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Limited Brands' Potential Looks Unlimited

Limited Brands (LTD) shares are down 20% from their 2006 high due to deteriorating operating margins and high inventory—with unclear company guidance as to why, possible competition for its popular Victoria's Secret and Bath & Body Works lines, and fears of slower U.S. consumer spending. But Limited could be a value play on a pullback as it goes about a total restructuring: It's selling most of its Limited Express apparel to private equity group Golden Gate Capital for $431 million, to focus on its Victoria's Secret and popular body pampering units (and using the money to pay down debt.) Limited's enterprise value is less than 8x ebidta. Even struggling competitor Gap (GPS) is trading at 10x ebidta. Margins are shrinking because Limited is significantly expanding 80% of its 1,005 Victoria Secret stores, raising same-store sales in Q1. Its younger-set Pink division netted $900m in sales and Mast Industries, its Asian distributor division is so profitable it could be spun off. Debt levels are low, so leveraged stock buybacks beyond its current $500m program are possible. Hedge funds are buying stakes, banking on Chairman Leslie Wexner's trendspotting success. Barron's Bottom Line: Buy on a pullback: Bulls see a $34 stock.
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