Dueling Fools
Limited Choices
September 8, 1999
Bull Argument
By
It starts at the mall. You stroll past specialty retailers such as Structure and Express, Lane Bryant, and Bath & Body Works, Victoria's Secret and Lerner -- without ever realizing that they are all part of the same company.
It's amazing: No matter what style or size or even layer of clothing you are looking for, The Limited <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LTD)") else Response.Write("(NYSE: LTD)") end if %> is there in force to sell it to you. With more than 3,000 stores and a majority stake in Intimate Brands' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBI)") else Response.Write("(NYSE: IBI)") end if %> 2,000 Victoria's Secret and Bath & Body Works locations, this mall heavyweight is an impressive fixture.
Over the last few years, competitors such as Merry-Go-Round and Edison Brothers have buckled under. That has given the company empty outlets to fill. In a finicky world of fashion, The Limited has proven, time and again, that its stores can adapt efficiently and profitably. To mall operators everywhere, that is a blessing. The Limited is a tenant you can count on to stick around long enough to pay the rent.
Then again, I'm not claiming that you have to deal with mall traffic to work with The Limited. Every year, as my wife's birthday rolls around, she discreetly marks off pages in the most recent Lerner New York catalog. Have recliner and touch-tone, will travel! The mail order business has been an effective supplement to a company that has built up a huge database of customers through its many locations. Tomorrow? Of course, the Internet.
Victoria's Secret has already set up an online shop, and the rest of The Limited's concepts are sure to follow. Right now, large size specialist Lane Bryant is conducting an e-commerce survey. The apparel chain is rewarding participants with a 15% store discount. Naturally, they will be e-tailing soon. Lane Bryant should be a major player in online shopping because, unlike the customers of the teen petite stores that have already gone cyber, not every woman online is a Size 7.
The Limited is taking calculated steps to make sure its online experience is in the best interests of patrons and shareholders. The company secured the Structure.com domain name four years ago and it has yet to go online. I'm not suggesting one buy The Limited just for the obligatory pop in price that will accompany a more finite announcement of online commitment. Given the turnout the company had earlier this year, when an online lingerie show at VictoriasSecret.com was so popular most fans were locked out, The Limited has a bright future ahead. That's pretty much common knowledge. However, the varied demographics that come with each of the company's concepts is going to be an online eyeball-feasting frenzy that I don't believe has been fully factored in. Nostradamus sees the drool. The Limited is going to be an Internet juggernaut sooner rather than later.
Oh, and the best part is that this potential Net paradise is free to shareholders today. That's right, free. Other freebies include the namesake stores, Express, Lerner New York, Lane Bryant, and Structure.
How so? Well, The Limited owns an 84% stake in Intimate Brands. Based on Intimate's $10 billion market cap, that translates into an $8.4 billion stake. Last week The Limited sold a 60% stake in its Galyan's chain of sporting superstores and related real estate for $190 million, implying a price tag of more than $300 million for the small Gaylan's concept as a whole. That adds up to $8.7 billion -- or the entire market cap of The Limited.
Before David begins poking holes in my math, yes, it's true, if The Limited were to sell that 84% Intimate stake in the open market, the share price would plunge farther than Miracle Bra cleavage and the tax bill would be huge.
However, The Limited is no stranger to the tax-free spin-off. Last month it rewarded investors with a share of Too <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TOO)") else Response.Write("(NYSE: TOO)") end if %> for every seven shares owned. Over the last four years the company has spun off a small piece of Intimate and the hip Abercrombie & Fitch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANF)") else Response.Write("(NYSE: ANF)") end if %> in its entirety.
The proceeds went to buy back shares and to fuel expansion of its remaining concepts. That's what makes The Limited such a shrewd investment. Unlike its highly leveraged peers who went belly up, the company has enough cash on hand to practically wipe out all of its existing long-term debt. If interest rates rise, the competition will have to raise prices to offset the interest expense. The Limited can meet the hikes and enjoy thicker margins, or stay pat and enjoy thicker sales.
Then again, those are two things the company is enjoying right now. Profit margins have expanded while same-store sales are up 11% so far this year. That's not too shabby for a company selling, in essence, for free.
It starts in the mall. It continues in your portfolio. It ends happily ever after.
Next: The Bear Argument