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LTD AT A GLANCE

P/E ► 52.2 HIGH EV/EBITDA ► 12.5 AVG ROA ► 4.2% AVG ROE ► 4.8% AVG Debt to Equity ► 2.83 HIGH Current Ratio ► 2.85 AVG Interest Coverage Ratio ► 2.03 AVG

 

 

 

 

 

 

Limited Brands (NYSE: LTD) is one of the largest specialty retailers in the United States, operating 2,686 stores throughout North America. Two well-known brands, Bath & Body Works and Victoria's Secret, are LTD's strongest businesses, bringing in a total of 80% of the company's $9 billion of net sales in fiscal 2008.^[1] The U.S. economy's struggles worked against Limited's selling efforts in 2008; net sales fell 10.8% from 2007, and the company's operating margin decreased by 4.5%.^[1]

The company is expanding its international reach with the acquisition of Canadian retailer La Senza and the opening of Bath & Body Works stores in Canada in fiscal 2008. Outside of Canada the company is researching potential markets in Europe and Japan.^[2][3] However, long-term growth plans have been trimmed since the subprime lending crisis in the summer of 2007 and the ensuing credit crunch and recession have made financing expansion more difficult and helped stifle consumer spending. Same store sales company-wide fell 7%^[4] in the first quarter of FY09 and continued to fall in June 2009, decreasing 12% from the same period in 2008.^[5] However, Bath & Body Works, one of the main revenue sources for Limited, is part of an industry trend of "ethical skin care." This means there is a surging popularity of products that claim to have not been animal-tested and contains sustainable materials. This moral component to the products serve as an extra incentive to consumers, which is very important now that customers are more reluctant to shop than they have been previously.

Business Overview

Limited Brands owns and operates several retail chains: Victoria's Secret, Bath & Body Works, C.O. Bigelow, White Barn Candle Co. and La Senza. In 2007 Limited Brands divested 75% of its ownership interest in its Apparel business which included the Express and The Limited retail chains. In FY08 net sales fell 10.8% to $9 billion.^[1] Gross and operating margins decreased as well, 1.4% and 4.5% respectively.^[1] Total revenues for the second quarter of fiscal 2009 (ended August 1, 2009) were $0.19 per share, an $0.08 decrease from 2008's revenues of $0.27 per share.^[6] Net income also decreased by 27% from 2008--$74.3 million compared to 2008's $102 million.^[6] Same-store sales decreased by 9%.^[6] The sales decreases were lower than analyst expectations, and the company has raised its earnings forecast for fiscal 2009. The company has introduced products at lower price points in order to accommodate thrifty consumers and has also introduced more high-priced goods to cater to those who are still willing to splurge. These moves, combined with confidence that the company can capitalize on its brand image for international expansion, have caused Citi to raise its rating of LTD stock to "Buy."^[7]

The company currently reports sales through three segments: Victoria's Secret, Bath & Body Works and Other.

Victoria's Secret (55% of Sales^[8], 70% of Operating Income^[9]).

The Victoria's Secret segment includes results from Victoria's Secret stores and online operations as well as operations of the La Senza brand.

• Victoria's Secret is best known for its lingerie and also for the models and fashion shows that exhibit this underwear. The brand also sells women's clothing, fragrances, and other personal care and beauty products. Victoria's Secret products are purchased primarily through retail stores, online, and through the Victoria's Secret catalog. Victoria's Secret Store sales totaled $3.6 billion^[8], while its sales in the direct-to-customer channel (online and catalog sales) nearly reached $1.5 billion^[8], putting the total sales of the Victoria's Secret brand over $5.1 billion in 2008.^[8] At the end of the first quarter of fiscal 2008, Limited Brands operated 1,043 Victoria Secret stores in the U.S.^[10]
• La Senza was the number one lingerie brand in Canada when it was acquired by Limited Brands in January 2007. La Senza is now a brand sold in Victoria's Secret store in addition to the 322 standalone La Senza stores in operation at the end of FY08.^[9] In 2008, La Senza's sales totaled $491 million.^[8] With the acquisition of La Senza, Limited Brands hopes to gain valuable experience with international retailing in the lingerie and beauty care market which will help the company expand further internationally.

