LB LandBridge Company LLC

Limited Brands Inc.’s (LTD) sustained focus on cost containment, inventory management and merchandise initiatives has kept it afloat in a sluggish consumer environment.

The company’s 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 also keen to enhance its retail footprint across the globe. 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 are primarily located in airports and tourist destinations. These stores provide significant growth opportunity and are an innovative way to advertise.

Limited Brands recently posted second-quarter 2011 results. The quarterly earnings of 48 cents per share beat the Zacks Consensus Estimate of 46 cents, and rose 33% from 36 cents in the prior-year quarter, riding on an improving sales environment.

The better-than-expected results prompted management to raise its fiscal 2011 earnings outlook. Management now forecasts third quarter earnings between 17 cents and 22 cents and fiscal 2011 earnings between $2.35 and $2.50 per share.

Earlier, Limited Brands had projected fiscal 2011 earnings between $2.25 and $2.45 per share.

Net sales of $2,458.1 million climbed 10% from the prior-year quarter, and also were ahead of the Zacks Consensus Estimate of $2,437 million. Consumers who cut back their discretionary spending during the recession are now gradually loosening their purse strings.

Comparable-store sales for the quarter jumped 9% compared with 7% registered in the year-earlier quarter. Comps rose 6% in May, 12% in June and 6% in July.

Limited Brands now expects comparable-store sales for the third quarter to be up in the low to mid single-digit range and for fiscal 2011 to rise in the mid single-digit range. The company now expects August comparable-store sales to jump in the high single-digit range compared with a low single-digit range projected earlier.

Limited Brands is also actively managing its cash flows, and returning much of its free cash via dividends and share repurchase. During fiscal 2011, the company expects to generate free cash flow of $700 million.

A specialty retailer of women’s intimate and other apparel, beauty and personal care products, 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, which will likely continue to weigh on the company’s results.

Moreover, 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.

Given the pros and cons, we prefer to maintain a long-term ‘Neutral’ recommendation on the stock. However, Limited Brands, which competes with Gap Inc. (GPS) and Hanesbrands Inc. (HBI), holds a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.

 
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