Limited Brands LTD
February 11, 2003 - 8:08pm EST by
2003 2004
Price: 11.60 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 6,173 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Yet another beaten down retailer without a catalyst, LTD owns the franchise Victoria Secret (VSS) and Bath and Body Works (BBW) retail chains along with a VSS catalog. The stock is currently trading at a 52 week low, sports a 3.5% dividend yield (40c), just announced a 150m share buyback plan (2-3% of the market cap), trades for less than 11x trailing earnings, 9x cash flow, and 2.2x book value, and sports a strong financial profile. If cash flow comes in at 850m for the year, the pcf ratio falls to 7.3, which much of it free.

Limited Brands, through Victoria's Secret (VSS), Bath & Body Works (BBW), Express, Express Men's (Structure), Limited Stores, White Barn Candle Co. and Henri Bendel, presently operates 4,036 specialty stores. There are over 1000 VSS and 1500 BBW stores.

Growth Drivers
VSS and BBW is the growth drivers, with operating profit more than 90% of the total company. LTD is a modest grower, though the focus for many years has been in spinning off alternative concepts (ANF, TOO, Lane Bryant, Lerner, among others) before the company completed the acquisition of the minority shares of Intimate Brands (VSS and BBW) it didn't already own last year. Stores peaked at 5640 in 1997 but have fallen each year since. Using Value Line’s data due to complexity of the financials, net margins were 4.5% in 1999 before falling to 4.3% and 4.0% in the past two years respectively before rebounding to an estimated 6% in 2003.

Balance Sheet
The Feb 2002 balance sheet had 1.38b in cash, 966m in inventory, and about 2.0b in total liabilities (not including operating leases), and I am not including marketable securities. The Q4 BS for Feb 2003 ought to look even better. The CapEx budget was originally 430m but the company's latest estimate was 325m or less.

Growth Path
The former IBI brands were originally expected to grow by about 6% in 2002 with total sqft growth of 2% (sans the most recent spinoffs), meaning other concepts contained to undergo consolidations. Until they become a more meaningful driver of profits, I have simply chosen to ignore the "other" brands, especially since the company has always been known to jettison flotsam as needed. At this point, I'm not entirely clear where the company is going beyond continued consolidations and modest expansion of the IBI brands. Mr. Wexner will hopefully tells us more in the Q4 or annual report, but the 2002 report was devoid of any real details (though those of you with extensive research connections can shed more light?) beyond some pretty pictures and the typical garishness you expect from VSS.

2002 Results
According the VL, the company will generate 565m this year in net income or 1.05 a share with cash flow estimated at about 851m. This estimate might be prove high by a small margin, as comps were below expectations in Q4 and there was margin pressure from the "other" apparel chains. CapEx thru 9 months was 213m, though with other actions net cash used for investing activities was closer to 100m. Comps for the past six months were 2, 1, +6, +3, -2, flat, and +2. For the year comps were up 3%. As you already know, retail sales in general sucked last year so these results don't look bad in comparison, though there is a lot going on under the numbers. In short, VSS is performing well, BBW is struggling but starting to improve, while the other apparel chains could be considered a waste of time, money, and effort based on their profit contribution (more detail than you want is included in the financials).

Why I am Interested in this Company.
The positives are clear here: great brands, great balance sheet, excess cash flow, and clear dominant positions in their markets. All this is being offered at a very low price.

What has to Happen for the Company to Succeed.
I don't know. The company is already succeeding, already dominates its niche, has great financials, just increased its dividend from 30c to 40c, just announced a buyback plan, and trades for 2.2x book value. The price regularly fluctuates up and down and thus the forces of gravity should eventually take it back up.

The Pitfalls that Stand in Its Path.
The biggest negative is also clear: the saturation potential of their existing brands is unknown. No, it isn't the retail climate. That too will change. If you don't believe me, pretend for a moment that the sun will shine again, that Iraq and Korea won't dominate the headlines 12 months from now, and that people will continue to enjoy having sex and smelling good. If that is true, eventually the retail environment will improve and if it doesn't, LTD isn't going anywhere. EVENTUALLY things get better. That said, saturation is the biggest issue. At this point, as noted before the company hasn't been exactly clear where we go from here, 3 to 5 years from now. If this stock traded for 20x earnings I might be more concerned about this but Mr. Wexner has proven to be one of retail's greatest innovators and it is unlikely that the man has simply gotten stupid during this period. His sizeable insider ownership position would suggest plenty of incentive to continue with good performance! Thus, it is conceivable another growth vehicle will be dreamed up, but the price does not depend on that.

Corporate Governance
As of the last proxy, insiders own 18% of the shares. Option issues and compensation is reasonable.

Value Line has a 1.20 estimate for next year, with a 6.4% margin expected. At this point, there is no way to tell if this is reasonable or not. The company has made the requisite "challenging environment is expected" statements and said that Feb comps are expected to be flat, but over the longer term the vision here is murky. I will update this profile after the Q4 c/c.

My rating
I believe in this idea. It is my largest position and a substantial part of my portfolio. Thus, while I will not rate this one, it would fit at 8 or above. If you think this idea is terrible, I’d really like to know why.

Note: Q4 EPS will be released Feb 27.


People continue to enjoy sex and smell good and are attracted to a 3.5% dividend and single digit cash flow with a dominant business.
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