Limited Brands (NYSE:LTD), a specialty apparel retailer focused on lingerie, beauty and personal care products, competes with retailers like Abercrombie & Fitch (NYSE:ANF), American Eagle (NYSE:AEO), AnnTaylor (NYSE:ANN), Gap (NYSE:GPS), and J.Crew Group (NYSE:JCG). Some of its popular brands include Victoria’s Secret in the lingerie business and Bath & Body Works in the personal care segment.
Despite fewer promotional discounts than offered in 2009, Limited reported a 10% year-over-year increase in comparable store sales during Q3 2010, a trend that continued into November.  As a result, Limited Brands’ stock price increased by nearly 10% (to $35). It was after Limited Brands’ special dividend of $3 that the price fell to its current level of around $31.
We currently have a $30.63 price estimate for Limited Brands’ stock, in line with current market price. We estimate Victoria’s Secret brands is the largest value driver for Limited Brands, contributing more than 52% of company value while Bath & Body Works contributes nearly 34% to the stock price. We see an upside to Limited Brands’ stock from Bath & Body Works stores in the scenario discussed below.
Bath & Body Works Going Strong
We’ve previously written about the potential upside to our stock estimate from Victoria’s Secret stores. (Is Victoria’s Secret the Key to Limited Brands Upside?) However, the Q3’10 and November’10 strength was not limited to any one brand. The company reported encouraging trends across both of its main brands (i.e. Victoria’s Secret and Bath & Body Works).
Bath & Body Works had a very good quarter with comparable store sales rising 6%. The increase in sales was driven by rising transactions as traffic to Bath & Body Works stores increased and its customer conversion rate remained high. Rising ‘spend per transaction’ as compared to last year also boosted sales.
Operating income in Q3’10 for the segment doubled from the same period last year driven by strong top line sales, improvements in the merchandise margin rate and leveraging of expenses. Continued improvements in the company’s merchandise margin rate has been driven by cost reduction and lower promotional activity.
Inventory levels have also declined for the 14th consecutive quarter, signifying ongoing improvement in margins and the efficiency with which the business has been run. 
Profit Margin Improvement Could Trigger Stock Upside
We currently project a slight increase in Bath & Body Works EBITDA Margin in 2011 and flat EBITDA margins thereafter. However, if Bath & Body Works continues to improve its margins, as has been the case in Q3, there could be a potential upside to Limited Brands’ stock. To demonstrate the company’s stock price sensitivity to this metric, we estimate that a gradual rise in Bath & Body Works’ EBITDA margin, reaching 24% by the end of our forecast vs. our base case estimate of 19%, there could be more than 10% upside to the $30.63 Trefis price estimate for Limited Brands’ stock.Notes: