Wednesday, December 28, 2011

Looking For A Retail Stock? Think 'Sexy'

 There’s a mall outside the Pennsylvania college town of Bloomsburg that doesn’t get many customers, even during the busy holiday season. It’s small, and there are bigger malls with better stores just a stone’s throw from here. But there’s one store inside that nearly always buzzes with customers: Victoria’s Secret.
The company, owned by Limited Brands (NYSE: LTD), has been building a loyal following, especially among young women. Take a walk around a college campus. Take note of how many young ladies are sporting sweats emblazoned with the word “PINK.”

If these woman are buying their sweats at Victoria’s Secret, you can bet that they’re also buying their underwear there. That’s a lot of brand-loyal young women who will be doing a lot of underwear buying over their lives.
And post up outside a Victoria’s Secret store sometime for a little while (but not long enough to draw mall security). You’ll see a lot more than college-age women walking in and out. You’ll see women that span generations. And you’ll see men, too.
Started as a catalog-order company, Internet and sales still make up some 40 percent of Victoria’s Secret total sales. But the stores are essential to driving the brand and the company.
A female friend shed some insight on why so many women swear by the brand: “Do you want to buy your underwear (in a department store) surrounded by granny panties and harsh florescent light? Or do you want to be looking at pictures of gorgeous models and thinking ‘Yeah, I could totally look like her!’"

Victoria’s Secret sells more than underwear. It sells “Sexy.” Women are buying, and you won’t hear many guys complaining.

Same store sales were up 12% over last year, according to the company’s last quarterly report. Margins have been growing since the economic crisis of 2008, and its 14% operating margin year to date runs higher than the industry average.

Cash has been coming in at such a good clip -- Limited decided in November to pay back its shareholders with a special $2-a-share dividend. I like it when companies give money back to their shareholders and I like it better when they do it with dividends rather than share buybacks. I have to think the company will pay that anticipating a strong quarter and year to come.
More on the way 
The company anticipates growth to continue. It predicts a 14% growth rate through 2013. Limited sells at 14 times earnings, not bad for a retailer growing at that rate. The company’s annual financials also show it’s been reducing inventories since 2008, another good sign for the retailer.
And there’s room to grow. Despite Internet and catalog sales worldwide, Victoria’s Secret remains largely an American brand, with very few stores outside the US. But the company has plans for international growth, starting with our neighbors to the north. With a bevy of international models serving as product pitchwomen, the brand would seem to have great potential outside the U.S.
Some concerns 
Victoria’s Secret sales increases have been offset to some degree by more sluggish sales at Limited’s other stores, including Bath & Body Works, but moreso at the lesser-known LaSenza, Henri Bendel, C. O. Bigelow, and the White Barn Candle Company. While Victoria’s Secret sales make up some 55 percent of the company’s revenue, this is far from a pure play on Victoria’s Secret. Investors must be careful not to treat it as such.
Limited also carries a lot of debt -- $6 billion to its $6.5 billion in assets. Its debt-to-equity ratio is a very unflattering 170%. That may be a little too constricting for some investors.
The bottom line
Limited Brands may not be the sexiest of all stocks, but it has plenty of appeal.  It’s already on my watchlist, and despite a number of good signals, LTD is down some 3 percent from when I first added it. With Valentine’s Day right around the corner, the stock may finally get the catalyst it needs to drive higher.

(This column was syndicated by the Motley Fool Blog Network) 

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