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Limited Brands' Balancing Strategy

GPS HBI

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Limited Brands Inc. is persistently striving to rebound from a lackluster economy, by adopting optimum inventory strategy, better expense management, merchandise initiatives and prudent capital spending with an aim of generating healthy cash flows and augmenting its financial position.

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 on augmenting 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 (of 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 of advertising.

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 second quarter of 2012, the company repurchased 5.1 million shares for $222.9 million, and still has $60.5 million at its disposal under its current $500 million repurchase program. The company announced the payment of a special dividend of $1 per share.

Riding on Positive Comps

Limited Brands has sustained its growth momentum with encouraging monthly sales data 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, 6% in both April and May, 7% in June and 12% in July. For August, management now expects comparable-store sales to rise in the low single-digit range.

Healthy Quarterly Results

Limited Brands recently posted second-quarter 2012 earnings of 50 cents a share that beat the Zacks Consensus Estimate by a couple of cents, and rose from 48 cents earned in the prior-year quarter. Management had earlier projected quarterly earnings between 46 cents and 48 cents a share.

Limited Brands posted net sales of $2,399.1 million, falling 2% from $2,458.1 million reported in the prior-year quarter, but marginally surpassing the Zacks Consensus Estimate of $2,398 million. The prior-year period sales included $216.6 million from a third-party apparel sourcing business that was sold in November 2011.

The company posted comparable-store sales growth of 8% during the second quarter of 2012 compared with 7% in the previous quarter and 9% in the prior-year quarter. Limited Brands now expects comparable-store sales to increase in the low-to-mid single digits in the third quarter and between 3% and 5% in fiscal 2012.

Sales at Victoria’s Secret Stores & Victoria’s Secret Beauty increased 10% to $1,170.1 million, whereas comps were up 10%. Victoria's Secret Direct sales jumped 3% to $406.6 million. Total Victoria Secret sales grew 8% to $1,576.7 million driven by a 10% rise in comps. Bath & Body Works & The White Barn Candle Co.’s total sales rose 8% to $609.1 million, with a 7% increase in comps.

Guidance Dovetails with Expectation

Management guided earnings in the range of 15 cents to 20 cents for the third quarter and between $2.73 and $2.88 per share for fiscal 2012 that dovetails with the Zacks Consensus Estimates. Earlier, Limited Brands had forecasted earnings in the range of $2.63 to $2.83.

The Zacks Consensus Estimates for the third and fourth quarters of 2012 are 20 cents and $1.75 per share, respectively. For fiscal 2012 and 2013, the Zacks Consensus Estimates are $2.85 and $3.22 per share, respectively.

Challenging Economy and Competition

The economy is still not out of the woods, and whether 2012 will mark the complete resurrection tough to say, unless some concrete steps are taken. Each and every company is vying to survive the downturn, and trying every means to reach the helm.

Limited Brands faces stiff competition from chain specialty stores, department stores and discount retailers on attributes such as, marketing, design, price, service, quality, and brand image. 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 3% during the second quarter of 2012 and 5% in the month of July.  Sales tumbled 17% to $94.9 million.

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 with a price target of $51.00. Moreover, Limited Brands, which competes with Gap Inc. (GPS - Analyst Report) and Hanesbrands Inc. (HBI - Analyst Report), holds a Zacks #2 Rank that translates into a short-term Buy rating and well defines better-than-expected second-quarter 2012 results and an upbeat guidance.

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