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Marcial: A Turnaround at Limited Brands?

"The [current] turnaround at Limited isn't yet being priced in," says Howard Tubi, retailing analyst at RBC Capital Markets, who rates the stock outperform.

The turnaround is showing up at Limited's two principal units, Victoria's Secret, which sells intimate apparel and accounts for 56% of Limited's sales, and Bath & Body Works, a specialty retailer of personal care and home fragrance products that makes up 26% of company sales. The two units' upbeat results helped boost Limited's better-than-forecast second-quarter results. Limited's other brands include Pink, La Senza, and Henri Bendel.

The turnaround story at Limited "continues to unfold as we would expect," says Tubin, with management remaining committed to introducing new products and supporting them with more marketing and media campaigns. At the same time Limited continues to be conservative in operating costs, inventories, and capital expenditures.

One strategy Limited has adopted at Victoria's Secret is to reduce prices on certain products to attract new customers and stimulate sales. Generally Wall Street frowns on price cutting because it could hurt profit margins. But some analysts like the moves made by Victoria's Secret. Tubi says reception of Victoria's price-cutting strategy has been good, as it offers value to existing customers and entices new ones to its stores.


Clark notes that the turnaround at Victoria's Secret is significant because it represents 70% of Limited's operating profit. At Bath & Body Works there's also "continued momentum" on the upside, she says. Bath & Body Works' top three categories, including candles and home-fragrance products, which comprise 70% of the unit's sales, have shown improvement, she adds.


Also bullish on Limited is analyst Kimberly Greenberger of Citigroup (C), who upgraded her rating to buy from hold in late August. She expects the company's overall sales to improve and margins to expand. The international markets, she adds, provide an opportunity for more growth. Greenberger raised her 12-month stock price target to 18 from 15.

Investors also get a hefty dividend yield of 4.2% with Limited shares. But Wall Street has yet to be convinced of the company's quiet turnaround, with only five of 20 analysts recommending buying the stock. Thirteen analysts rate Limited a hold, and one recommends selling the stock.

Yet Limited has recently attracted increased buying from some of its big shareholders. As of June 30, 2009, Janus Capital Management purchased 10.2 million shares, bringing its total holdings to 11.4 million shares, or a 3.5% stake. Another institutional holder, AXA, bought 4.7 million shares, boosting its stake to 27.6 million shares, or 8.6%. Barclays Global Management acquired 4.9 million shares, raising its stake to 15.4 million shares, or 4.8%.

The increased buying by these institutions shows faith in this specialty retailer even as consumers keep a strong hold on their wallets.
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