There's no doubt about it. Investors in dual Motley Fool Income Investor, Motley Fool Inside Value pick Limited Brands
What's going to turn things around? According to Inside Value lead analyst Philip Durell, Limited's plans to expand internationally may play a big part in the company's future growth story. Recommending the stock last month, Philip commended the firm for its January purchase of Canadian lingerie chain La Senza: "With 385 stores in 37 different countries, La Senza offers international growth opportunities, especially for Victoria's Secret, which is already well-known overseas despite having no stores outside the United States." Limited agrees. Quoting from its most recent 10-K filing, "The acquisition of La Senza supports our objective of enhancing our capabilities to pursue our strategic growth goals internationally."
A gathering storm
You see, over in London-towne, a little lingerie shop with the ominous name "Vendetta" is about to open its doors. The first international opening of Russia's Dikaya Orkhideya (Wild Orchid) chain, it will be one of four stores that Wild Orchid plans to open in Britain this year -- roughly one per month.
Now don't laugh. I know what you're thinking. If Limited wants to expand its La Senza presence in the U.K. market, it can crush tiny Vendetta like an orchid. But thinking that is a mistake. Vendetta poses a real, and growing threat to Limited in general, and to La Senza in particular. Although information on the firm is not easy to come by, I've done some digging, and discovered that Vendetta's parent company is a force to be reckoned with.
Anatomy of an Orchid
Wild Orchid leads the market for lingerie in Russia and Ukraine, operating a combined 216 Wild Orchid, Bustier, Legion VI, and Underwear Bazaar stores at the end of the first quarter of 2007, and controlling a 14% market share. What's more, the firm is growing rapidly, both in store count and in sales.
Revenues amounted to $98.6 million in fiscal 2006. The company plans to grow that to $150 million this year, maintaining its pattern of 50% annual sales growth over the last three years. In fact, Wild Orchid may even exceed this pace. In Q1 alone, ruble-denominated sales skyrocketed 97% to the equivalent of $23.3 million, and the firm posted a $0.9 million profit on those sales. Now, a 3.9% net margin may sound as laughable as the idea of a Russian lingerie store taking on the mighty U.S. Limited -- but it's worth pointing out that the firm earned no profit whatsoever last fiscal year, despite its 68.8% gross margins.
For comparison, Limited managed to net only 5.9% out of its own 37% gross margins over the last 12 months. Just imagine what it could have done if allowed to start from a 69% gross!
A fertilizer infusion
Helping fuel Wild Orchid's growth was a $50 million cash infusion from privately owned German investment boutique Wermuth Asset Management, which traded the cash for a 20% stake in the company earlier this year (and retains an option to expand its stake). Presumably, Wild Orchid will be using the funds to finance not only its British invasion, but also its announced plans to open 100 new shops throughout the Russian region this year.
Ambitious as that sounds, it's only the beginning. CEO Alexander Fedorov calls the Wermuth investment "the first step toward an IPO ... in both domestic and international markets by 2009." By the time Wild Orchid starts trading on (one presumes) the London Stock Exchange, Fedorov hopes to be heading a firm with $350 million annual revenue and a $600 million market cap. Not quite the size of the behemoth that is Limited. But growing much faster: If Wild Orchid surpasses 300 stores, as planned by year-end, and continues its frenetic pace of domestic and international expansion, it will quickly eclipse Limited's new international prize, La Senza, in size.
Such growth could easily attract the attention of a stodgy clothier looking to boost growth through a pre-IPO buyout. Someone like Sears
And we haven't reached the really good part of this flower story yet.
Flowers, flowers everywhere
Why, one wonders, did Wild Orchid decide to plant its first invasive species in Britain? I suspect part of the reason owes to nearly 0.7% of the population of Britain being recent Russian immigrants. That's 400,000 potential Vendetta customers with Western incomes, and that's before Wild Orchid even begins expanding its brand awareness to the broader English population.
If we assume that Wild Orchid's further expansion plans track this logic, then consider what markets it might expand into going forward: Australia, Turkey, the United States, Israel, the United Arab Emirates, perhaps? They're all countries popular with Russian emigres. They also happen to be countries where La Senza already has a presence; countries where Limited would likely try to begin building on La Senza's market position to expand Victoria's Secret internationally.
I don't know about you, but I for one see a major pillow fight in the works.
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