A Limited Response (LTD)

By Glenn Curtis | June 26, 2007 AAA

Limited Brands (NYSE: LTD) announced last week that it will cut about 10% of its workforce - a move that some estimate could yield up to $100 million in annual cost savings. In addition, it announced plans to up its $500 million buyback program to $1 billion.

While these actions appear to be the right moves, it was obvious that the investment community didn't have much enthusiasm. The stock was up a measly 31 cents on the news.

What's Limiting The Share Price?
I think the investment community's reaction was muted because of the lingering risks to the story. Primarily, the competitive pressure that the company is seeing in its core, Victoria's Secret lingerie business.

Big-name discounters such as Target (NYSE: TGT) and middle-of-the road department stores such as J.C. Penney (NYSE: JCP) are launching their own private label brands and revamping their undergarment sections in an effort to drive foot traffic.

Limited Optimism
In an article posted in late May, I argued that the near-term outlook for Limited Brands was, in a word, limited. My reasons? Strong margin pressure, and management's downbeat earnings guidance for Q1 and for the full year. (To read the full article see, A Limited Short-Term Outlook.)

While I continue to maintain my tepid stance on the company, I am impressed by what management is doing to cut costs and enhance shareholder value.

Limited Brands is definitely facing some strong challengers. That said, I would argue that the cost-cutting measures should provide the company with a little more breathing room as it prepares to do battle with these retail stalwarts.

There are some other, often overlooked, things that I continue to like about Limited Brands as well.

Strong Comps and Corporate Actions on the Horizon
In the month of June management has said that it expects the company to post a low- to mid-single-digit improvement in comparable store sales. That's decent given all of the competitive pressures.

As well, the company continues to consider its "options" for its struggling Limited locations. One of these options is an outright sale. In short, this potential catalyst could help support the stock in the near term.

The Inside Story
I think the current year's consensus number of $1.57 per share is quite feasible. As well, insiders own about 15% of the outstanding stock. I find it quite comforting to know that these folks have an adequate incentive to make sure the restructuring succeeds for the long-term.

However, this doesn't mean I think the stock is ready to run just yet. There are still a host of risks in this equation.

Investors should keep in mind that Limited Brands is in a state of transition, and that the cost cutting initiatives, although terrific, might not fully offset the struggles it's facing and will continue to face in its Victoria Secret business.

Don't Forget About Uncle Sam
Yet another thing I'm worried about is tax loss selling. Now, I know what you are thinking - tax loss selling doesn't usually happen until the November-December timeframe.

I can't argue with that. However, if the stock doesn't get a boost now, or at least over the next few months, I think the shares could get hit pretty hard come year end - as investors book their losses and move on to greener pastures.

The Bottom Line
Limited's near-term outlook remains, in my mind, fairly limited. However, the company is doing the right thing by cutting jobs and buying back stock.

Over the long haul, despite the numerous competitive risks, I think the company will fare just fine. That said, I'd continue to wait for a more favorable entry point. One should eventually present itself, possibly as early as Q4.

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