Foolish Forecast: Leaner Limited Brands

Victoria's Secret (and so much more) operator Limited Brands (NYSE: LTD  ) traipses down the catwalk on Wednesday, wearing a sultry little number. ... Sorry, I got carried away with the metaphor there for a moment. In fact, Limited Brands will be bringing quite a few numbers with it when reporting Q2 results, and as for whether they're sultry or 'nsulting, only time will tell. Not that that's stopped analysts from guessing.

What analysts say:

  • Buy, sell, or waffle? Twenty-three analysts still track Limited Brands, down three from last quarter. Nine give it a buy rating, a baker's dozen say hold, and one counsels selling.
  • Revenue. On average, they expect to see sales grow 8% to $2.65 billion.
  • Earnings. Profits are predicted to fall 32% to $0.19 per share.

What management says:
Limited Brands has said so much of note this quarter that it's hard to know where to begin. I'll start with the news that, belying its own name and at the same time confirming it, Limited is cutting down on the number of brands it operates, selling off controlling stakes in its Limited and Express subsidiaries to Sun Capital and Golden Gate, respectively. The two sales will yield a total of $425 million in cash after payment of taxes, and a post-tax GAAP gain of $146 million. After the sales, the company will be Limited to just two key businesses: Victoria's Secret and Bath & Body Works.

More recently, Limited Brands announced its July sales figures -- as did every other retailer from Aeropostale (NYSE: ARO  ) to Zumiez (Nasdaq: ZUMZ  ) -- a couple of weeks ago. For a complete rundown of the results, check out Lawrence Rothman's write-up, but the long and the short of it is that Victoria's Secret same-store sales fell 4%. Meanwhile, Bath & Body Works sales declined 2%.

What management does:
Limited's gradual revival in margins has stumbled, and for two quarters running, both gross and net results have declined.

Margins

1/06

4/06

7/06

10/06

2/07

5/07

Gross

35.9%

36.6%

37.1%

37.8%

37.7%

37.0%

Operating

10.2%

10.8%

11.1%

11.3%

11.4%

10.4%

Net

7.0%

7.1%

7.3%

7.4%

6.3%

5.8%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Two Fools say:
Limited Brands gets the thumbs-up from two separate Motley Fool advisory services: Motley Fool Income Investor (which found it first), and Motley Fool Inside Value (which found it cheaper). What do our analysts have to say about the changes afoot at Limited? Let's ask them:

Jim Fink, Income Investor: "These sales make sense and allow the company to focus on (and expand internationally) its two core brands of Victoria's Secret and Bath and Body Works. ... Limited Stores is 'The Dog. The margin eater.' [By giving Limited away for no profit], that characterization has proven itself to be right on the mark."

Philip Durell, Inside Value: "I'm confident that, combined with new investments in the intimate apparel, personal care, and beauty brands, this move will increase earnings and free cash flow. ... Victoria's Secret and Bath & Body Works ... accounted for 72% of the company's revenue and 98% of its operating profit in the most recent fiscal year."

I have to agree. Limited loses essentially no profits by shedding its dead weight. All it loses are two problems it need no longer worry about. But before you decide if you agree, too, make sure to read each analysts' full investment write-up. You can do this by taking a free trial to either Income Investor or Inside Value for the next 30 days.

Fool contributor Rich Smith does not own shares of any company named above. Zumiez is a Motley Fool Hidden Gems recommendation. The Fool's disclosure policy is not for sale.


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