One of the main things that I look for in assessing an investment opportunity is consistency. Limited Brands, Inc. (NYSE:LTD) meets the definition of consistency in retailing. The company’s two flagship store brands are Victoria’s Secret and Bath & Body Works. It also owns Henri Bendel and La Senza. Its stores sell lingerie, personal care and beauty products, apparel and accessories. The company operates more than 2,600 stores in the U.S. Its brands are also sold in more than 770 company-owned and franchised locations outside the U.S. L Brands has also built a large e-commerce business for its brands as well.
Latest results
In May, Limited Brands, Inc. (NYSE:LTD) reported net sales increased to $737 million compared to $671.9 million last May. Comparable-store sales increased 3% in May. For June, net sales came in at $1.1 billion compared to slightly less than $1.1 billion in June of last year. Comparable-store sales were flat in June.
Outlook
This year, capital spending will be about $650 million. Limited Brands, Inc. (NYSE:LTD) is increasing its investment in real estate at Victoria’s Secret and boosting square footage for its PINK and lingerie products. Square footage at Victoria’s Secret is expected to expand by about 4% this year. This will include expansions of existing Victoria’s Secret locations and the opening of about 50 new PINK Stores.
Free cash flow this year is expected to be between $650 million and $750 million. In the first quarter, Limited Brands, Inc. (NYSE:LTD) repurchased 1.2 million shares for $54.7 million. There is still $184.2 million remaining to be purchased on the existing $250 million repurchase program. L Brands continues to be a very shareholder-friendly company with share repurchases and an attractive $1.20 per share dividend for a yield of 2.2%.
Where I see tremendous growth still for Limited Brands, Inc. (NYSE:LTD) is in international markets. Its store brands are well-known and appeal to the world’s growing middle class. In Canada, Victoria’s Secret International has 26 stores and another eight new stores will open this year. Victoria’s Secret Beauty & Accessories already has 126 stores open and there will be a total of 200 stores by the end of the year. Bath & Body Works International plans to open an additional 22 stores this year.
Competition
L Brands competes with The Gap Inc. (NYSE:GPS) and Hanesbrands Inc. (NYSE:HBI). The Gap store brands include Gap, Old Navy, Banana Republic, Piperlime, Athleta and Intermix. Its products for women include lounge-wear, sleepwear, intimates and active apparel. HanesBrands sells its products under the names Champion, Hanes, C9 by Champion, Bali, Playtex, Just My Size, L’eggs, barely there, Gear for Sports, Zorba, Sol y Oro and Rinbros.
In June, The Gap Inc. (NYSE:GPS) reported that net sales rose 8% to $1.5 billion compared to last year. Comparable-store sales increased 7% compared with a flat June last year. The strongest division was Old Navy, where comparable-store sales rose 13% on a global basis.
Where Gap has done a great job is online and its e-commerce initiatives. I see this segment driving growth forward for the company. In the first quarter, online revenue rose 27%. The company can now process orders online and ship-from-store at Old Navy, Gap and Banana Republic. Gap can now use its pools of inventory and take something from a store and ship it to an online customer.
Next month, the company is launching the ability for online customers to reserve store items for purchase. The plan is for a customer to find an item they want online, reserve it, and then go to the store for purchase and hopefully buy more items. Gap is being very creative with its online strategy and is encouraging its customers to shop more online and in its stores. It’s being creative and giving customers the product that they want; that explains the comparable-store sales gains at Gap.
The focus for HanesBrands is its recently announced purchase of competitor Maidenform Brands, Inc. (NYSE:MFB). The deal makes sense for both companies and is good news for shareholders. Maidenform buys its products from third parties. Now, as part of Hanesbrands Inc. (NYSE:HBI), Maidenform products can be produced at HanesBrands’ low-cost, global manufacturing facilities. The two companies’ product portfolios complement each other and can strengthen relationships with retailers such as Wal-Mart and Target by cross-marketing.
According to HanesBrands, the all-cash transaction is expected to be accretive to earnings in the first year. Within three years, HanesBrands expects $500 million in incremental sales, $0.60 in EPS, $80 million in operating profit, and $65 million in cash flow.
Foolish assessment
Victoria’s Secret and Bath & Body Works are two retailers that women love to shop at and whose products women love to have at home. Even men have learned to shop at both stores to pick up items for their loved ones. The annual Victoria’s Secret Fashion Show has become a must-see television event and the Victoria’s Secret Catalog is found in everyone’s mailbox.
For L Brands, I still think the company has tremendous room to grow overseas. Its stores are well-know and appeal to women worldwide. I also really like the 2.2% dividend yield and that makes the stock very attractive for income investors.
Gap shares continued to make new highs last week after posting strong June sales. According to Zacks, earnings are forecast to rise 17% this year and over 11% next year. Even though the stock has reached new highs, shares still remain attractive with an EV/EBITDA of 7.9.
I think the acquisition of Maidenform Brands, Inc. (NYSE:MFB) by HanesBrands is a great move. Both have complementary product lines and the acquisition will boost earnings in the first year. Shares in HanesBrands still look attractive with a forward P/E of 14 and a PEG ratio of 1.1.
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Mark Yagalla has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
The article Catering to Women and Consistency Go Together With This Retailer originally appeared on Fool.com and is written by Mark Yagalla.
Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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