The Limited Brands Overview
On Aug. 10, 1963 the son of a Russian immigrant, Les Wexner opened the first 1Leslie’s Limited with $10,000. Leslie created the name and image of his store after running his fathers small shop, Leslie’s, for one week while his parents were on vacation
in Miami. Leslie an inspiring architect at the time did not want to work in retail but had
agreed to spend a few months learning how the small shop worked so his parents could
take a break. Leslie while running the store for the week decided to put his basic
accounting skills to work from college for fun and studied for the week where his father 2made and lost his money; his fathers store was making a profit of around $10,000.
Leslie quickly discovered that his father made his money from typical sportswear
separates and lost a large amount of money selling dresses and coats. When his father
came back he claimed that he made his money on dresses and coats. Leslie tried to argue
with his father about how to run the shop, but his father said he knew nothing about retail,
so in an effort to prove his father wrong he started his own specialty shop where he
would sell a limited selection from his fathers shop and thus Leslie’s Limited was born.
Since the beginning Les Wexner’s shops have had core competencies of specialization, differentiation and efficiency. The Limited Brands has bought and
transformed many failing or small retail stores into highly recognized specialty shops
such as Victoria's Secret and Abercrombie & Fitch by applying these ideas. The Limited
Brands has made its fortune by using its competencies and sticking to its mission of
“building a family of the world’s best fashion brands, offering captivating customer
experiences that drive long-term loyalty and deliver sustained growth.” The company
has established its family of brands owning such stores since its beginning as The
Limited, Express, Lane Bryant, Victoria’s Secret, Structure, Abercrombie & Fitch and
countless other brands all of which specialize in its own specific area of apparel, lifestyle
Although Limited Brands sells apparel this is not its main industry of operation.
Limited Brands makes 70% of its sales from personal care, beauty and lingerie putting it 3primarily in the packaged goods industry. Limited Brands has applied its talent of specialization, differentiation and efficiency to revolutionize this industry with such
power houses as Victoria’s Secret and Bath & Body Works. This transformation has
taken place over the past 10 years; apparel was a little more than 70% of the 4organizations sales in 1994. This transformation has shown that Limited Brands has a
strong ability to adapt to the markets and has built a diversified organization which
covers more than one industry. Limited Brands strategy of diversifying across industries
while specializing in each one specifically has been extremely successful with revenues 5of $9.4 billion dollars in 2004 and a net income of $705 million in 2004.
1 How We Got Started Les Wexner: Limited Brands. www.fortune.com. 2 Ibid. 3 Limited Brands 2004 Annual Report, 2. 4 Ibid, 2. 5 Ibid, 29.
1. Strengths (Internal/Company Focus)
Limited Brands has two distinct strengths that differentiate it from its competition these are diversification and specialization which are supported by its organizational structure, a crucial strength to their success. Limited Brands has built a portfolio of companies and investments over the past forty-two years in multiple industries to include sporting goods, data processing, technology, real estate, apparel, beauty, and lingerie with their interest in companies like Galyan’s Trading Company, Alliance Data Systems and
their ownership of companies like Victoria’s Secret, C.O. Bigelow, Limited Real Estate
and Express. Although Limited Brands has spread its organization over multiple industries it has not lost its original goal and strength of specialization. Limited Brands had used specialization to create stores that are well known through catering to their customers needs with a specific line of products. Customers know that if you want apparel from Limited Brands you have to go to Express or The Limited, for your fragrances and perfumes its C.O. Bigelow and for lingerie its Victoria’s Secret. By separating each line and developing it under its own name brand and company Limited Brands has been able to deliver exceptional products and in-store experiences.
Limited Brands restructured its organization in 2004 to allow for specialization within each industry. While the company expanded into the different industries and established its name brands the CEO Wexner continued to oversee the entire operation with CEOs of each individual company reporting directly to him. This structure became a weakness for the company which Wexner identified, remodeled and thus turned it into one of his strengths. Wexner created three groups, lingerie, beauty and personal care and apparel within the organization. Wexner believes that this approach will “get [them] to 6accelerated growth rates faster by focusing efforts across tightly defined categories.”
This approach will allow the groups to take advantage of a centralized infrastructure and shared transactional services, while also shearing the supporting Limited companies such as Limited Design Services and Limited Logistics Services.
