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Limited Brands Stays Neutral

Zacks Equity Research

Limited Brands Inc. (LTD) 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 with an aim to generate healthy cash flows and augment its financial position.

The Company Counts Upon

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 is keen 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.

Limited Brands is also actively managing its cash flows and returning much of its free cash to shareholders’ through share repurchases or dividend. During the first quarter of 2012, the company repurchased 8.3 million shares for $380.9 million. The company still has $283.4 million at its disposal under its current $500 million repurchase program.

Riding on Positive Comps

Limited Brands has sustained its growth momentum with monthly sales data being encouraging so far in the year. The company has been witnessing healthy comparable sales registering growth of – 9% in January, 8% in both February and March, and 6% in both April and May. For June, management now expects comparable-store sales to be in the flat to low single-digit range.

Healthy Quarterly Results

Limited Brands recently posted first-quarter 2012 earnings of 41 cents a share that beat the Zacks Consensus Estimate and the prior-year quarter earnings by a penny. Management had earlier projected quarterly earnings between 38 cents and 40 cents a share. The company’s share repurchase activity provided cushion to the bottom line.

Limited Brands posted comparable-store sales growth of 7% during the first quarter of 2012 compared with 7% in the previous quarter and 15% in the prior-year quarter. Limited Brands now expects comparable-store sales to increase in the low-to-mid single digits in the second quarter and between 3% and 5% in fiscal 2012.

Sales at Victoria’s Secret Stores & Victoria’s Secret Beauty increased 10% to $1,088 million, whereas comps were up 9%. Victoria's Secret Direct sales jumped 4% to $382 million. However, comps at La Senza edged down 1%. Total Victoria Secret sales grew 8% to $1,470 million driven by a 9% rise in comps. Bath & Body Works & The White Barn Candle Co’s total sales were up 5% at $505 million, with a 6% increase in comps. 

Guidance Dovetails with Expectations

Management guided earnings in the range of 40 cents to 45 cents for the second quarter and between $2.63 and $2.83 per share for fiscal 2012 that dovetails with the Zacks Consensus Estimates.

The Zacks Consensus Estimates for the second and third quarters of 2012 are 46 cents and 24 cents, respectively. For fiscal 2012 and 2013, the Zacks Consensus Estimates are $2.82 and $3.19, respectively.

Challenging Economy and Competition

The economy is still not out of the woods, and whether 2012 will mark the complete resurrection is tough to say. Limited Brands faces stiff competition from chain specialty stores, department stores and discount retailers. Competitors having 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.

Closing Commentary

Given the pros and cons, we reiterate our long-term Neutral recommendation on the stock. Moreover, Limited Brands, which competes with Gap Inc. (GPS) and Hanesbrands Inc. (HBI), holds a Zacks #3 Rank that translates into a short-term Hold rating.

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