Limited Looking Good in 2011 on Growth in Lingerie Business

Limited Brands (NYSE:LTD), a specialty apparel retailer focused on lingerie, beauty and personal care products, competes with retailers like Abercrombie & Fitch (NYSE:ANF), American Eagle (NYSE:AEO), AnnTaylor (NYSE:ANN), Gap (NYSE:GPS), and J.Crew Group (NYSE:JCG). Some of its popular brands include Victoria’s Secret in the lingerie business and Bath & Body Works in the personal care segment.

We estimate Victoria’s Secret brands is the largest value driver for Limited Brands, contributing more than 52% while Bath & Body Works contributes nearly 34% to our $30.63 Trefis price estimate for Limited Brands’ stock.

Encouraging trend, given weakness reported by some competitors

Limited Brands continued its year on year comparable store sales gains through December with a 5% gain beating analyst expectation. For full year 2010, Limited Brands’ comparable store sales increased by 8% over 2009. While Victoria’s Secret ‘s comparables increased by 12% in 2010, Bath & Body Works showed a 4% increase in comparables during the same period. ^[1]

What makes the December growth special for Limited Brands is the fact that it has come at a time when many other major retailers in the U.S. have suffered. Out of the dozen retailers that reported December sales, about half have missed analysts’ expectations for the holiday month’s same-store sales. ^[2]

Discount and teen clothing stores in particular reported weak numbers for the month with retailers like Wet Seal, Inc (NASDAQ:WTSLA) and American Eagle Outfitters, Inc. (NYSE:AEO) lowering their earnings forecast as high discounting during holidays is likely to drain profits. Wet Seal’s and Hot Topic’s same-store sales dropped 2.1% and 1.7% in December over the same period last year, contrary to expectations. ^{[3] [4]}Even the department stores like Macy’s and Kohl’s reported sales below expectations. ^[5]

Not all competitors have struggled

Despite many retailers falling short on sales expectations, December sales results were rather mixed with a number of retailers topping analysts’ expectations.

The Buckle Inc., which makes apparel and accessories for men and women, reported strength in December, with same-store sales up 6.1% over the last year, beating expectations for a 4.5% increase. Saks also managed to exceed analysts’ expectations which sent the stock higher.  ((Retailers Are Showing Softness In December Same-Store Sales, Nasdaq))

Still, the relative strength versus competitors signals a strong competitive position for Limited Brands, since the company generated strong December results while avoiding the trap of heavy discounts and promotions. The recent sales strength for Limited Brands supports our revenue per square foot (RPSF) growth estimates for the company’s Victoria’s Secret U.S. stores.

Victoria’s Secret U.S. stores’ RPSF decreased from $731 in 2006 to $581 in 2009 driven by declines in store traffic and transactions as well as decreased units per sales transaction due to reduced consumer spending during the global economic downturn. For full year 2010, we forecast RPSF to increase back sharply as consumer spending has picked up significantly since the downturn.

Beyond 2010, we forecast Victoria’s Secret U.S. RPSF will increase at a slowing rate for a few years and then level off based on the following factors:

1. Increasing market share in intimate apparel sales

Over the past few years, the share of branded products in the intimate apparel market has increased primarily due to forward integration by brands into retail. As more consumers become brand conscious regarding their under garments, Victoria’s Secret U.S. RPSF is likely to increase.

Victoria’s Secret is the largest player in the U.S. intimate market, controlling nearly 38% of the market, will be most benefited by this trend. Other major players, like Hanesbrands, Maidenform, Warnaco and Fruit of the Loom will also witness a surge in revenues.

2. Expansion into new product categories

Victoria’s Secret in the past has expanded its product offering outside the core lingerie products. Victoria’s Secret now also offers shoes, evening wear, accessories, handbags, luggage as well as fragrances. We expect this expansion trend to continue in the future as Victoria’s Secret tries to realizes full potential of its strong brand image. Increased product offering at Victoria’s Secret stores will likely result in an increase in Victoria’s Secret U.S. RPSF.

Mitigating factors:

3. Increasing competition in the high margin intimate apparel market

The highly lucrative lingerie business is attracting lots of new entrants. Many merchants at major department stores and a slew of catalogs, including Newport News and Spiegel, and e-commerce businesses, including Figleaves.com and Barenecessities.com, are now cashing in on the lingerie bonanza.

Even specialty retailers like American Eagle Outfitters, Abercrombie & Fitch etc. that have never done lingerie in the past are developing their lingerie lines. As a result, Victoria’s Secret U.S. stores have started losing its market share. Going forward, defending its turf will become an increasing concern for Victoria’s Secret.

4. Low growth in developed markets

Intimate apparel market in the U.S. has grown at slower rate as compared to the global average. The reasons for this low growth include aging populations in the developed world, fierce retail competition driving prices down, and the continued movement of production to lower cost countries. This trend will adversely affect Victoria’s Secret U.S. RPSF of Victoria’s Secret U.S. stores in the future.

Drag the trend line in the chart above to see the impact of change in Victoria’s Secret U.S. RPSF on Limited Brands’ stock value.

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Our complete analysis for Limited Brands’ stock is here.

1. Limited Brands Reports December 2010 Sales, Limited Brands, Inc. [↩]
2. Retailers Are Showing Softness In December Same-Store Sales, Nasdaq [↩]
3. Limited Brands, Buckle December Comps Increase; Wet Seal Comps Decline – Update, RTT News [↩]
4. Hot Topic, Inc. Reports December Comp Store Sales Down 1.7%, Hot Topic, Inc. [↩]
5. Saks Hits New High On Sales Blowout, Macy’s Stumbles, Forbes [↩]