Limited Brands (NYSE: LTD), the owner of well-known retail concepts such as Bath and Body Works and Victoria's Secret, recently announced a bit of good news and a bit of bad news.
First, The Good News
Management said it has agreed to sell a 67% stake in its Express apparel concept to an affiliate of Golden Gate Capital, a San Francisco-based private equity firm.
This is important because it means that going forward the company will place a greater emphasis on building its higher-margin beauty and intimate-apparel niche, and less emphasis on traditional casual apparel - an extremely competitive business these days.
In return for Express, the company will receive about $425 million after taxes. In conjunction with this announcement, the company also said that it's reviewing its options for its Limited clothing stores as well.
That was the good news - that management has chosen a pretty definitive path and now appear to be more focused than ever on selling the company's higher-margin wares rather than banging its head against the wall and trying to make it in the casual apparel racket by heavily marking-down merchandise in an effort to draw foot traffic.
The other positive that nobody seems to be talking about is that with this sale (and the potential sale of Limited) the company will be picking up some serious money that it can theoretically plunge back into its Bath and Body or Victoria's Secret concepts, or on advertising, or on share repurchases - or whatever can best add value for its shareholders.
Now, For The Bad News
Unfortunately, management also muddied the waters a bit by announcing that it expects the company to earn between 12 cents and 14 cents per share in the first quarter. That's well below the 25 cents to 28 cents that was previously anticipated. It also dropped its full-year profit expectation to between $1.55 and $1.65 per share from its previous target of $1.75 to $1.90 per share.
Lower-than-expected sales and operating margins at its stores, particularly at its Victoria's Secret locations were to blame for the revised outlook.
Perhaps not surprisingly, because of the news, three big name firms - Wachovia (NYSE: WB), Citi (NYSE: C) and Bank of America (NYSE: BAC) - all downgraded the stock. The share price has been under pressure since.
Where is the Stock Headed?
Frankly, given management's surprising first-quarter guidance, I think the shares are likely to trade in a range of $22 to $28 for the next few months - at least until the near-term outlook for Victoria's Secret becomes clearer. (To learn more, read Can Earnings Guidance Accurately Predict The Future? and Everything You Need To Know About Earnings.)
To be totally clear, I agree with management's decision to focus on beauty and lingerie. After all, those concepts remain wildly popular, thanks to the quality of the merchandise they offer and the attractiveness of the stores themselves.
As for Express and Limited, I just can't see why the company has continued operating those businesses for as long as it has, given the relentless competition its been facing from both department-store chains and discounters such as Gap (NYSE: GPS) and Target (NYSE: TGT). I think a sale is a really good move, and one that will be beneficial for shareholders over the long haul.
Some in the investment community have suggested that the shares might be buoyed over the next several months by news that the company has found a buyer for its Limited stores or by an announcement that it plans to buyback shares, or issue a special dividend.
Those are all potential catalysts, especially if the company jettisons its Limited stores. However, despite these would-be catalysts, I remain cautious because when a company sells-off a major brand (as Express and Limited are) there are usually a host of expenses that go along with that transaction that most people overlook, such as severance expenses or costs associated with real estate sales, or breaking leases.
In any case, I worry that management may lump as many of these costs into this year's results as it can in an effort to make next year's numbers look stronger. It's a possibility investors should be aware of.
The Bottom Line
While I am a big believer in the long-term outlook for Limited Brands, I prefer taking a more cautious approach in the near-term because of the costs that might accompany a sale of the Limited outlets, and the difficult times it is experiencing at its Victoria's Secret stores.
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