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Financial Analysis of Limited Brands

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Financial Analysis of Limited Brands
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Financial Analysis of Limited Brands - February 12th, 2011

Limited Brands (formerly known as The Limited, Inc.) is an American apparel company based in Columbus, Ohio. In 2009 it reported 9.04 billion dollars in revenue for the last fiscal year[1].
Limited Brands (NYSE: LTD) is one of the largest specialty retailers in the United States, operating 2,971 stores throughout North America. Two well-known brands, Bath & Body Works and Victoria's Secret, are LTD's strongest businesses, bringing in a total of 84% of LTD's $8.6 billion of net sales in fiscal 2009.[1] The U.S. economy's struggles worked against Limited's selling efforts in 2009; same store sales company-wide fell 9% in 2008 and 4% in 2009. Revenue fell 4.5% from 2008, however LTD's operating margin increased from 6.5% to 10.1% demonstrating their ability to weather the recession hurt them in 2008.[2]

LTD is expanding its international reach with the acquisition of Canadian retailer La Senza and the opening of Bath & Body Works and Victoria Secret stores in Canada in fiscal 2009. Outside of Canada LTD is researching potential markets in Europe and Japan.[3][4] However, long-term growth plans have been trimmed since the subprime lending crisis in the summer of 2007 and the ensuing credit crunch and recession have made financing expansion more difficult and helped stifle consumer spending. However, Bath & Body Works, one of the main revenue sources for Limited, is part of an industry trend of "ethical skin care." This means there is a surging popularity of products that claim to have not been animal-tested and contains sustainable materials. This moral component to the products serve as an extra incentive to consumers, which is very important now that customers are more reluctant to shop than they have been previously.

1 Business Overview
1.1 Business Financials
1.1.1 Fiscal Year 2009 Performance (Ended January 30, 2010)
1.1.2 Q1 FY2010 Results (Ended May 1st, 2010)
1.1.3 Q2 FY2010 Results (ended July 31, 2010)
1.1.4 Q3 FY2010 Results (ended October 30, 2010)
1.2 Business Segments
1.2.1 Victoria's Secret (62% of Net Sales, 67% of Operating Income[13])
1.2.2 Bath & Body Works (27% of Net Sales, 41% of Operating Income[19])
1.2.3 Other (11% of Net Sales, -8% of Operating Income [22]) Henri Bendel
1.2.4 Divestiture of Apparel Business
2 Trends and Forces
2.1 International Expansion: Looking for Growth Opportunities Abroad
2.2 Weakness in Domestic Economy Hurting Sales
2.3 Bath & Body Works Caters to "Ethical Skin Care"
2.4 Increases in Commodity Prices Will Raise Clothing Retailer Prices
3 Competition
4 References
Business Overview

Business Financials
Fiscal Year 2009 Performance (Ended January 30, 2010)
Limited Brands owns and operates several retail chains: Victoria's Secret, Bath & Body Works, C.O. Bigelow, White Barn Candle Co. and La Senza. In fiscal 2009, net sales fell 4.5% to $8.9 billion. Gross and operating margins increased 5.7% and 55% however due to better cost controls. EPS rose strongly from $0.65 in 2008 to $1.37 in 2009. Net income increased by a whopping 103% from 2008 to $448 million. [5] Same store sales decreased by 4%.[6] In November, LTD reported a net sales increase of 14% to $893 million from the same period a year ago. Comparable store sales increased 10% for the month. Victoria's Secret stores, La Senza, and Bath & Body Works had comparable store sales changes of 13%, -10%, and 8% respectively.[7] Limited Brands has introduced products at lower price points in order to accommodate thrifty consumers and has also introduced more high-priced goods to cater to those who are still willing to splurge after the 2008 Financial Crisis. They have also controlled costs that in 2008 hurt them due to the decrease in sales due to low consumer spending. These changes helped LTD's financial performance rebound in 2009.

Year Operating Revenue (millions) Operating Profit (millions) Operating Margin Net Income (millions) Net Profit Margin Same Store Sales Change
2009 $8,632 $868 10.1% $448 5.2% (4.0%)
2008 $9,043 $589 6.5% $220 2.4% (9.0%)
2007 $10,134 $1,110 10.0% $718 7.1% (2.0%) [8]
Q1 FY2010 Results (Ended May 1st, 2010)
LTD had net sales of $1.932 billion -- a 12% increase from Q1 fiscal 2009. Limited Brands also had a comparable store sales growth of 10% from Q1 fiscal 2009 to Q1 fiscal 2010.[9]
The retailer posted net income of $112.5 million, compared to $2.6 million in Q1 fiscal 2009.[9]
The net gain was driven by LTD's strong operating income of $185 million, compared with $65.2 million in Q1 fiscal 2009.[9]
For Q2 fiscal 2010, Limited Brands expects EPS to be in the range of $0.27 to $0.32, compared with EPS of $0.19 in Q2 fiscal 2009.[9] The retailer also projects fiscal 2010 EPS to be in the range of $1.60 to $1.80.[9]

