In March, Limited Brands changed its name to L Brands as a temporary measure. Because the company still refers to itself as Limited Brands, and because L Brands is a silly name, this article will use the original name for the company. Seriously -- just pick a name out of a hat, guys.
There are three big brands that sit behind Limited Brands (NYSE:LB). The biggest is lingerie brand Victoria's Secret, which pulls in more sales than Limited's La Senza and Bath & Body Works brands combined. The company just reported its July sales and, as usual, the good is mixed in with some bad. This time, it was Victoria's Secret's direct business, which had an 11% decline in sales year over year.
Limited has this issue almost every month -- most things do well, and then one falls by the wayside. For most of last year, the business was trying to turn its La Senza lingerie brand around. By the end of the year, it had closed enough stores and reworked the company into a good little business. But now, Victoria's Secret is slipping online. That weakness could be great for investors, though.
Turnarounds, they've had a few
Limited understands how turnarounds work, but the company just can't seem to handle all of the moving pieces to maintain strength across the portfolio. In July, the Victoria's Secret direct business, which fell, accounted for 15% of total revenue. That's more than La Senza, and more than half of what Bath & Body Works pulled in. In short, the fall was meaningful, and can't be simply overlooked.
The situation is similar to what Coach (NYSE: COH) has experienced this year. The business is strong, and the brand is meaningful to the average consumer, but the company is trying to juggle too many balls. Coach has been slipping on its core demographic -- women's handbags -- due to its focus on growing the international and men's businesses.
Coach and Limited are both dealing with a faux turnaround. The businesses are both strong enough that they're not in need of a J.C. Penney-style turnaround, but there are things to be fixed. As a result, they seem to offer less-risky positions than companies requiring lots of work.
The benefits of multiple brands
Apart from spreading its business out, Limited's selection of brands gives it a nice way to generate some extra cash. La Senza, for instance, is now running smoothly, but doesn't generate a whole lot of income for Limited. As a result, it would make a nice little sum if Limited could sell it off to a smaller -- or more Canadian-focused -- business. That influx could help Limited rework the Victoria's Secret brand, which would then hopefully drive more direct sales.
If La Senza is the throwaway brand, Victoria's Secret is the company's driving brand -- maybe like the kind of brand you could name a business after. Its biggest plus is its market share, which estimates have put in the high 20% range. That strength means that it has plenty of leverage to work with, but it also puts a target on the brand's back.
What to look out for
In recent years, I've come to consider Gap (NYSE:GPS) the apparel brand that most other apparel brands need to look out for. The GapBody brand targets the same demographic that Victoria's Secret appeals to. As Gap continues to expand its footprint, more GapBody locations are going to spring up within striking distance of Victoria's Secrets.
Gap has been growing sales at a strong clip and, in June, it pushed its full business year-over-year comparable sales up 7% worldwide. Gap brand comparable sales grew 5% over the same period, which easily beat out the 1% fall that Victoria's Secret experienced in June.
That potential to rise to Gap's level is what makes Limited an interesting opportunity. The downside is that it's no secret. Limited is trading at 23 times its trailing 12-month earnings, while Gap is trading at about 18, and Coach is down at 15. Even so, I like the potential, and I think Limited Brands could make a run for it, if it could just sort a few issues out.