Limited Brands' Decent Comps Run


Limited Brands Inc. (LTD), a specialty retailer of women’s intimate and other apparel, beauty and personal care products, is persistently trying every means to navigate through this sluggish economic environment by adopting optimum inventory strategies, better expense management, merchandise initiatives and prudent capital spending

The U.S. economy is reeling under the ongoing financial crisis, the rippling effects of which have gradually engulfed the global market. Amid this environment, Limited Brands, the owner of Victoria's Secret Direct and La Senza chains, has enjoyed a positive sales rhythm so far in 2012, and we believe it will sustain the same tempo for the balance of the year.

Riding on Positive Comps

During the period from January to May 2012, Limited Brands consistently registered comparable-store sales growth. Over that period, comps growth touched a low of 6% and hit a high of 9%, thereby recording average growth of approximately 7.4%. In the first five months of 2012, comps increased 9% in January, 8% in both February and March, and 6% in both April and May.

In terms of performance, Limited Brands fared far better than competitor Gap Inc. (GPS), which posted average comparable-store sales growth of 2.2%. From January to May, Gap registered comparable sales growth in each month except January and April. The company registered comps growth of 4% in February, 8% in March and 2% in May but comps decline of 1% in January and 2% in April.

Closing Commentary

Limited Brands’ Bath & Body Works segment is gaining traction, thanks to a rise in store transactions, enhancement in the direct channel business and growth in new stores. Victoria’s Secret Stores has been performing well, and the company is also revamping its La Senza brand both at home in Canada and internationally by improving product assortments, store operations and layout.

Limited Brands wants to augment its retail footprint across the globe by expanding aggressively in Canada and other international markets.

Another driving factor is the travel retail concept. These are small Victoria’s Secret stores (about 1,000 square feet) operating under a wholesale model, and primarily located in airports and tourist destinations. These stores provide significant growth opportunities and are an innovative way to advertise.

The economy is still not out of the woods, and whether 2012 will mark a complete resurrection is tough to say. Limited Brands faces stiff competition from chain specialty stores, department stores and discount retailers. Competitors with a larger number of stores, greater market presence, brand recognition, and financial resources will likely continue to weigh on the company’s results.

The La Senza brand has been facing headwinds, witnessing a comparable-store sales fall of 1% during the first quarter of 2012 and -8% in the month of May.

Moreover, the company’s customers are sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, sluggishness in the housing market, and high unemployment and household debt levels, which may affect their spending.

Given the pros and cons, we reiterate our long-term Neutral recommendation on the stock. Moreover, Limited Brands holds a Zacks #3 Rank that translates into a short-term Hold rating.

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