Bath & Body Works (25% of Sales^[8], 30% of Operating Income^[9])

• Bath & Body Works is a popular retail store selling personal care and beauty products such as lotions, fragrances, and hair products, as well as home accessories. Bath & Body Works also operates C.O. Bigelow and White Barn Candle Company stores and sells products from these two brands in B&BW locations stores as well. C.O. Bigelow's personal care products are very similar to those of Bath & Body Works but are marketed primarily through a quaint, upscale "apothecary" brand image. White Barn Candle Co., on the other hand, focuses more on home accessories, such as fragrance candles and room sprays. Merchandise from Henri Bendel, another one of Limited Brands' holdings, is also sold here. Net sales from the division, including C.O. Bigelow and White Barn topped $2.3 billion in 2008.^[8] At the end of 2008, the Bath & Body Works segment operated 1,638 stores in the United States.^[10]

Other (12% of Sales^[8], -23% of Operating Income^[9])

The Other segment includes results from corporate functions, Mast (an apparel production and sourcing company that serves Victoria's Secret, La Senza and third-party customers), Beauty Avenues (a personal care sourcing company serving both Victoria's Secret and Bath & Body Works) and Henri Bendel. Henri Bendel is the only component of the Other segment that operates its own stores.

Henri Bendel

Henri Bendel is an upscale brand founded in 1896 and later acquired by the Limited Brands. There are a total of five stores which sell personal care products and accessories at a higher price point. Bendel used to sell apparel as well but due to slumping sales Limited has decided to end the apparel business and focus on accesories.

Divestiture of Apparel Business

In the summer of 2007, Limited Brands shed its underperforming women's and men's apparel businesses, Express and The Limited,, selling each brand to a different private equity firm, in order to focus more on its higher-profit Victoria's Secret and Bath & Body Works chains. The company gained $302 million from the sale of Express to Golden Gate Capital, while it lost $72 million on the sale of The Limited to Sun Capital Partners.^[11] The company divested 75% of its ownership interest in each of the two brands, meaning that it still owns 25% of each brands and thus reports results from the two brands as "Other Income (Loss)".^[12]

Trends and Forces

International Expansion: Looking for Growth Opportunities Abroad

As the Victoria's Secret and Bath & Body Works reach their full potential in the U.S. market, Limited Brands is eyeing international expansion for their two major brands. This process began with the acquisition of La Senza, a specialty lingerie retailer based in Canada. La Senza is now a part of the Victoria's Secret business, with branded merchandise shared between stores in the U.S. and Canada. At the end of FY2008, Limited Brands operated 322 La Senza locations^[10] and plans on expanding that number to 326 by the end of the year. The company's expansion abroad will continue with the launch of Bath & Body Works in Canada in 2008, planning to open a total of 20 more locations in 2009 to add to the six opened in 2008.^[4] In the first quarter of FY09 the company had opened 2 Bath & Body Works stores in Canada.^[4] Through the La Senza brand and the first Canadian Bath & Body Works stores, Limited Brands plans on gaining experience and knowledge in the retailing market abroad, which will help it in its efforts to expand into other international markets. Apart from Canada, the company is currently researching other international markets, including Europe and Japan, and looking for partners with experience in these markets to join in launching the Victoria's Secret and Bath & Body Works brands abroad.^[13][14] However, Limited has not opened any stores outside of the United States or Canada.

Weakness in Domestic Economy Hurting Sales

After the subprime lending crisis in the summer of 2007 the macroeconomy in the U.S. has exhibited weak performance, and as such consumers have cut back on their discretionary spending, particularly on non-necessity goods. Both Victoria's Secret and Bath & Body Works sell products to consumers that are mostly fashion and beauty items that are subject to being cut out of consumers' spending habits during times of economic distress. Due to the economic uncertainty in the U.S. and Canada consumers have shied away from the Limited Brands' stores as same-store sales decreased 9% company-wide in 2008.^[8] Limited Brands' struggle has continued in the first quarter of FY 2009 as same store sales fell 7%.^[4] Also, net sales were $1.725 billion, down from 2008's $1.925 billion.^[4] The outlook for the economy is still uncertain and it is unlikely that consumer spending will pick up, and subsequently sales of lingerie and beauty care products, until the picture brightens.

Bath & Body Works Caters to "Ethical Skin Care"

One important global trend during 2008 and 2009 is the proliferation of environmental consciousness. Individuals and entire corporations have become more conscious of the effects the products they use and produce have on the environment at large and there is an increased focus on sustainable materials and products that have not been tested on animals. In addition to environmental consciousness, more products are being formulated without potentially harmful ingredients such as parabens and petroleum. This trend of "ethical products" presents a new marketing opportunity for cosmetics and skin care companies. Consumers like feeling that they are helping the environment and promoting sustainable resources. Originally the domain of niche brands, ethical, fair-trade products have become more popular in lines such as Clarins, Bath & Body Works and Jack Black.^[15] Bath & Body Works is one retailer that has taken advantage of ethical products by making the idea part of its ethos. The company does not test its products on animals and uses natural ingredients such as jojoba and tea tree oil, avoiding synthetic products.

