Unlimited potential

Four years ago, Les Wexner, CEO of the Limited Brands, looked at his powerhouse retailer and women’s apparel conglomerate and decided it was time for a change.

Wexner, who founded the firm in 1963 with a single Columbus store called The Limited, realized that after several years of acquisitions, it was necessary to break off several of the brands he had folded into the company, including Abercrombie & Fitch and Lane Bryant, in order to solidify the brands and strengthen the corporation’s balance sheet.

That began a string of spin-offs and divestitures that continued until earlier this year, when the company shifted directions yet again — making a series of moves that included changing the company’s name.

In May, The Limited officially became Limited Brands. But it was not just a simple name change.

The corporation also announced it was buying back the approximately 17 percent of Intimate Brands shares that it didn’t already own. Because Intimate Brands Inc., which controls the Victoria’s Secret and Bath & Body Works brands, accounts for 90 percent of The Limited Inc.’s operating income, the announcement came as no surprise.

For each one of the 72.6 million shares of Intimate Brands tendered to the company, shareholders received in return 1.1 shares of The Limited stock.

“The recombination makes us a more balanced business,” said Limited Brands chairman and CEO Les Wexner at the company’s annual meeting in April.

But the move is about more than just balance. It’s about cost savings, leveraging resources and centralization. More important, says Wexner, it’s about enhancing shareholder value.

Ironically, that’s something the company’s four-year divestiture was supposed to accomplish. So why reverse direction?

The formation of Limited Brands allows the company to avoid having all of its revenue flowing from one retail sector. According to Wexner, under the new arrangement, 45 percent of Limited Brands’ revenue is expected to come from apparel, 27 percent from intimate apparel and 28 percent from cosmetics and packaged goods.

“The balance in our portfolio is important,” says Tom Katzenmeyer, vice president of investor relations. “We’re in fashion apparel, lingerie and personal care. It takes the risk out to be in the three categories.”

According to Katzenmeyer, the move will save investors about a penny a share in costs because with just one company, there will no longer be a duplication of listing fees, legal fees and other expenses. And the buyback has been good for investors in another way. Last October, shares of The Limited stock were around $9; after spiking at just over $22 at the time of the name change, shares of Limited Brands last month were in the $20-range.

But Katzenmeyer says money was just one reason.

“There are benefits all across the board,” he says. “We are narrowing our focus to a handful of very powerful brands.”

The centralized corporation has the benefit of sharing resources, which legally couldn’t be done before.

“The new company structure allows us to move people and ideas seamlessly with no legal considerations,” says Katzenmeyer. “If Express wants to introduce its own fragrance, it can go to The Limited for that expertise.”

Operationally, Katzenmeyer says there won’t be many changes. Each company will retain its own CEO and operating committee, all administration offices will remain housed in Columbus, and no store closings or layoffs are planned.

The story

The Limited made its first public stock offering in 1969, and in 1980, it began introducing additional brands, starting with Express, then adding Lane Bryant, Henri Bendel and Lerner. By 1988, it had launched Limited Too and acquired Abercrombie & Fitch.

By 1995, The Limited represented a conglomeration of companies and brands. That same year, it offered a partial IPO of Intimate Brands, a company which includes the Victoria’s Secret and Bath & Body Works brands.

The partial IPO established Intimate Brands as an independent public company, while The Limited retained control of 83 percent of the stock. At the time, Intimate Brands represented 72 percent of The Limited’s operating income and 57 percent of its market capitalization.

“We spun out Intimate Brands to get a market value put on it,” says Katzenmeyer.

The Limited was in acquisition mode until 1998, when it began divesting itself of some of its holdings. That year, it split off Abercrombie & Fitch. It sold off a 60 percent interest in Galyan’s Trading Co. in 1999. And last year, it sold Lane Bryant.

What’s left for the $9.36 billion retailer are higher-profit brands that match the company’s new direction, new name and logo, and a respectable financial picture. It has changed its strategy to refocus on the market that made it a leader — fashion.

“We are striving to be the world’s best in fashion brands, brands that stay relevant and are sophisticated and forward-thinking,” Wexner says.

The evolutionary process

Wexner said The Limited began redefining itself in 1998, and the old name was, well, limited, in its scope and ability to define the changing company.

“We felt at this point it was time to change names. We are building a family of the world’s best fashion brands, an ambitious goal. Limited Brands recognizes what we are now in contrast to what we’ve been,” says Wexner.

But this is just the beginning, he says.

“Clearly, there is much to be done,” he says. “Building implies systematic, relentless change.”

It’s clear the company hopes that evolving from a decentralized group of separate companies into one centralized company will help build the market shares of the lower-revenue-generating companies that formerly fell under The Limited’s corporate umbrella. To aid in the centralization, it has brought in new blood.

“We brought in talent from outside the organization, people from companies like General Electric and Pepsi, and each brought expertise in a particular function, like marketing, IT or real estate,” Katzenmeyer says.

The result is a significant transformation that has helped lead the company to the best financial results in its history.

“We are reporting record earnings,” says Katzenmeyer. “We’ve earned three times more than analysts expected.”

So will Limited Brands mirror Intimate Brands’ success? Katzenmeyer says that while the brands will not be marketed differently than they have been, the marketing channels may change.

“We are considering a test of Express on television,” he says. “Right now, the only brand that advertises on television is Victoria’s Secret.”

And, he says, the company wants to expand the venues where Bath & Body Works and Express are marketed.

“We think Express will do well on the Internet, although it will take some time to launch the Web site,” says Katzenmeyer.

All in the family

As a sign of the company’s new direction, Wexner now refers to his company as a family of brands.

“The word family implies values and a particular behavior,” he says. “It says that we will take care of each other. The potential advantage of family-like behavior is that we can collectively do more than we could as an individual. We have to be a family.”

So how do analysts feel about the Limited Brands family? Dana Telsey, managing director of New York’s Bear Stearns, says bringing Intimate Brands back into the fold was a good move.

“Given the significant contribution of Intimate Brands, the recombination was the right thing to do,” she says.

Telsey says Limited Brands’ future looks rosy.

“They have been one of the best performing retail stocks this year, and the outlook is quite positive,” says Telsey. “I expect this performance to continue the rest of the year.”

Telsey says Limited Brands’ proactive management style makes it attractive to investors.

“The company finds ways for adding shareholder value,” she says. “Given their large cash picture, I anticipate a share repurchase down the line.”

The company recorded $1.4 billion in cash in its annual report, and that large cash balance kept the annual meeting a quiet one. When Wexner opened the floor to questions, one shareholder asked why the company keeps so much cash on its books.

“In uncertain economic times, it’s better to be secure,” he said.

That said, no one else had anything to ask.

“It’s amazing how tripling your earnings per share can silence a room,” Wexner said. How to reach: Limited Brands, www.limitedbrands.com.

Limited Brands (Formerly The Limited) closed its fiscal year with this portfolio:

Intimate Brands Apparel Assets Equity Stakes and Other

Victoria’s Secret Stores Express, Women’s $416 million market value of

Victoria’s Secret Direct Express, Men’s equity stakes in public cos.

Bath & Body Works, The Limited $1.4 billion cash on balance

White Barn Candle Lerner/New York & Co. sheet

Intimate Beauty Corp. More than $3.6 billion in sales

2,000 stores

Limited Brands’ mission statement:

Create a family of the world’s best fashion brands to drive sustained growth in shareholder value.