2. Weakness (Internal/Company Focus)
Limited Brands is posting losses in the apparel industry. I believe that the company is weak in the apparel industry because of its lack of online sales and straying from its original idea of specialized merchandise. Express and Limited posted a 10% decrease and a 5% decrease respectively during the second quarter of 2005 compared to 7the same quarter in 2004 for net sales. Their combined decrease in net sales was 9% for 8the quarter and 13% for year-to-date. In the second quarter report the company claims
that these drops were experienced because of product selection. The report cites specific types of items that had declines in sales such as sweaters and jackets and then the other 9items that help to offset the declines such as pants and woven tops. The apparel stores
may have become too large straying away from their specific sales lines of the past which is leading to a loss of profit within the overall stores.
6 Limited Brands 2004 Annual Report, 5. 7 Form 10-Q Limited Brands IND – LTD, 15. 8 Ibid, 15. 9 Ibid, 17.
The apparel group of Limited Brands is their weakness because it had a negative
income of 43 million dollars for the second quarter which is a continuation a steady
decline since the fall of 2004. Online sales are another weakness for the company
because it does not offer them for its apparel stores. The Express website will allow you
to search for clothes, view them and even create a “wish…list.” The problem is that the costumer is required to print the list out, find a store and show it to a clerk to receive the
items. The apparel group has been a continued weakness of Limited Brands as
recognized by CEO Wexner in his 2004 Annual Report statement about the group.
Wexner stated that it has been suggested that he sell them but that will not happen
because in their weakness he sees opportunity.
3. Opportunities (External/Industry Focus)
Limited Brands has performed significantly better in the lingerie and beauty
products industries than the apparel industry. Within the lingerie and beauty products
industry Limited Brands operates multiple stores and name brands but its two
powerhouses Victoria’s Secret and Bath & Body Works have posted $225 million and nd$85 million respectively in operating income for the 2 quarter this was a 19% and 10%
increase respectively from the same quarter last year. This lack of performance gives
them opportunities within the apparel industry such as re-specializing their shops and
opening up online retail site. Express and The Limited have all of the tools at their
disposal to retake their respected places as top fashion and apparel shops. Limited
Brands owns its support companies which allows for the apparel group to make its
comeback along with the strong name and product quality recognition of the shops. The
company has large opportunities in the apparel industry if it can re-specialize its product
lines while taking into consideration the latest fashion trends. The opportunity for growth
within the industry is there, as CEO Wexner said in the 2004 Annual Report he believes
that the companies “can again achieve operating profits of 8-10%” and by respecializing
in specific items and styles; he states that they are redesigning their line so that their tops 10will compliment their newly designed pants line.
4. Threats (External/Industry Focus)
Limited Brands faces its greatest threats in the apparel industry and its
differentiation. The apparel industry has multiple companies that are creating clothes for
the same market as The Limited and Express and Limited Brands must figure out how to
differentiate its product lines from these organizations. One of these competitors is
Abercrombie & Fitch which was actually transformed from a sporting goods store for
wealthy men to an apparel store for upper class suburban kids by Limited Brands. It is
hard for Limited Brands to compete with the competition that it created. Thus the threat
for Limited Brands is for them to meet the fashion styles of their target audience while
still differentiating themselves from the competition and keeping their unique style as
Apparel shops like A & F also are selling their merchandise online which allows ndthem a cheaper venues to sell their merchandise. In the 10-Q for 2 quarter it was
10 Limited Brands 2004 Annual Report, 20.
mentioned in the notes that Express’s decrease in sales was partly due to “significantly
higher markdowns to clear slow-moving inventories in all significant product 11categories.” These items could have been partially cleared to warehouses and sold
online to create the space; The Limited and Express are holding back from selling online
because of the unique in-store experiences that they offer but by not using this technology
Limited Brands is losing ground with others in the industry.
The second threat to the company is over expansion into too many markets. As of
right now the company runs many of its own supporting businesses which are listed on
their financial statements as “other.” The word “other” also includes their smaller specialty shops such as C.O. Bigelow but is primarily their supporting businesses. In the nd2 quarter for 2005 these organizations had an operating income loss of $63 million.
The threat here is that Limited Brands is expanding into markets such as real estate and rddata processing, industries when it may be more efficient in the long run to use 3 party
companies who specialize in these industries. Right now this may be working for the
company but this could become a threat in the future for specialization is more efficient,
which Limited Brands has proven with its shops.
