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L Brands Inc (LTD), The Gap Inc. (GPS), Abercrombie & Fitch Co. (ANF): Three Attractive Stocks in the Apparel Business

A market leader

I once heard that “there´s nothing limited about L Brands Inc (NYSE:LTD),” especially not its growth prospects. Although I am not sure this company’s stock is a definite buy, I would advise an overweight position, inline with Barron’s and Morningstar’s recommendations, especially for those interested in long-term returns.

Morningstar specialists expect another 5-to-10 years of L Brands Inc (NYSE:LTD)’ leadership in the segments in which it operates. This positive outlook is generated by both strong financial results and the company’s efforts to downsize and refocus on its higher-margin specialty-retail business.

As owner of Victoria’s Secret and Bath & Body Works, both sector-leading brands, among other smaller businesses, this $10 billion company targets the high-end market segment with its quality products while still offering reasonable prices to the public. Consequently, its stores have retrieved considerably good results even through a sluggish economy, with sales volumes that more than double the U.S. average.

Also central in keeping the company profitable are management initiatives for cost containment and inventory administration. Furthermore, the careful, strategic approach to expansion has certainly reduced the company’s risks in its overseas operations, providing consistent and sustainable growth.

Moreover, new product offerings helped to boost Victoria’s Secret and BBW’s comps by 3% and 7%, respectively, in 2012. Additional efforts to overhaul its La Senza brand worldwide have retrieved positive results, as comps for January grew 15%.

As a result of all these factors, the company retrieved better-than-expected results for Q4 2012. Earnings of $1.76 per share beat the Zacks’ consensus estimate of $1.74 for the 10th consecutive quarter, offering an increase of 17.3% year-over- year.

While offering the highest operating margin (15%) and return on capital (92.7%) in its history, L Brands Inc (NYSE:LTD) trades at a 19.9 x P/E. Although slightly above the 18.9x industry average, you should consider paying a premium for this stock, as forward P/E is projected at 15.6x (Morningstar), implying a 27.5% growth in EPS during FY 2013.

Bottom line

Limited discretionary spending power is certainly a matter of concern when considering investing in apparel retailers. Although all of the above analyzed companies offer relatively positive outlooks, I would recommend holding these stocks until the market shows further signs of normalization. I would say wait, but if you need to put your money down somewhere, I believe I would go for L Brands Inc (NYSE:LTD).

The article 3 Attractive Stocks in the Apparel Business originally appeared on and is written by Victor Selva.

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