Go Figure: Charting Intimate Brands Is a Tease

Does the excitement surrounding the Victoria's Secret fashion show reveal a red-hot stock underneath?
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The days following

Victoria's Secret's

titillating fashion show proved anticlimatic for shares of its parent

Intimate Brands

(IBI)

.

After flirting with a 52-week high of 45 1/8 on Feb. 3, the day of the much-publicized lingerie show, the stock has drifted lower. On Tuesday, shares closed at 39 3/4, up 13/16.

Is the recent rally fading faster than the memory of

Naomi Campbell

in her skivvies?

IBI's stock began its up-trend in November, when it broke out of a trading range it had held for the previous six months. Marking its transformation from a buy-and-hold play, volume soared as the stock became a favorite of momentum investors.

"It's a volume story," says Doug Fairclough, chief investment strategist of

ClearStation

, a San Francisco firm that tracks stocks from a technical perspective. "There were huge accumulations in January." Following the Victoria's Secret fashion show "there was some selling, but the volume was light. That suggests there's room for more buying."

Another positive indicator, Fairclough says, is the stochastic bar, which compares the current stock price with those of the recent past and indicates whether sentiment has become too negative or too positive. The stochastic shows that the selloff in Intimate Brands has gone too far.

But Fairclough adds this caveat: IBI stock is trading perilously close to its 13-day moving average of 38, which acts a price floor. Indeed, on Monday the stock bounced from that level. Should the stock trade below this average, especially on heavy volume, chartists believe that shares could head even lower.

But the chart doesn't tell the whole story. Todd Slater, an analyst with

Lazard Freres

, who tracks Intimate Brands from a more fundamental standpoint, shrugs off technical concerns. He says the stock could hit $52 a share in 12 months. He rates the company a buy. His firm participated in IBI's 1995 initial public offering, although it has performed no underwriting since.

Short of

Viagra

, what would cause IBI shares to rise?

Intimate Brands, Columbus, Ohio, has earmarked $160 million for expansion plans in fiscal '99. Those include opening 260 Victoria's Secret and

Bath & Body Works

stores; launching

Intimate Beauty

, a division dedicated to cosmetics and fragrances; developing

Victoria's Secret Hosiery

; growing the

White Barn Candle Company

; and nabbing its share of e-commerce through

VictoriasSecret.com

.

Earnings estimates, as measured by

First Call

consensus, have subsequently climbed to $1.87 per share for the year ending January 2000 from previous projections of $1.78. Analysts expect Intimate Brands to earn $1.59 per share for the most recent fiscal year, ended January 1999, compared with $1.30 a share for the prior year.

Victoria's Secret has slowly been building a beauty business and now sells some $475 million worth of cosmetics and fragrances. That's an auspicious start for Intimate Beauty, which was formed last December to develop additional beauty brands under the stewardship of Robin Burns, who left her post at

Estee Lauder

(EL) - Get Report

to join the company.

"Robin's objective will be to develop multiple brands each targeted toward a unique customer demographic or attitude," says Debbie Mitchell, an Intimate Brands spokeswoman.

Then there's the White Barn Candle Company, which began as a test in Bath & Body Works stores. There are now about 49 of these separate units, which specialize in home fragrance -- air freshener gone upscale. Slater says stores selling scented candles, potpourri and other incense could grow to 1,000 someday.

With all the press coverage surrounding the Victoria's Secret fashion show, it's no surprise that VictoriasSecret.com, which simulcast the affair, attracted 2 million visitors that day. But what is unusual is that men, who account for only 10% of the company's customers in stores, are buying four times more merchandise than women from the Web site.

In addition to lingerie, Victoria's Secret sells $130 million worth of hosiery. The company is expanding that niche with 13 Victoria's Secret Hosiery boutiques that also sell swimwear and accessories.

While all of these initiatives are attracting go-go investors to Intimate Brands' stock, they aren't the sole reason for the shares' recent run. Intimate Brands languished for the first half of 1998 as it struggled with problems in the Victoria's Secret catalog, which accounted for $531 million in sales for the first nine months of fiscal '98, or 22.6% of Intimate Brands total $2.4 billion for the period. (Victoria's Secret stores account for the largest bulk of revenue, $1.04 billion for the first nine months, while Bath & Body Works had $572 million in sales.)

It was only in the last three months of the year that the stock began to climb once the company ironed out some of the wrinkles caused by over-mailings and improper merchandising. The catalog industry as a whole also suffered setbacks during that time. By the fourth quarter, ended Jan. 30, the company had cut mailings by 15%. That boosted the division's productivity, which saw sales per page jump 25% for the period.

For fiscal 1999, Intimate Brands is planning to trim the catalog's circulation by an additional 3%, Slater says, which should push sales per page up another 25%.

Both Victoria's Secret stores and catalogs also suffered from a merchandising problem. The company wasn't stocking enough basic bras and panties, causing it to lose out on sales of those crucial items.

"It's like going to the grocery and finding they're out of milk and bread," Mitchell, the spokeswoman, says.

The company is spending millions to boost inventory in basic products, a strategy that could spur sales at stores open at least a year by as much as 5%, according to Slater's estimates.

"It will be similar to what you saw at the Gap when they intensified their inventory of denim and khakis," he says.

There are challenges, of course. Intimate Brands faces sharp competitors like

Gap

(GPS) - Get Report

, which also is developing a hosiery and fragrance concept, called Gap Body. And should the economy slow, consumer demand for fancy lingerie and fragrance products could also dwindle.

For now, Intimate Brands, 84% owned by the Limited, is confident enough in its prospects that it has launched a $500 million share buyback. (The Limited is expected to spin off its stake at some point, although plans have yet to be finalized.)

"Our charge is to enhance shareholder value under present structure," Mitchell says.

That leaves Intimate Brands sitting pretty.