(Filed Under Financial and General Interest News). Fitch Ratings, the global rating agency, has affirmed its ratings on Limited Brands,Inc., including the long-term Issuer Default Rating (IDR) at ’BB+’. In a statement accompanying the full list of rating, Fitch noted, “The affirmations reflect Limited Brands’ strong brand recognition and dominant market positions in intimate apparel and personal care and beauty products, strong operating results, reasonable credit metrics, solid cash flow generation and good liquidity. The ratings also consider the company’s track record of shareholder-friendly activities.”
The statement continued, “Fitch has a favorable view of the business profile given the diversity of its two profitable flagship brands, Victoria’s Secret and Bath & Body Works, as well as a strong direct business,
and a growing international effort. Both concepts have been successful in keeping merchandise fresh and current, which has fueled strong comparable store sales, enhanced customer loyalty, and optimized
markdown activity. At 15% - 20% of operating profits, the large catalog and Internet business (15% of 2011 sales) is a positive for operating margins, and extends the reach of the brands. “Limited Brands’ comparable store sales (comps) trends have remained robust, growing at 10% in 2011 (fiscal year ended Jan.
28, 2012) on top of a strong recovery at 9% in 2010. In addition to positive operating leverage from the favorable comps trendline, the company has driven margin growth through efficient inventory management.
EBITDA margins of over 19% (after adjusting for the sale of the third party sourcing business) are solid in comparison to the broader retail average in the low teens. “Pro forma for the unsecured notes issued in February 2012, lease-adjusted leverage is 3.6x, increasing about 0.4x, which is within the context of the existing rating level. Fitch generally expects the company to maintain a leverage profile in the mid-3x area, directing free cash flow (FCF) toward dividends
and share repurchases.
“Comparisons will be difficult for 2012 given the robust performance of 2011. However, the core drivers of the business remain strong - relevant brands and merchandise that command attractive pricing and benefit from a loyal customer base. As such, Fitch estimates that Limited Brands will continue to post positive comparable store sales in the low single digit range. Operating margins are expected to be similar to 2011 levels.
“Fitch expects Limited Brands to generate FCF (before dividends) in the range of $650 million - $700 million in 2012 and 2013. This compares to FCF generation of
$840 million in 2011, as the company will be spending more on capital expenditures in 2012 ($575 million - $625 million vs. $426 million in 2011). Fitch typically shows FCF after dividends. For 2011 and 2010, this figure was negative $304 million and negative $478 million. The wide differential to the earlier stated figures reflects the large special dividend outlays (beyond a regular dividend of approximately $200 million - $250 million), which are an outgrowth of the company’s shareholder-friendly stance. “There is no change in the company’s shareholder-friendly posture. Limited Brands remains committed to returning cash to shareholders through share repurchases and dividends. This posture is a key
constraint to the rating. Fitch expects the company to direct a significant portion of its FCF and the proceeds from its recent $1 billion bond issuance to fund these repurchases and dividends in 2012. More significant debt-financed share repurchases could
be a concern for the rating.
“Liquidity is strong, as indicated by a cash balance of $935 million as of January 28, 2012 and an undrawn $1.0 billion revolving credit facility. The company has a comfortable maturity profile, staggered over many years. Fitch considers refinancing risk low
given Limited Brands’ strong business profile, favorable operating trends, and reasonable leverage.”
Fitch currently rates Limited Brands as
The individual Firtch ratings for Limited
Brands are as follows
--Long-term Issuer Default Rating (IDR)
--Bank credit facility ’BBB-’;
--Senior guaranteed unsecured notes
--Senior unsecured notes ’BB’;
--Short-term IDR and commercial paper
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