Zacks_Analysts' Blog : Limited Brands to Outperform - Analyst Blog

We recently upgraded our recommendation on Limited Brands Inc. (LTD) – a specialty retailer of women’s intimate and other apparel, beauty and personal care products – to Outperform with a price target of $46.00. Earlier, we had a Neutral view on the stock.

Sustaining Growth Momentum

Even when the economy is ringing alarm bells, the owner of Victoria's Secret and La Senza chains is sustaining its growth momentum. Limited Brands’ comparable-store sales for September 2011 rose 11% following a similar increase in August 2011 and compared with a 12% jump in September 2010. Comps rose 6% in July, 12% in June and 6% in May.

The company’s sustained focus on cost containment, inventory management, and merchandise initiatives has kept it afloat in a sluggish consumer environment. The consumers, who cut back their discretionary spending during the recession, are now gradually loosening their wallets.

Comparable-store sales for September increased 13% at Victoria ’s Secret Stores & Victoria’s Secret Beauty, 12% at Bath & Body Works & The White Barn Candle Co., 7% at Victoria ’s Secret Direct and 2% at La Senza.

The company’s 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.

Past Performance Boosting Confidence

Limited Brands’ better-than-expected performance has been fostering a sense of confidence in the stock in an economy, which appears to be relapsing into another recession. In the last four quarters the company has topped the Zacks Consensus Estimate in the range of 0.8% to 5.9%. The average remained at 3.4%. This suggests that Limited Brands has beaten the Zacks Consensus Estimate by an average of 3.4% in the trailing four quarters.

In the last reported quarter, that is second-quarter 2011, Limited Brands posted earnings of 48 cents a share that beat the Zacks Consensus Estimate of 46 cents, and rose 33% from 36 cents earned in the prior-year quarter riding on an improving sales environment. The quarterly earnings also came ahead of the company’s guidance range of 38 cents to 43 cents a share provided earlier.

The better-than-expected results, prompted management to raise its fiscal 2011 earnings outlook to a range of $2.35 to $2.50 per share. Earlier, Limited Brands had projected fiscal 2011 earnings between $2.25 and $2.45 per share.

Other Driving Forces

Limited Brands, which competes with Gap Inc. (GPS) and Hanesbrands Inc. (HBI), is keen to enhance 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 foot) operating under a wholesale model, and primarily located in airports and tourist destinations. These stores provide significant growth opportunity and are an innovative way to advertise.

Limited Brands is also actively managing its cash flows, and returning much of its free cash via dividends and share repurchase. During second-quarter 2011, the company bought back 8.2 million shares for $314 million under its $500 million share repurchase program. During fiscal 2011, the company expects to generate free cash flows of $700 million.

Zacks Rank Defining Positive Stance

We believe that consumers will remain watchful on their spending in the upcoming holiday season, and thereby we could see aggressive pricing and new products to entice shoppers. We believe that retailing companies will move heaven and earth to win the hearts of bargain hunters and it definitely remains a wait-and-watch story as to who emerges successful in wooing consumers in this distressed economy. However, Limited Brands is seen as a frontrunner based on the trust it has earned over the years.

As of now we have a short-term Buy recommendation on the stock, which is well defined through our Zacks #2 Rank.