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LINGERIE UNLIMITED

Limited Brands charges ahead with a focus on intimate apparel

By Molly Knight

In 1963 Leslie H. Wexner, a cash-poor Ohio State University graduate, hit up his aunt Ida for a $5,000 loan.

Auntie’s confidence in the young fellow was well placed, to say the least. He used the funds to found The Limited, Inc.

Today the Columbus, Ohio-based company (now called Limited Brands) owns Bath & Body Works, C.O. Bigelow, Diva London, Express, Henri Bendel, Pink, the newly acquired La Senza lingerie chain, Victoria’s Secret and The White Barn Candle Company — in addition to its “first-born,” the Limited apparel chain.

In October the company posted net sales of $6.7 billion for the first three quarters of fiscal 2006 (which ends Jan. 28), up 8 percent from the comparable period a year ago. Third-quarter net sales rose 12 percent year on year, to $2.1 billion. And this year the company’s expansion promises to be anything but limited.

At an investor meeting in November, Wexner announced intentions to increase Limited Brands’ domestic retail square footage by 10 to 15 percent over the next 12 months. The company wants to expand at that rate annually going forward, officials said. “We want to grow,” said Len Schlesinger, vice chairman and COO of Limited Brands. “And we want to grow at an accelerated rate.”

Most of this growth will take place within the company’s two major brands: Victoria’s Secret and Bath & Body Works. Company officials say boosting the size of about 130 existing Victoria’s Secret stores by roughly 50 percent will maximize store productivity. They also plan to open between 30 and 50 Bath & Body Works units this year. “I am most excited about our real estate strategy,” said Sharon Turney, president and CEO of Victoria’s Secret. “We see great opportunities, and we have great plans to take the brand to the next level. We’ve continued to refine and improve the design and are seeing healthy results from our most recent remodels and expansions.”

The decision to boost the size of Victoria’s Secret stores was based on the success of a larger prototype at the Simon Property Group-owned Forums Shops at Caesars, in Las Vegas. Eight additional test stores with the same design have opened in the U.S., yielding roughly $1,000 in sales per square foot each, according to Martyn R. Redgrave, executive vice president and chief administrative officer of Limited Brands. Since 2003, “sales in the bigger stores have increased by 35 percent,” Redgrave said. But this number amounts to a 5 percent increase in productivity over the smaller Victoria’s stores, and insiders say the company must still figure out ways to maximize returns per store. “We’ve taken a hit to sales productivity in the short term,” Redgrave said, “while our offerings and assortments catch up to fill the space.”

Indeed, the ability to maximize efficiency within the walls of its lingerie giant is crucial to the company’s profit picture, insiders say. Wexner echoed this in his opening remarks to investors. “Think of the company as we do — as Victoria’s Secret,” he said. “This is where our future is.”

Wexner calls Victoria’s Secret the Starbucks of its sector and says it dominates its category more than Nike does athletic shoes. And yet the chain has plenty of room to keep growing, says Turney.

“We firmly believe we can take our $5 billion brand domestically and turn it into a $10 billion brand,” said Turney. “We’re in a pretty good place.”

The company says it will not be turning the La Senza stores into Victoria’s Secret units, though. Limited paid $628 million for the 645-unit La Senza in November. The deal comprised 318 company-owned stores in Canada and a further 327 licensed ones in 34 countries. La Senza will retain its name and management. As Wexner told investors, the chain’s international infrastructure will help Limited Brands meet its worldwide expansion goals.

One of the ways Victoria’s Secret hopes to boost profits is through the leverage created by its new loungewear and sleepwear spin-off, Pink. Since its inception two years ago, Pink has grown within Victoria’s Secret stores into a $700 million concept. Each Victoria’s Secret store offers Pink products, but there is also one Pink stand-alone store each in Birmingham, Ala., Detroit and San Francisco.

The company says it will open more freestanding Pink units next year, in addition to expanding the brand’s presence inside Victoria’s Secret stores.

This year Limited Brands will be launching Pink Beauty, which the company says will help solidify its footprint in the cosmetics sector. Currently, the beauty business brings Limited Brands $1 billion annually. Company officials say they hope to double that number over the next five years.

“Right now with Bath & Body Works, we are the fifth-largest cosmetics business in the U.S.,” said Wexner. “Procter & Gamble is number one. We have aspirations to be fourth, and then third, and then second.”

For the 30 to 50 Bath & Body Works units it plans to build this year, Limited Brands is targeting power centers, outdoor lifestyle centers and Main Street projects, company officials say. Of the 1,298 existing Bath & Body Works stores, 147 are in power centers and 96 in outdoor lifestyle centers. An additional 316 operate in what the company calls “top malls.” Return on sales performance for the power center and outdoor center units is 30 percent and 26 percent, respectively, versus 23 percent at those top malls.

Dr. Robert Passikoff, president of Brand Keys, a New York City-based retail real estate consulting firm, says he understands why sales in those outdoor centers are strong.

“With these kinds of table stakes, it’s all about location,” said Passikoff. “Either you’re there or you’re not. So it’s smart to be in as many places as possible. People want convenience. They want to be able to show up to their local strip center — and it’s there. That kind of thing resonates strongly with consumers. It’s very simple.”

In an attempt to branch out even more, the company secured a U.S. licensing agreement to begin testing in October at U.K. accessories concept Diva London. Currently, three Diva London units are operating in Ohio and the Washington, D.C., metro area, with three more to be built in those same areas.

The 450-square-foot stores target trend-conscious women 18 to 35, and the price points range between $5 and $40.

“We have recruited a great accessories team,” said COO Schlesinger. “And we fundamentally are going to invest a substantial amount of energy and resources in seeing if that category can stand as another leg of the enterprise.”

Though this new specialization will give Limited Brands more leverage in the marketplace, Passikoff says those in charge of Diva London will have to be vigilant in keeping up with the times.

“The accessories area is one where values and trends come into play a lot more than basic clothing or sexy underwear,” said Passikoff. “They’re going to have to be on their toes, because when a type of earring goes out, it’s out. This customer they’re targeting doesn’t just want the same old same old.”

Some wonder whether the time is right for Limited Brands to start looking overseas. The idea is “romantic,” says Turney. But “we don’t know much about it.”

Schlesinger is a more optimistic. “We understand it’s there, and we are committed to playing,” he said. “We recognize how much we have to learn.”

Maybe Wexler’s view on global expansion is the most upbeat of the company’s entire leadership team. Some might even call his outlook limitless — and perhaps with good reason.

After all, that’s the name he gave his 315-foot yacht.