Time to Limit the Damage

Limited (LTD Quote) shares took a beating Thursday as investors wrinkled their noses at foul second-quarter results from the company's apparel division -- Limited Stores and particularly its Express chain.

The retailer posted a loss, despite stellar performances by its crown jewels -- Victoria's Secret and Bath & Body Works -- and it trimmed full-year earnings estimates below Wall Street's expectations.

Contrarians could well view the selloff as a buying opportunity on the premise that the latest disappointment will force the retailer's hand on the issue of divesting the apparel brands. Without its lagging businesses, shares of Limited Brands could be undervalued.

So, will Limited's chairman and chief executive, Leslie Wexner, ever part with his company's namesake brand?

"That has been speculation for a long time now," said Morningstar analyst Brady Lemos. "So far, they haven't given any indication that they're going to do that, partially because Limited is the first brand that Wexner started with, so it's kind of his baby."

Despite any sentimental attachment Wexner may have for the Limited brand, he has shown a propensity for spinning off apparel brands in the past, and he's made no bones about relegating his baby to second-class status in the company's portfolio.

Limited has quietly transitioned itself away from the fashion-driven apparel space and exploited its sweet spot in lingerie and health and beauty products. A decade ago, apparel made up more than 70% of its business; now it makes up roughly 25%. Meanwhile, personal care products used to make up only 4% of its sales; that figure has grown to more than 30%.

The company's Limited stores used to number over 1,000, and now they've been pared back to roughly 400.

During this transition, Wexner unloaded a number of popular apparel brands -- many of which went on to be successful companies on their own. For example, Limited spun off Abercrombie & Fitch (ANF Quote), whose shares have soared 142% since the beginning of 2004. It sold Lerner New York to Bear Stearns, which has since taken it public as New York & Co. (NWY Quote). The shares are essentially flat since it went public last October. It also spun off Limited Too, which is now a public company named Too (TOO Quote). Its shares are up 65% since the beginning of last year.