Limited Brands Balances Risk-Reward - Analyst Blog

Limited Brands Inc.'s (LTD) constant focus on cost containment, inventory management and merchandise initiatives has kept it afloat in a sluggish retail environment. Management also expects gross margin to improve in the year driven by an improvement in the merchandise margin rate.

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

Limited Brands is keen to enhance its retail footprint across the globe by expanding aggressively in Canada and other international markets. Moreover, the company is actively managing its cash flows and expects to generate free cash flow of $800 million during fiscal 2010.

Limited Brands, which competes with Gap Inc. (GPS) and Hanesbrands Inc. (HBI), now expects fiscal 2010 earnings between $1.82 and $1.97 per share up from $1.68 and $1.83 previously anticipated. The company projected fourth-quarter 2010 earnings between $1.02 and $1.17.

The company is also returning much of its free cash via dividends and share repurchases. Limited Brands recently declared a special dividend of $3 per share. The company's board also authorized a share repurchase program of $200 million, which includes $53 million under its previous $200 million authorization.

Limited Brands is a specialty retailer of women's intimate and other apparel. The company's customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels and high household debt levels, which may negatively impact their discretionary spending, and in turn the company's growth and profitability.

Moreover, most of the company's stores are located in retail shopping areas, such as malls and other types of retail centers, which have been adversely impacted by the recent economic turmoil. These malls have been registering lower sales volume and declining traffic, as consumers grappling with the recent economic downturn have been trading down to cheaper brands.

Given the pros and cons we prefer to be Neutral on the stock. Limited Brands also holds a Zacks #3 Rank, which translates into a short-term ‘Hold' rating, and correlates with our long-term recommendation.

 
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