There’s not much of an economic slowdown at Victoria’s Secret. Limited Brands, Inc. (NYSE:LTD), which owns the brand along with Bath & Body Works and others, reported that its sales were up 5% in September 2012 compared with the same period in 2011 on a same-store basis. Overall revenue was down, but looks to have been entirely due to the sale of one of the company’s business units last November. This report actually shows lower growth than what the company had been achieving- year to date same-store sales are up 7%- but still should satisfy investors who are worried that a slow-growing economy might impact the business.
Revenue and earnings were down in the second quarter of 2012 compared to the same period last year, but again this was caused by Limited’s sale of a business unit. Adjusted earnings per share were actually up slightly, and we’ve already seen that it is getting good numbers in terms of same-store sales. When the company issued its quarterly report it also raised current year earnings guidance, to a range centered at about $2.80 per share. This implies a P/E of 18, which is a bit more appealing than the trailing P/E of 21.
We’ve actually seen mixed views from hedge funds recently when it comes to Limited Brands, Inc. Doug Silverman’s Senator Investment Group initiated a position in the stock during the second quarter, buying 1 million shares over that period. Senator has over $2.5 billion in assets under management (see more of Senator’s stock picks). However, the two largest positions in the stock according to our database of 13F filings were both decreases from the beginning of April. Columbus Circle Investors cut its stake 11% to 1.7 million shares, while Horizon sold shares to yield a total of 1.6 million. See stocks owned by Donald Chiboucis’s Columbus Circle Investors and Murray Stahl’s Horizon Asset Management.
We would build a general peer group for Limited Brands, Inc. consisting of Hanesbrands Inc. (NYSE:HBI), The Gap Inc. (NYSE:GPS), and Nordstrom, Inc. (NYSE:JWN), keeping in mind that Limited Brands likely trumps all three of these companies in terms of brand power. Somewhat surprisingly, it doesn’t get much of a price premium, if any. Hanes actually carries a trailing P/E of 31, while Gap’s is 21 and even Nordstrom’s is 18. On a forward basis Limited is even with Gap at a P/E multiple of 15; Hanes is expected to recover from a bad quarter, and joins Nordstrom at 10 times earnings estimates. Hanes hasn’t been doing well recently, and Nordstrom experienced a decline in earnings (though a rise in revenue) in its most recent quarter compared to a year ago. Gap has been growing, and its stock price has doubled over the last year; its September numbers were a 6% increase in same-store sales versus September 2011. It may be a more competitive pick than Limited Brands.
We also think that the owner of Victoria’s Secret can be appropriately compared to Lululemon Athletica inc. (NASDAQ:LULU). Lululemon has been seeing quite rapid growth: in the second fiscal quarter (ending in July) its revenue rose 33% and its earnings rose 49% compared to the second quarter of last year. The market has taken note and it trades at 51 times trailing earnings. The sell-side expects that the fiscal year ending January 2014 will beat this one by 23% on an EPS basis, and so the forward P/E is 34- over twice the figure for Limited or Gap. Lululemon has an excellent brand and great growth opportunities, but it feels like the yoga trend has to slow down over the next several years or at least attract more competitors to the related apparel businesses.
Limited Brands trades at a good place compared to its peers, and the brands under its umbrella seem stronger than Gap’s although recently that company has been getting better growth. From an investment perspective, both could work out. Lululemon looks to have better growth ahead of it than Limited Brands, but may be just a bit overpriced even after accounting for that factor.