Q2 FY2010 Results (ended July 31, 2010)
Sales increased 8.5% to $2.24 billion, compared with year-ago sales of $2.07 billion. Earnings per share were $0.36 compared to $0.19 in Q2 2009.
Operating income was $236.5 million compared to $148.6 million last year, and adjusted net income was $120.6 million compared to $60.3 million last year. Increased sales per store along with a one time pre-tax gain of $52.3 million or $0.10 per share, related to the sale of a portion of the company's shares of Express (EXPR) in its initial public offering helped results.

Comparable store sales increased 7%. [10]
Q3 FY2010 Results (ended October 30, 2010)
Operating income increased 153% to $149.1 million compared to the same period last year. Net income was $61.3 compared to adjusted net income of $6.1 from the same period last year.
Comparable store sales increased 10% while net sales increased 11.6% to $1.98 billion from last year.
Revenue for third quarter was $1.983 billion, which is above the market consensus of $1.97 billion.[11]
The company expects its fourth quarter earnings to be $1.02 to $1.17 per share, which is below the market consensus of $1.17 per share.[12][11]
Business Segments
Limited Brands currently reports sales through three segments: Victoria's Secret, Bath & Body Works and Other.

In 2009, Victoria's Secret continues to be LTD's most profitable brand.
Victoria's Secret (62% of Net Sales, 67% of Operating Income[13])
The Victoria's Secret segment includes results from Victoria's Secret stores and online operations as well as operations of the La Senza brand.

Victoria's Secret is best known for its lingerie and also for the models and fashion shows that exhibit this underwear. The brand also sells women's clothing, fragrances, and other personal care and beauty products. Victoria's Secret products are purchased primarily through retail stores, online, and through the Victoria's Secret catalog. Victoria's Secret Store sales totaled $3.4 billion, while its sales in the direct-to-customer channel (online and catalog sales) nearly reached $1.4 billion, putting the total sales of the Victoria's Secret brand over $5.3 billion in 2009.[14] At the end of the first quarter of fiscal 2008, Limited Brands operated 1,044 Victoria Secret stores in the North America. [15] The brand drove LTD's June 2010 sales results as its same store sales increased 17%. [16]
La Senza was the number one lingerie brand in Canada when it was acquired by Limited Brands in January 2007. La Senza is now a brand sold in Victoria's Secret store in addition to the 258 standalone La Senza stores in operation at the end of FY09.[17] In 2009, La Senza's sales totaled $423 million. [18] With the acquisition of La Senza, Limited Brands hopes to gain valuable experience with international retailing in the lingerie and beauty care market which will help LTD expand further internationally.
Bath & Body Works (27% of Net Sales, 41% of Operating Income[19])
Bath & Body Works is a popular retail store selling personal care and beauty products such as lotions, fragrances, and hair products, as well as home accessories. Bath & Body Works also operates C.O. Bigelow and White Barn Candle Company stores and sells products from these two brands in B&BW locations stores as well. C.O. Bigelow's personal care products are very similar to those of Bath & Body Works but are marketed primarily through a quaint, upscale "apothecary" brand image. White Barn Candle Co., on the other hand, focuses more on home accessories, such as fragrance candles and room sprays. Merchandise from Henri Bendel, another one of Limited Brands' holdings, is also sold here. Net sales from the division, including C.O. Bigelow and White Barn topped $2.3 billion in 2009.[20] At the end of 2009, the Bath & Body Works segment operated 1,658 stores in the United States and Canada.[21]
Other (11% of Net Sales, -8% of Operating Income [22])
The Other segment includes results from corporate functions, Mast (an apparel production and sourcing company that serves Victoria's Secret, La Senza and third-party customers), Beauty Avenues (a personal care sourcing company serving both Victoria's Secret and Bath & Body Works) and Henri Bendel. Henri Bendel is the only component of the Other segment that operates its own stores. Other segments posted sales of $942 million in 2009. [23]

Henri Bendel
Henri Bendel is an upscale brand founded in 1896 and later acquired by the Limited Brands. There are a total of 11 stores which sell personal care products and accessories at a higher price point. Bendel used to sell apparel as well but due to slumping sales Limited has decided to end the apparel business and focus on accesories.

