Dueling Fools
Limited Choices
September 8, 1999
Bear Argument
By
If you bought shares of The Limited a few years back, you'd be smiling like the Cheshire Cat, having picked up shares of spinoffs Abercrombie & Fitch and Intimate Brands. Just recently, Limited Too took up membership in this exclusive and lucrative club.
But looking at the company's prospects now, you might feel a bit more like Sylvester watching Granny hang Tweety's feeder atop Spike's new doghouse.
To the company's credit, it's still a majority owner of Intimate Brands, which in the guise of Victoria's Secret has made unmentionables mentionable, and through Bath & Body Works has made "salve" a household word.
(Gee, I wish there were some way I could buy shares of Intimate Brands without having to get the rest of the stuff along with it! What? There is?)
But most of the appeal of owning shares of The Limited has been connected to the company's ability to develop and spin off powerful new retail concepts.
Now, though, there's little to be excited about in the company's stable but bras and bath oils. It's not surprising that the company would want to expose its best divisions to the public markets and jump-start their growth, but where does that leave investors today?
It leaves them to consider an odd mishmash of reasonably competent chains -- none of which really address the most dynamic apparel markets.
You've got Lane Bryant pushing oversized women's apparel. Galyan's, a majority of which was sold to an investment firm last week, sells sporting goods. Henri Bendel is strictly upscale, a sophisticated store for sophisticated ladies dragging Yorkies through an increasingly casual world.
Then there's the middle of The Limited road, where the Lerner New York, Express, and Limited chains reside. All of them, while targeted slightly differently, essentially appeal to the stylish 20-ish-and-older woman and are probably where most of the company's future opportunities lie (though there has been talk of harsh realities for The Limited chain, including its possible closing).
What about the fashion-conscious teenage girl? She left with Limited Too. Her brothers and boyfriends? Structure wants to join their frat but hasn't made the cut.
Forgive me if I'm not doing handsprings.
The Fool's Warren Gump discussed this in a recent News World piece, in which he noted that the company's non-Intimate Brands operations accounted for more than half of its revenues last year -- but still posted a loss despite $5 billion in sales.
Out of fairness, I should note that Warren's observation came in a column in which he suggested that The Limited might be turning things around.
Indeed, there have been signs of life; sales have risen by at least 10% in both of this year's first two quarters. (I'll be more interested to see the company's third-quarter numbers, as shoppers start updating their fall wardrobes.) Reports from the stores say the fashion picks were spot on this summer, while merchandise assortments have been strong.
Remember, though, that this is the fashion business. If they miss during the back-to-school season, a lot of the optimism that's been built up this year will be dashed against the rocks. Even the best retailers slip -- but The Limited, by trimming the variety of its store assortment over the years, has increased its exposure to merchandising gone bad.
The way I see The Limited, the company is accustomed to operating from a position of strength, influence, and rah-rah growth -- not backpedaling and in-process turnarounds. The Limited on the rebound is a good story, but it's no longer the company mall shoppers and investors have come to know and love these many years. It's a paradigm (sorry, I know that's a horrible word) that I'm not particularly comfortable with.
Wait, one might say, mightn't we be happy that The Limited is currently trading at a significant discount to such well-known retailers as Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> and the aforementioned Abercrombie & Fitch, based on projected full-year 1999 EPS? I wouldn't even put The Limited in the same category right now. Gap is a Rule Making giant boasting one of retail's hottest store concepts in Old Navy, while Abercrombie & Fitch is a nimble, fast-growing chain with a killer focus on its target market. No turnaround stories, they. And on a forward earnings basis, Intimate Brands is currently trading at about the same valuation as The Limited. What's the point of taking on the chaff along with the wheat -- charity? Even The Limited knows the difference, moving last winter to start buying back more Intimate Brands stock.
Limited? Well, you get what you pay for.
Next: The Bull Responds