Bath & Body Works’ Profit Margin to Help Carry Limited’s Stock

by Trefis Team
+16.21%
Upside
55.03
Market
63.95
Trefis
LTD
Limited Brands
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Bath & Body Works US stores constitutes around 26% of Limited Brands’ (NYSE:LTD) stock price by our estimates, second to Victoria’s Secret. The profit margin (using EBITDA margin) from this business segment declined 2008 due to an increase in buying and occupancy expense rate and higher expenses from promotional activities. The profit margin has recovered some on a better product mix, and we expect the positive trend to continue with improving economic environment and active inventory management and cost-cutting plans.

While we expect the margins to increase slowly and stabilize at 19% levels by the end of Trefis forecast period, Trefis members forecast a higher margin level of close to 23%, which translates to 7% upside to our price estimate for LTD stock.

We currently have a Trefis price estimate of $30.63 for Limited Brands’ stock, about 6% above the current market price of $28.93.

Improving Economy to Drive Sales

Bath & Body Works caters to the complete well-being by providing shower gels and lotions, aromatherapy, antibacterial soaps, candles and personal care accessories. Improving economic conditions will boost consumer spending which in turn will increase sales at Bath & Body Works U.S. stores. This will result in a reduction in buying and occupancy expense rate and an increase in the gross margin rate.

As sales increase, general, administrative and store operating expense rate will further reduce thereby increasing the Bath & Body Works U.S. stores EBITDA Margin.

Better Inventory Management and Controlling Costs

In Q3 2010, Limited Brands’ net sales increased nearly 12% to almost $2 billion compared to the same period previous year, led by a focus on inventory management and cost containment, in addition to merchandise initiatives like bringing in low cost goods for cost-conscious customers.

The company plans to actively manage inventory to minimize the buying and occupancy expense rate and the level of promotional activity. With plans to cut down on marketing and other overhead expenses, Limited Brands will be able to increase Bath & Body Works profit margins from in its US operations in the future.

Trefis Community Forecast

The Trefis community forecasts Bath & Body Works’ profit margins from its US stores will increase from 20% in 2010 to almost 23% by the end of the Trefis forecast period, compared to the baseline Trefis estimate of an increase from just over 18% to 19.3% during the same period. The member estimates imply an upside of 7% to the Trefis price estimate for Limited Brands’ stock.

Our complete analysis for Limited Brands’s stock is here.

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