Limited Expressing Itself (Fool Plate Special) August 4, 1999

An Investment Opinion

Limited Expressing Itself

By Warren Gump (TMF Gump)
August 4, 1999

After faltering for quite some time, retailer The Limited (NYSE: LTD) seems to have finally started the resuscitation at several of its previously struggling chains. After yesterday's market close, the company raised expectations for Q2 earnings for the second time, projecting earnings per share of $0.26, $0.07 above current consensus estimates and double the earnings from a year ago. In May, the company encouraged analysts to raise estimates for the quarter to $0.18 from $0.15 due to positive Q1 trends that were expected to continue. Yesterday's announcement attributed the quarter's excellent results to strong sales and gross margin improvement at several chains, particularly Express, Lerner New York, and Lane Bryant.

The Limited's biggest earnings contributor over the past few years has been its 84% stake in Intimate Brands (NYSE: IBI), the operator of Victoria's Secret and Bath and Body Works. Although those chains accounted for just 42% of consolidated sales last year, they represented 98% of operating profit because of the weak results from apparel operations. (Intimate Brands pre-announced positive Q2 news yesterday too, indicating that earnings per share would beat published estimates by a penny.)

In addition to the chains mentioned above, The Limited's apparel operations include Limited Stores, Limited Too, Structure, and Henri Bendel. These chains had sales of over $5 billion last year, but posted an operating loss of $11 million. Two years ago, they had revenues of $5.1 billion and an operating profit of $156 million. Obviously, the chains have tremendous room for improvement. Across all brands, same-store sales have increased 11% for the year. For the four week period that ended July 31, a relatively unimportant month from a profit perspective since it includes lots of end-of-the-season closeouts, the company had a 7% boost in comparable store sales.

The Limited is trying to do more than just improve operating results to improve its share price. In May, the company announced that it would spin off its youth-oriented Limited Too chain to shareholders in a transaction that will be completed later this month. This continues the company's tendency to capitalize on successful chains, as demonstrated by its publicly selling stakes in Intimate Brands and Abercrombie & Fitch (NYSE: ANF) earlier this decade. (Abercrombie was subsequently entirely spun-off.) On another front, the company has announced plans to sell a majority stake in its Galyan's sporting goods uber-store chain to investment firm Freeman Spogli & Co.

Based on the strong results that The Limited has posted over the past couple of quarters and its excellent brand names, the company appears to be in the early stages of a turnaround that could be quite meaningful. Maybe it's time to take a cue from the company's board, which repurchased 15 million shares for $50 apiece in June.