Limited sold its third-largest brand, Lane Bryant, to Charming Shoppes for $280 million in cash and $55 million in stock. Lane Bryant, combined with Limited's stable of stores outside of Intimate Brands, hasn't produced much operating income in the last year. Netting out publicly traded holdings, however, the market gives Limited's apparel operations zero value. That can't be right.

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By Brian Lund (TMF Tardior)
July 10, 2001

Clothing retailer Limited Inc. (NYSE: LTD) sold its entire stake in women's clothing store Lane Bryant to Charming Shoppes (Nasdaq: CHRS) for $280 million in cash and $55 million in stock. Limited has a long history of nurturing and then spinning off or selling brands. In the last three years, it has brought Abercrombie & Fitch (NYSE: ANF) and Limited Too (NYSE: TOO) public and sold a majority stake in recently IPO'd Galyan's Trading Co. (Nasdaq: GLYN).

Limited had shopped Lane Bryant around for months in an effort to focus its operations on a few key brands.  Its apparel business includes, in descending order of revenue: Express, Lerner New York, Limited Stores, Structure -- which it intends to fold into Express -- and Mast. Limited also owns a majority share in Intimate Brands (NYSE: IBI), which owns Victoria's Secret and Bath & Body Works. Since Limited owns a majority of Intimate Brands (IBI), it consolidates IBI's results in its financial statements. IBI accounts for nearly half of the sales on Limited's books.

Lane Bryant was Limited's third-largest branded store, accounting for 19% of Limited's apparel business in 2000 excluding IBI. It was Limited's fastest-growing brand in the first quarter of 2001, scoring a 5% same-store sales (comps) boost compared to a company-wide increase of 2%.

What Lane Bryant meant to the bottom line, however, is more in question. Limited's apparel business had a 2.5% operating margin on operating income of $123 million in 2000, compared to 14.7% operating margins on income of $754 million at IBI. In Q1, when Lane Bryant shone, the apparel group produced a mere $5 million in operating income, while IBI tossed off $61 million. (For more on this industry, visit our InDepth: Retail section.)

After this transaction goes through in the third quarter, Limited will own the following stakes in publicly traded companies:

• 84% of IBI, worth about $6.2 billion;
• a 20% stake in Alliance Data Systems (NYSE: ADS), worth about $200 million;
• ownership of, or warrants to purchase, 30% of Galyan's, worth somewhere near $50 million.
• 8% of Charming Shoppes, worth $55 million.

Limited's enterprise value stands at about $6.5 billion -- almost exactly the value of its holdings. Of course, the IBI stake isn't very liquid, as it would be disastrous to unload that many shares on the market. Still, if the market price represents IBI's value, then the market is valuing Limited's five other brands at a total of $0. Limited warned that the second quarter would be slow, but not that slow.

With Lane Bryant selling for $335 million, it's hard to believe Express and Lerner, Limited's two largest and fastest-growing brands in 2000, aren't worth more. There may be more value hiding in Limited still, even after all the spinoffs.

Natty fellow Brian Lund owns no shares in the companies mentioned. The Motley Fool is investors writing for investors.

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