Unscrambling Monday's Egg

Victoria's Secret? The Limited!

NOTE: For the month of July we decided to feature public companies from some of the states the Chicks live in. This week we are doing my State of Part-time residence, Ohio which has many companies listed on the Forbes 500 list. Here are the companies we have chosen to review (along with where they appear on Forbes' list): The Limited (185), AK Steel (372), Cardinal Health (51), and TRW (114). Some other interesting Ohio tidbits... State Bird: Cardinal; State Tree: Buckeye; State Flower: Scarlet Carnation; Cutest Hockey Coach: Kevin Kaminski, Cincinnati Mighty Ducks.

Using The Chicks' Dozen to Uncover Victoria's Secret (The Limited; NYSE: LTD)
by Chick Megan

Not too long ago I made a phone call to Victoria's Secret. "Could you please stop sending my husband, er, me, your catalog?" Oh no, it had nothing to do with me disliking what they're selling. Not really anyway. But let's face it, for the swollen, pregnant woman who swears the reflection of her rear in the mirror MUST be somebody else's, that particular magazine is the last thing I need to see. And this really isn't just for my own good; it's for my husbands, too. How fair is it for him to have to look at that when reality is such a stark contrast? Now I am just sure that when all is said and done I will reorder the catalog and things will return to normal. But in the meantime, completely eliminating the delivery of little Miss Vickie's airbrushed, photographically enhanced bombshells will make for a lot less self-deprecation for me, and a lot less "woes-me" for my husband. (By the way, he swears this isn't the case. But he knows better, too.)

Let's strip down to the basics here and see if we can uncover Victoria's Secret.

1. Buy What You Know  Everyone has, at some point or another, been exposed to Victoria's Secret. But actually, Victoria's Secret is just one of nine brands coexisting together under the umbrella of The Limited (NYSE: LTD). The Limited, which is really the pioneer of this conglomerate, owns 84% of Victoria's Secret, the branch they decided to spin-off in an IPO back in 1995. They still share the same offices and are essentially run by the same team, however for the purposes of this Dozen, unveiling Victoria's Secret really means getting into bed with the LTD. So let's see, we've got Vickie, LTD, Henri and Lane all in bed together. Sound a little risqué? Then get your mind out of the gutter people! I am talking about the other companies that contribute to the bottom line of The LTD.

The other eight include Express, Structure, Lerner NY, Lane Bryant, Henri Bendel, White Barn Candle Company, Bath & Body Works, and of course, the Queen Mother, The Limited. If you have ever, in your entire existence, stepped foot into a mall, then you have heard of either one or more of these. And this crew pretty much has everything covered (except for Vickie's models, of course). Express, The Limited, and Henri Bendel are for women and teens, Structure is for men, Lane Bryant is for plus-sized women, White Barn Candle has candles and other gift items and Bath & Body Works carries all kinds of wonderful bath and body products and gift items as well. As for Victoria's Secret, well, that's been already been told.

2. Keep it Simple Sexy!  Clothing we know. Well, hopefully. Trust me when I say, you wouldn't want to see this body in the nude!

3. Industry  Retail clothing. Again, an easy industry to relate to because we all wake up and have to put our pants on, one leg at a time. Unless you're at a nudist camp, in which case, even Vickie's selection is too much.

4. Leader In Its Field  It isn't the Gap but it still fares well as far as recognition goes. (See #1)

5. Repeat Profitability  Goes without saying.we need to be clothed, or be arrested. And when different seasons come along and trends have changed, we go back for more. Or, let's just say you have had an incredible weight gain and need to replenish your wardrobe. Whatever the reason, whatever the gender, LTD has something to offer.

6. Gross Margin

Sales (2126.8) - Cost of Goods Sold (1456.3) = X (670.5)
X (670.5) / Sales (2126.8) = 31.52 %

The Chicks like to see Gross Margins at 50%; the LTD leaves little here to be desired.

7. Net Margins

Net Income (30.7) / Sales (2126.8) = 1.4%

Again, not too appealing. We ask for 8% or better.

8. Cash vs. Long Term Debt

Cash (288.9) / Long Term Debt (400) = .72x

Our preference? More cash than debt. It's not the worst, but it's not the best either.

9. Flow Ratio

Current Assets (1819.9) - Cash (288.9) = X (1531)
Current Liabilities (774.7) - Short Term Debt (0) = Y (774.7)
X (1531) / Y (774.7) = 1.97

Falling short again, we like to see a flow ratio come in under 1.5. I must admit, it isn't as bad as fluorescent lights during bikini season, but it still doesn't cut it.

10. Increasing Growth

Sales 05/01/01 (2126.8) - Sales 02/03/01 (3547.5) = X (-1420.7)
X (-1420.7) / Sales 02/03/01 (3547.5) = -.40

Like a leaking water bra, there is nothing pretty about this number either. At the very least we are looking for a positive number... here we get less than zero. Yuck.

11. Strong Management and Operating History  The Chairman of the Board for LTD is Mr. Leslie Wexner, who founded the company back in 1963. Stay tuned for more info on Mr. Wexner, recently listed on Forbes list of wealthiest people... I'll be doin' a little ditty on him in the month of August. And in light of that and in the interest of more important issues, let's delve a little deeper into what's troubling this company.

This past May the reports were really nothing but doom and gloom. Comparable store sales were down 6 percent for May from the same time period in 2000. Net sales last year? $740.3 million. This year? $701.7. The company is claiming the darkest hours aren't even here yet... expect more of the same for the second quarter.

Also, The Limited has decided to end the Structure era and replace all those stores with Express units. The stores weren't up to snuff and in typical LTD fashion, pardon the pun, they put the kabash on their existence. This seems to be the trend with this company over the years, and it may be because of that trend that they continue to survive the inconsistent industry they're in. If the stores aren't performing, they don't hang out praying their luck will change... they close their doors. Seventy-nine store doors, to be exact, have been closed for that very reason.

12. Buy On Sale

52-week high= $27.87
52-week low = $14.43
52-Week Average ($27.87 + $14.43 / 2) = $21.15
Current Price: $14.43