Financial Analysis of Horizontal/Vertical Statement, Ratios, and Dupont Analysis
Limited Brands had a solid looking performance in 2004 with net sales of $9.4
billion dollars and a net income of $705 million dollars, but their ratios as compared to
their past and the industry show that they could have performed higher. Limited
experienced a 5.31% increase in sales in 2004 along with a 5.79% increase in 2003. An
increase of 4% was also seen in the second quarter of 2005 as compared to their same 12quarter last year. As for net income the company has seen a decrease of 3.3% in 2002,
a decrease of 1.7% in 2004 and a decrease of 27% year-to-date in 2005. Their decrease
in 2004 could be seen as a one time deal when you look at how extraordinary well they
performed in 2003 with an increase of 43%. The 43% increase of net income in 2003 as
compared to 2004 could be due to the fact that Limited Brands sold there interest in
Alliance Data Systems, and the decrease in 2005 could be seen by the extra $65 million
dollars that was made form selling interest in Galyan’s Trading Company for a gain of 13$18 million.
Although it is clear that Limited Brands has been impacted by a decrease in
apparel sales and has made up for them by selling companies and stocks a vertical
analysis of their income statement shows that they are consistent across the years. The
gross profit for Limited Brands as a percentage of revenues for the past three years has
been 36.7%, 36.4% and 35.9%. For the second quarter of 2005 this was consistent with
34.6%. The net income of Limited Brands has shown the same reliability between 2002-
2004 with 5.9%, 8.0% and 7.5% respectively for an average of 7.1%. In the second
quarter of 2005 the net income was 4.5% of net sales, this value is lower then before and
can be contributed to the significant increase in interest expanses this quarter and
significant decrease in interest income along with an increase in income tax provisions.
11 Form 10-Q Limited Brands IND – LTD, 17. 12 Form 10-Q Limited Brands IND – LTD, 15.
13 Limited Brands to sell 22% stake in Galyan’s, http://www.retailnet.com/story.cfm?ID=16758.
Over the past three years Limited Brands has had an average cash flow from operations of $930 million with 2002 performing below this at $795 million and 2003 coming in above with $1,633 million. All of these values are positive which shows that the company is making money. The lower values for 2004 with a decrease of 12.23% can be attributed to the smaller net income and the sale of third-party warrants along with substantially smaller gains on investees’ stock. The CFO for Limited was also below the
industry average of 76.3% for 2004.
Limited Brands is staying consistent with the industry average of 1.91 current ratio for 2004 with a 1.85. This shows ratio shows that Limited Brands is within the industry average for short-term debt-paying capabilities. The short term liquidity of Limited Brands of 1.81 in 2004 is down from 3.28 in 2003 but is right around the average for the industry of 1.71. The inventory turnover of limited brands is slightly below the industry 7.13 with a 5.8 and 6.0 in 2004 and 2003 respectively. This ratio shows that limited brands keeps a higher inventory of more specialized products on its shelves.
Limited Brands is under the industry ROE average of 22.8% with a 15.1% in 2004 and a 17.42% in 2003. Their lower performace can be contributed to their below average financial leverage of 6.5%. Limited Brands keeps their leverage below 2% with 1.5% and 1.8% in 2004 and 2003 respectively. Limited brands may post a small ROE but unlike the industry they do not take on significant leverage to boost it. What this does show is that the company could take on more leverage in the future. The company is doing well though because it’s profit margin and asset turn over rate of 10.1% is close to
the industry average of 11.9% which shows that their smaller ROE is because of their significantly lower financial leverage.
Limited Brand’s accountants have put together very comprehensive annual
reports with disclosures that detail every major transaction or discrepancies between the different years to include drops in specific lines such as pants. The only problem that I found with the accountants was that their depreciation was hard to track along with their LIFO or FIFO approaches. The biggest problem that I did find which was a red flag to me was the fact that they had different numbers for different years on their annual reports and there were also discrepancies between their annual reports and the 10-Ks that were filled with the SEC. Although there seemed to be these errors the numbers would still balance out in the end for the most part. I believe that the accounting problems were accidental and that overall they did a good job putting together very comprehensive statements with very robust disclosures.