Divestiture of Apparel Business
In the summer of 2007, Limited Brands shed its underperforming women's and men's apparel businesses, Express and The Limited,, selling each brand to a different private equity firm, in order to focus more on its higher-profit Victoria's Secret and Bath & Body Works chains. LTD gained $302 million from the sale of Express to Golden Gate Capital, while it lost $72 million on the sale of The Limited to Sun Capital Partners.[24] LTD divested 75% of its ownership interest in each of the two brands, meaning that it still owns 25% of each brands and thus reports results from the two brands as "Other Income (Loss)".[25]

Number of Stores 2006 2007 2008 2009
Victoria's Secret 1,003 1,020 1,043 1,040
La Senza 291 312 322 258
Bath & Body Works 1,546 1,592 1,638 1,627
Trends and Forces

International Expansion: Looking for Growth Opportunities Abroad
As the Victoria's Secret and Bath & Body Works reach their full potential in the U.S. market, Limited Brands is eyeing international expansion for their two major brands. This process began with the acquisition of La Senza, a specialty lingerie retailer based in Canada. La Senza is now a part of the Victoria's Secret business, with branded merchandise shared between stores in the U.S. and Canada. At the end of FY2008, Limited Brands operated 322 La Senza locations[27] and plans on expanding that number to 326 by the end of the year. LTD's expansion abroad will continue with the launch of Bath & Body Works in Canada in 2008, planning to open a total of 20 more locations in 2009 to add to the six opened in 2008.[28] In the first quarter of FY09 LTD had opened 2 Bath & Body Works stores in Canada.[28] Through the La Senza brand and the first Canadian Bath & Body Works stores, Limited Brands plans on gaining experience and knowledge in the retailing market abroad, which will help it in its efforts to expand into other international markets. Apart from Canada, it is currently researching other international markets, including Europe and Japan, and looking for partners with experience in these markets to join in launching the Victoria's Secret and Bath & Body Works brands abroad.[29][30] However, Limited has not opened any stores outside of the United States or Canada.

Weakness in Domestic Economy Hurting Sales
After the subprime lending crisis in the summer of 2007 the macroeconomy in the U.S. has exhibited weak performance, and as such consumers have cut back on their discretionary spending, particularly on non-necessity goods. Both Victoria's Secret and Bath & Body Works sell products to consumers that are mostly fashion and beauty items that are subject to being cut out of consumers' spending habits during times of economic distress. Due to the economic uncertainty in the U.S. and Canada consumers have shied away from the Limited Brands' stores as same-store sales decreased 9% company-wide in 2008.[31] Limited Brands' struggle has continued in the first quarter of FY 2009 as same store sales fell 7%.[28] Also, net sales were $1.725 billion, down from 2008's $1.925 billion.[28] The outlook for the economy is still uncertain and it is unlikely that consumer spending will pick up, and subsequently sales of lingerie and beauty care products, until the picture brightens.

Bath & Body Works Caters to "Ethical Skin Care"
One important global trend during 2008 and 2009 is the proliferation of environmental consciousness. Individuals and entire corporations have become more conscious of the effects the products they use and produce have on the environment at large and there is an increased focus on sustainable materials and products that have not been tested on animals. In addition to environmental consciousness, more products are being formulated without potentially harmful ingredients such as parabens and petroleum. This trend of "ethical products" presents a new marketing opportunity for cosmetics and skin care companies. Consumers like feeling that they are helping the environment and promoting sustainable resources. Originally the domain of niche brands, ethical, fair-trade products have become more popular in lines such as Clarins, Bath & Body Works and Jack Black.[32] Bath & Body Works is one retailer that has taken advantage of ethical products by making the idea part of its ethos. LTD does not test its products on animals and uses natural ingredients such as jojoba and tea tree oil, avoiding synthetic products.

Increases in Commodity Prices Will Raise Clothing Retailer Prices
In 2010, cotton consumption exceeded cotton production for the fifth year in the row, making cotton prices increase by 80.5% from last year.[33] [34] In 2009, natural disasters also severely damaged crops in many large cotton producer countries, such as China, India, and Pakistan. This led to decreases in cotton exports from these countries and increases in cotton imports as these countries sought to supplement their supply of cotton. [35][36] With limited cotton supplies and rising prices, retailers will either have to absorb these higher material costs, restructure the composition of their clothing to have less cotton, or pass these higher costs to its consumers. Higher clothing prices or lower quality clothing could discourage consumer spending, resulting in decreased net sales. However, adult or teen clothing retailers may not be too adversely affected as their clothing (which is usually 30-40% cotton based) has more flexibility in their composition and thus, costs.