Competition

Due to the diversity of its holdings, Limited Brands competes with a variety of other retailers and fashion companies. Few companies own brands and operations in both lingerie/intimate apparel and home and beauty care retailing, but one such competitor exists in luxury conglomerate LVMH Moet Hennessy L.V. (LVMUY), which has operations in wines and other alcoholic drinks, apparel, cosmetics, retailing, and jewelry. LVMH Moet Hennessy L.V. (LVMUY) is primarily a source of competition for Limited Brands because it owns fashion lines such as DKNY that compete with Victoria's Secret as well as the beauty care chain Sephora which competes with Bath & Body Works. However, it is difficult to compare Limited Brands to LVMH Moet Hennessy L.V. (LVMUY) because the former doesn't break out their sales for their fashion lines and their retail chains like Sephora. Sephora is a beauty-retail chain that sells both third-party and private label brands of beauty care products ranging from makeup and haircare to bath products. Sephora operates over 515 stores in 14 countries throughout the world, with about 126 of those stores in North America, making its retail footprint significantly smaller than Limited Brands' Bath & Body Works brand.

Beyond LVMH Moet Hennessy L.V. (LVMUY) each of Limited Brands' major operations competes with other apparel and retail companies.

In the Victoria's Secret brand Limited Brands owns the leading brand of lingerie in the U.S. Competitors include:

Companies that produce other brands of lingerie:

• Hanesbrands (HBI) owns brands such as Hanes, Wonderbra and Playtex. Though the company is primarily focused on undergarments, it does own apparel brands Champion and Outer Banks, which serve both men and women and offer casual and business apparel respectively. Hanesbrands sells mostly women's underwear though Hanes caters to men and women. Also, Hanesbrands is not in the cosmetics or skincare industries. The company is a manufacturer and wholesaler of apparel--it's goods are sold in department stores such as Macy's Inc. (M) and J.C. Penney (JCP), opening it up to a wider customer base than Victoria's Secret.

Victoria's Secret, specifically the Pink line, also faces competition from up-and-coming lingerie and loungewear brands:

• American Eagles' Aerie was opened in 2006, and since then the brand has grown from 3 to 116 stores. The rapid growth, especially during a recession, is evidence of aerie's appeal amongst consumers. However, it is still a new brand and thus much smaller than Limited Brands. In addition, since it is still new not much can be said of the line's staying power, although signs so far are optimistic.
• Abercrombie's Gilly Hicks is another relatively new underwear line geared towards young women. At the end of fiscal 2008, Gilly Hicks had only 14 operating stores, though the line also has a website. As with aerie, Gilly Hicks' relative newness in relation to competitor Victoria's Secret makes comparisons difficult, however Gilly Hicks has demonstrated staying power. It's revenues increased from $230 thousand in 2007 to $17 million in 2008. In addition, it can take advantage of Abercrombie & Fitch's already strong brand image and attract consumers who already shop at A & F.

The Bath & Body Works segment competes with a variety of retailers, from cosmetics boutiques to candle shops and home and bath care retailers:

• Sephora
• The Body Shop is an individual segment of cosmetics giant L'oreal (LRLCY). It currently has 2,550 stores around the world, greatly increasing its exposure compared to Bath & Body Works, which is focused in North America. The Body Shop made over $800 million in revenues in 2008 compared to Bath & Body Works' $2 billion. The Body Shop is backed by L'Oreal, which is a much larger company than Limited.

References

1. ↑ ^{1.0 1.1 1.2 1.3} LTD 2008 Annual Report pg. 15  
2. ↑ Limited Brands (LTD) First Quarter 2008 Financial Packet
3. ↑ Limited Brands, Inc. 1Q08 (Qtr End 5/3/08) Earnings Call Transcript
4. ↑ ^{4.0 4.1 4.2 4.3 4.4} Limited Brands, Inc. F1Q09 (Qtr End 05/02/09) Earnings Call Transcript.
5. ↑ Limited Brands struggles with 12 percent sales drop.
6. ↑ ^{6.0 6.1 6.2} Limited Brands Net Drops 27%; PetSmart Net Rises.
7. ↑ Limited Brands upgraded to 'Buy'
8. ↑ ^{8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8} LTD 2008 Annual Report pg. 22  
9. ↑ ^{9.0 9.1 9.2 9.3 9.4} LTD 2008 Annual Report pg. 21  
10. ↑ ^{10.0 10.1 10.2} LTD 2008 Annual Report pg. 20  
11. ↑ Limited Brands (LTD) Annual Report 2007
12. ↑ Limited Brands (LTD) Annual Report 2007
13. ↑ Limited Brands (LTD) First Quarter 2008 Financial Packet
14. ↑ Limited Brands, Inc. 1Q08 (Qtr End 5/3/08) Earnings Call Transcript
15. ↑ “Extreme ethical” emerges as new cosmetics trend