Is It Time to Buy Limited?

Appearances can be deceiving where Limited Brands (NYSE: LTD) is concerned. Despite its name, the company no longer represents Limited stores. And even after a 277% surge in the last 12 months, and the surge of investor interest it's provoked, the shares might be anything but a good buy right now.

After selling off its namesake chain and Express a couple of years back, Limited Brands' major mall-based concepts include Bath & Body Works and Victoria's Secret. In short, its proverbial eggs reside in precariously few baskets.

Compared to similar numbers from other mall-based retailers, Limited's financial data reveals several worrisome problems:

*All data from CAPS and Capital IQ, a unit of Standard & Poor's.

As you can see, Limited's debt load stands out ominously among its rivals. Although the company last reported about $968 million in cash, it's got a whopping $2.9 billion in debt. Its revenue isn't a great sign, either. Still, the company did manage to increase operating earnings by 20% over the prior year.

I'm also leery of Chico's, despite -- or perhaps because of -- its amazing 271% run in the last year. However, it's one of the two companies in the lineup above that has increased revenue in the last 12 months, and it carries no debt.

Limited's troubles don't end with massive debt loads. In the past 12 months, the company has posted frankly lousy same-store sales growth -- and I use the term "growth" loosely:

*From company press releases.

Especially after three preceding quarters of declines, Limited's anemic fourth-quarter comps increase wasn't much to write home about. Worse yet, that paltry 1% growth stacked atop an easy comparison; in the year-ago period, its fourth-quarter comps had dropped by 10%.

Limited may look like a relative bargain next to, say, Chico's, which has a price-to-earnings ratio of nearly 38. Still, investors need to beware the riskiness inherent in Limited Brands. Flagging revenue and anemic comps seem to contradict the confidence many investors have in Limited, given the stock's strong surge in the past year.

Limit your exuberance
Many retail stocks are rallying right now, but I believe investors are getting way ahead of themselves on most of them. The smartest stock pickers will choose their retail stocks very carefully. Personally, I'd prefer a retailer like Aeropostale over Limited right now, since the former has shown strong and consistent performance during the recession. Better yet, Aeropostale has lots of cash and no debt. Trading at just more than 10 times forward earnings, it's cheaper than Limited, with many awe-inspiring years of earnings and revenue growth under its belt.

While Limited may be a safer stock than seriously beleaguered retailers such as Borders Group (NYSE: BGP) and Blockbuster (NYSE: BBI), its retail niches are no less vulnerable to incursions from lower-priced competitors. In short, Limited's brands could face limited growth going forward. As much as I like Limited's concepts, I'm not sure that increasingly frugal customers will splurge on items from Bath & Body Works and Victoria's Secret as often as they used to. Similar merchandise is available at plenty of other venues, including discounters.

Where, then, would Limited's growth come from? Its most recent profit owed partly to inventory controls and cost-cutting, but to really succeed, this retailer will need to resurrect its organic sales growth. Unless it can do so, Limited will remain far less appealing than it initially appears.

Would you buy Limited at its current price, or leave it alone? Am I missing an important factor that supports the strong surge in its stock price? Or do you agree that Limited's a risky investment, likely headed for a fall? State your case in the comments box below.