NEW YORK — A Wall Street analyst expressed optimism over the prospects for Limited Brands Inc. as he upgraded the company’s stock, and said in a research note that the turnaround in the retailer’s apparel division has been “faster than expected” and is “sustainable.”
John Morris of Harris Nesbitt Research said his concerns over weakness at the company’s Bath & Body Works division had previously overshadowed any current upside from improvements in the company’s Victoria’s Secret business or its apparel division, which is made up of Express and Limited stores.
But Morris last week lifted his rating on the shares to “outperform,” or “buy,” from “neutral,” or “hold,” based on his belief that the apparel division is turning around more quickly than anticipated, and that Victoria’s Secret is building momentum thanks to product launches and a potential turnaround in the beauty division.
At Express, Morris said new merchandising executives are “showing early signs of success in repositioning the brand to be more on-trend with compelling product.” In addition, “a more aggressive pricing structure anniversaries in the upcoming months and has already contributed to higher traffic and conversion counts.”
Limited Brands has struggled for a couple years to right its Express division and offer core consumers fashions with a clear, age-consistent identity. The Limited stores division has struggled with appropriate fashion within its price-value ratio.
Morris said while he does not believe a sale or spin-off of the Express division is “imminent,” he speculated, “a spin-off is plausible in the next two years.”
On Thursday, Limited Brands said March same-store sales in its apparel division were down 4 percent after rising 5 percent in February. At Victoria’s Secret, March comps rose 7 percent, and Bath & Body Works, which is narrowing its product focus, giving it potential to improve, according to Morris, reported a 1 percent March comp increase.
Limited Brands reported in late February that full-year 2005 net earnings were down 3 percent to $683.3 million, while net revenues rose 3 percent to $9.7 billion.
Other near-term catalysts for Limited Brands, such as a “stronger-than-expected spring season, greater management visibility with investors and easy [sales] comparisons,” Morris wrote, “should help propel the stock higher.” In fact, he thinks a turnaround in the apparel division could “trigger a $186 million positive swing in divisional operating performance” by 2007. The division had an operating loss of $92 million last year.
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The analyst upped his 2006 earnings per share estimate to $1.50 from $1.40 — within range of the company’s own estimate — and his 2007 EPS estimate to $1.75 from $1.66. The Wall Street consensus is for $1.48 in 2006 and $1.65 in 2007.
Morris’ upgrade, however, failed to buoy Limited Brands’ stock price, and shares of the company closed Friday at $24.74, up 1.1 percent for the week. The shares have gained just 7.5 percent in the last 52 weeks and are up 30 percent on a two-year basis.
Morris’ 12-month target price on Limited Brands shares is $30.