In addition, raising commodity prices in other areas will also raise costs for retailers. The price of shipping a 40-foot dry container from China to the US has increased by 90% since 2009. Lumber and coal prices increased 36.3% and 23.7% from last year, respectively, while oil prices increased by 40% in early 2010 but has now decreased back to a steady single digit increase for the year.[33] While premium price and established brands may be able to pass their higher costs to their consumers, value based companies may not fare as well and may suffer from lower profit margins.[33]


Due to the diversity of its holdings, Limited Brands competes with a variety of other retailers and fashion companies. Few companies own brands and operations in both lingerie/intimate apparel and home and beauty care retailing, but one such competitor exists in luxury conglomerate LVMH Moet Hennessy L.V. (LVMUY), which has operations in wines and other alcoholic drinks, apparel, cosmetics, retailing, and jewelry. LVMH Moet Hennessy L.V. (LVMUY) is primarily a source of competition for Limited Brands because it owns fashion lines such as DKNY that compete with Victoria's Secret as well as the beauty care chain Sephora which competes with Bath & Body Works. However, it is difficult to compare Limited Brands to LVMH Moet Hennessy L.V. (LVMUY) because the former doesn't break out their sales for their fashion lines and their retail chains like Sephora. Sephora is a beauty-retail chain that sells both third-party and private label brands of beauty care products ranging from makeup and haircare to bath products. Sephora operates over 986 stores in 23 countries throughout the world as of 2010, with 254 of those stores in North America, making its retail footprint significantly smaller than Limited Brands' Bath & Body Works brand.

Beyond LVMH Moet Hennessy L.V. (LVMUY) each of Limited Brands' major operations competes with other apparel and retail companies.

In the Victoria's Secret brand Limited Brands owns the leading brand of lingerie in the U.S. Competitors include:

Companies that produce other brands of lingerie:

Hanesbrands (HBI) owns brands such as Hanes, Wonderbra and Playtex. Though the company is primarily focused on undergarments, it does own apparel brands Champion and Outer Banks, which serve both men and women and offer casual and business apparel respectively. Hanesbrands sells mostly women's underwear though Hanes caters to men and women. Also, Hanesbrands is not in the cosmetics or skincare industries. HBI is a manufacturer and wholesaler of apparel--it's goods are sold in department stores such as Macy's Inc. (M) and J.C. Penney (JCP), opening it up to a wider customer base than Victoria's Secret.
Victoria's Secret, specifically the Pink line, also faces competition from up-and-coming lingerie and loungewear brands:

American Eagles' Aerie was opened in 2006, and since then the brand has grown from 3 to 137 in 2010 . The rapid growth, especially during a recession, is evidence of Aerie's appeal amongst consumers. However, it is still a new brand and thus much smaller than Limited Brands. In addition, since it is still new not much can be said of the line's staying power, although signs so far are optimistic.
Abercrombie's Gilly Hicks is another relatively new underwear line geared towards young women. At the end of fiscal 2010, Gilly Hicks had only 16 operating stores, though the line also has a website. As with Aerie, Gilly Hicks' relative newness in relation to competitor Victoria's Secret makes comparisons difficult, however Gilly Hicks has demonstrated staying power. It's revenues increased from $230 thousand in 2007 to $17 million in 2008 and $26 million in 2009. In addition, it can take advantage of Abercrombie & Fitch's already strong brand image and attract consumers who already shop at A & F.
The Bath & Body Works segment competes with a variety of retailers, from cosmetics boutiques to candle shops and home and bath care retailers:

The Body Shop is an individual segment of cosmetics giant L'oreal (LRLCY). It currently has 2,550 stores around the world, greatly increasing its exposure compared to Bath & Body Works, which is focused in North America. The Body Shop made $726 million in revenues in 2009 compared to Bath & Body Works' $2.3 billion. The Body Shop is backed by L'Oreal, which is a much larger company than Limited.
Competitor 2009 Revenue ($millions) 2009 Operating Income ($millions) 2009 Operating Margin Same-store Sales Change from 2008
Limited Brands, Inc. 8,632 863 10.1% -4%
Hanesbrands (HBI) 3,891 58 1.5% -3%
American Eagle Outfitters (AEO) 2,990 238 8.0% -4%
Abercrombie & Fitch Company (ANF) 2,928 117 4.0% -23%
LVMH Moet Hennessy L.V. (LVMUY) 24,440 4,530 18.5% N/A
L'Oreal (LRLCY) 24,725 3,840 15.5%

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