Limited Brands’ (NYSE:LTD) Victoria’s Secret did not start off very well this year due to prolonged cold weather, cautious consumer spending and a weak response to new products. The brand saw a modest 3% growth in comparable store sales and its gross margins declined on the account of increased promotional activities and introduction of free shipping. 
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For the remaining year, Victoria’s Secret’s growth is likely to remain under pressure due to lower shipping & handling revenues and negative publicity. However, its long term growth will find support from firm inventory control, store consolidation in the U.S., expansion of PINK, an increase in product categories and international expansion.
A Slowdown In Direct-To-Consumer Business & Negative Publicity Can Weigh On 2013 Results
Direct-To-Consumer Business (Important Factor)
Although Limited Brands’ direct-to-consumer business has grown moderately over the past few years, fiscal 2013 may see a slowdown. Victoria’s Secret‘s direct sales increased at an average annual rate of 5% during the last three years, but declined by 6% in the first quarter of fiscal 2013 primarily due to the introduction of free shipping and the impact of prolonged cold weather.    While the weather impact is temporary, lower shipping and handling revenues will continue to weigh on the channel’s growth this year. That said, the business should be back on track next year as Limited Brand’s product offerings, strong brand identity & customer reach remain strong.
Negative Publicity (Small Factor)
Although Victoria’s Secret is one of the most popular apparel brands in the U.S., it hasn’t really been in positive media headlines lately. A few months back, the brand introduced a collection for its tween customers with a tagline “Bright Young Things”. This resulted in an uproar among parents as they felt that the content written on bras, panties and bath towels was obscene and not fit for young girls.  In February 2013, Victoria’s Secret promised to make a line of bras for women who’ve had mastectomy surgery in response to a Change.org petition.  However, the brand hasn’t delivered any material results so far.  Recently, it saw a protest from About-Face (a group promoting women’s self-esteem and body image) demanding the inclusion of more diverse body shapes in Victoria’s Secret’s advertisements. 
Growth In The U.S. Through Store Consolidation And Expansion Of PINK Will Help In Medium To Long Term
Victoria’s Secret has a wide footprint in the U.S. market with over 1,000 stores. In order to improve the brand’s overall store productivity, Limited Brands has been closing its under-performing stores. This has worked well for the retailer as its revenue per square feet jumped from $581 to $817 over the last three years.  At the same time, revenues grew at an average annual rate of about 12%. The company plans to shut down another 18 Victoria’s Secret stores in 2013, and we expect this trend to continue in the near future, although at a slower pace. 
On the other hand, Limited Brands is looking to expand Victoria’s Secret’s relatively young PINK brand in the U.S. A few years back, the company launched PINK to primarily targets college girls. About 25% of the U.S. female population between 15-34 years falls under the college going age group.  Since Victoria’s Secret’s presence is limited in this demographic, there is a large scope for expansion. During the last two years, the retailer has opened only 21 PINK stores but plans to increase the store count by 50 in fiscal 2013. 
Disciplined Inventory Control Will Help Margins And Comparable Store Sales
Limited Brands maintains tight control over its inventory for timely launch of new products, which results helps its comparable store sales. In the last quarter, Victoria’s Secret launched its spring collection with prevailing trends such as seductive prints, neon, embellishments and novelty fabrics, which helped it register healthy comparable store sales growth of 5% in February.   In the subsequent months, the demand for spring clothing fell drastically due to prolonged cold weather.  While this could have easily led to significant inventory hangover, the company maintained the necessary control.
Limited Brands offered compelling discounts on its products as it planned to enter the second quarter with optimum inventory levels. Although this weighed on its Q1 comparable store sales growth, it will help in timely launch of the new seasonal collection. Limited Brands’ inventory per square foot (cost) was up by just 3% in Q1 fiscal 2013, as compared to the previous year.  The retailer plans to keep its inventory increase under control during the second quarter even as it looks to re-launch a number of products . Excess inventory on the account of merchandise mix imbalance or low product demand has severely impacted retailers such as Urban Outfitters (NASDAQ:URBN) and Gap (NYSE:GPS) in the past.
Increased Product Categories At Existing Stores
Over the past few years, Victoria’s Secret has expanded its offerings outside its core lingerie products. Now the brand also offers shoes, evening wear, swimwear, sportswear, loungewear, accessories, handbags, luggage and fragrances. We expect Victoria’s Secret to continue to add different categories in the future as well. During Q1 fiscal 2013, it introduced new categories in its beauty products, which played a vital role in the comparable store sales growth.  Also, the company is increasing the number of locations offering Victoria’s Secret beauty products and accessories. In 2012, the brand had 108 locations operational and it plans to add another 70-100 stores this year.  It is also adding full line merchandise of PINK to its existing stores, which should again aid its comparable store sales growth. By the end of fiscal 2012, about 20% of Victoria’s Secret stores had PINK products in them. 
International Expansion To Open New Growth Avenues
Currently, most of Limited Brands’ operations are spread across the U.S. However, the retailer has started expanding internationally and the response has been encouraging so far. At the end of Q1 fiscal 2013, Victoria’s Secret operated 26 stores in Canada which have performed quite well, thanks to the brand’s popularity in the region. The retailer plans to add eight more stores by the end of fiscal 2013.  Although Victoria’s Secret is at a nascent stage in the U.K., its stores in London have generated robust sales and inspired its entry in other locations such as Manchester, Leeds and Sheffield.  Additionally, its initial stores in the Middle East and Hong Kong have also delivered promising results. As Victoria’s Secret continues to expand outside the U.S., new revenue sources will open up and help the company sustain its long term growth.
Our price estimate for Limited Brands Stands at $55, implying a premium of about 5% to the market priceNotes:
- Limited Brands Q1 fiscal 2013 earnings transcript, May 23 2013 [↩] [↩] [↩] [↩] [↩] [↩]
- Limited Brands’ SEC filings [↩] [↩]
- April Sales Transcript, Limited Brands, May 2013 [↩]
- L Brands’ Management Hosts Pre Recorded March 2013 Sales Conference, Apr 11 2013 [↩]
- Victoria’s Secret ‘Bright Young Things’ Slogan Has Parents Upset, Huffington Post, Mar 25 2013 [↩]
- Victoria’s Secret Mastectomy Bras A Likely Reality Due To Change.Org Petition, Huffington Post, Feb 1 2013 [↩]
- Victoria’s Secret Protest In Bras Outside California Store Demands Body Diversity, Huffington Post, Jun 17 2013 [↩] [↩]
- Limited Brands Q4 fiscal 2012 earnings transcript, Feb 28 2013 [↩] [↩] [↩]
- Data available with the U.S. Census Bureau [↩]
- Limited Brands Hosts February Sales Conference, Seekingalpha, March 7 2013 [↩]
- Victoria’s Secret Launches First Spring 2013 Swim Collection And Angels And Artists Swim Video Series, Fashion + Lifestyle, Jan 6 2013 [↩]
- Prolonged Cold Puts Retail Sales In Deep Freeze, Cnbc, Mar 31 2013 [↩]