Limited Gets Lift From Bath & Body Works

The improved margins from Bath & Body would send LImited's stock higher.
By Trefis ,

NEW YORK (TheStreet) - Limited Brands (LTD) , a specialty apparel retailer focused on lingerie, beauty and personal care products, competes with retailers like Abercrombie & Fitch (ANF) - Get Report, American Eagle (AEO) - Get Report, AnnTaylor (ANN) , Gap (GPS) - Get Report, and J.Crew Group (JCG) .

Some of its popular brands include Victoria's Secret in the lingerie business and Bath & Body Works in the personal care segment.

Despite fewer promotional discounts than offered in 2009, Limited reported a 10% year-over-year increase in comparable store sales during the third quarter of 2010, a trend that continued into November.

As a result, Limited Brands' stock price increased by nearly 10% to $35. It was after Limited Brands' special dividend of $3 that the price fell to its current level of around $31.

We currently have a $30.63 price estimate for Limited Brands' stock, in line with current market price. We estimate Victoria's Secret brands is the largest value driver for Limited Brands, contributing more than 52% of company value while Bath & Body Works contributes nearly 34% to the stock price. We see an upside to Limited Brands' stock from Bath & Body Works stores.

Bath & Body Works had a very good quarter with comparable store sales rising 6%. The increase in sales was driven by rising transactions as traffic to Bath & Body Works stores increased and its customer conversion rate remained high.

The third-quarter operating income for the segment doubled from the same period last year driven by strong top line sales, improvements in the merchandise margin rate and leveraging of expenses. Continued improvements in the company's merchandise margin rate has been driven by cost reduction and lower promotional activity.

Inventory levels have also declined for the 14th consecutive quarter, signifying ongoing improvement in margins and the efficiency with which the business has been run.


We currently project a slight increase in Bath & Body Works EBITDA Margin in 2011 and flat EBITDA margins thereafter.

However, if Bath & Body Works continues to improve its margins, as has been the case in third quarter, there could be a potential upside to Limited Brands' stock.

To demonstrate the company's stock price sensitivity to this metric, we estimate that a gradual rise in Bath & Body Works' EBITDA margin, reaching 24% by the end of our forecast vs. our base case estimate of 19%, there could be more than 10% upside to the $30.63 Trefis price estimate for Limited Brands' stock.

Our complete analysis of Limited Brands' stock is

here

.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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