track for next year.
Our price estimate for Limited Brands $ 66, which is just ahead of the market price. However, we’re in the process of updating our model in light of the recent earnings.
Good Inventory Planning Should Help
Retail inventory per square foot at cost increased by 8% during the quarter, which was more than Limited Brands’ sales growth rate. While the uptick at first glance could concern some, in fact most of the inventory increase was attributable to the previous launch of the Body by Victoria bra and increased investments in bras and sports bras launched in October. Moreover, the company also started stocking up for the holiday selling season, which culminates with its January semi-annual sale. Limited Brands plans to end the year with mid to high single digit rise in inventory per square foot at cost. Therefore, we believe that the retailer maintains a disciplined inventory position. This leaves it well poised to launch new fashions and operate with fewer markdowns in the near future. Limited Brands itself stated that it is well positioned fro the fashion-product assortments it will offer for the holiday season. The company believes that these products will resonate well with its customers due to their appealing design. Also, the upcoming Victoria’s Secret fashion show on December 10 (featuring musicians such as Taylor Swift, Fall Out Boy and others) will strengthen the company’s connection with its customers. 
Victoria’s Secret’s Intimates Should Continue To Drive Its Results
During the quarter, Limited Brands saw double-digit growth in Victoria’s Secret’s and PINK’s bras and panties. Overall, third quarter sales at Victoria’s Secret increased by 5% and comparable store sales rose by 4%. This growth was attributable both to strong sales of lingerie and to double-digit growth in fragrances from its beauty category. On the flip side, Victoria’s Secret struggled to maintain the same growth momentum for its apparel products, due to industry-wide low demand. The brand has witnessed similar trends in the past several quarters where strong growth in intimate sales have offset the impact of weaker apparel sales. This year, the U.S. apparel market has been hit due to slow job growth, a change in spending patterns, increased taxes and higher healthcare costs.
Hence, it is quite clear that the brand needs to invest more in its bras and panties, as intimates is a niche market and less susceptible to unfavorable economic headwinds. The brand appears to be doing so as it is increasing its investments in sports bras; and it continues to focus on its core business – bras, panties, PINK and beauty.
Direct Channel Might Weigh On Growth, but Only In The Near Term
Victoria’s Secret’s direct-to-consumer revenues declined by 1% during Q3 due to lower apparel sales and absence of shipping and handling revenues. Limited Brands introduced free shipping at the start of the year in order to bring in more customers. While it seems like a valuable step, it has weighed on the retailer’s e-commerce growth throughout the year. That said, the business should be back on track next year as it continues its organic growth, backed by Limited Brand’s strong brand identity & vast customer reach.
Victoria’s Secret‘s direct sales have increased at an average annual rate of 5% during the last three years. This trend is likely to continue in the future, once they have anniversaried the onset of free shipping.The outlook for online apparel growth in the U.S. is very promising. According to eMarketer, online apparel sales in the U.S. will reach $90 billion by 2016 up from $45 billion in 2012.  Since Victoria’s Secret’s intimate sales have been much stronger than its apparel sales, and it is the market leader, we believe that its online sales will grow at a robust pace. Moreover, Limited Brands’increasing shipments to global markets should contribute to this growth as well.Notes:
- Limited Brands’ Q3 fiscal 2013 earnings transcript, Nov 21 2013 [↩]
- Retail E-Commerce Set To Keep A Strong Pace Through 2017, eMarketer, Apr 24 2013 [↩]