Fitch Rates Limited 'BB+/B'; Outlook Negative

Business Wire,  July 1, 2008  

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CHICAGO -- Fitch Ratings has assigned ratings on Limited Brands, Inc. (Limited) as follows:

--Long-term Issuer Default Rating (IDR) 'BB+';

--Bank credit facility 'BB+';

--Term loan 'BB+';

--Senior unsecured notes 'BB+';

--Short-term IDR 'B';

--Commercial paper 'B'.

The Rating Outlook is Negative. Limited had $2.9 billion of debt outstanding at May 3, 2008.

The ratings reflect Limited's leading market position in intimate apparel and a top-five position in personal care and beauty, strong brands and solid cash flow generation. The ratings also consider the challenging operating environment, increasingly competitive industry, Limited's weaker credit metrics following its recapitalization in 2007, and track record of shareholder-friendly activities. The Negative Rating Outlook reflects the potential for prolonged weakness in same store sales that would negatively impact operating margins, worsening credit metrics, and management's discipline with regards to share repurchases.

Limited is a leading intimate apparel retailer under the brands Victoria's Secret and La Senza with 1,346 stores as of May 3, 2008. In addition, Victoria's Secret Beauty and Bath & Body Works (BBW), with 1,626 stores, represent the fifth largest beauty and personal care company in North America in terms of sales. The brand has a 94% awareness. Given the strength of the brands, Limited has produced positive same store sales historically, with strong sales productivity metrics in the specialty retail space at annual sales per square foot of $694 and $655 at Victoria's Secret and BBW, respectively, in 2007. Nevertheless, higher energy costs and falling real estate and stock prices weakened consumer sentiment and lowered discretionary spending in categories such as apparel sales in the second half of 2007. Therefore, 2007 and first quarter 2008 same store sales were negative 2% and 8%, respectively. Fitch expects Limited's same store sales performance could remain pressured in the near term. Also of concern is the increasingly competitive industry as Limited competes with many different types of retailers including individual and chain specialty stores, department stores, discount retailers as well as e-commerce and catalogue businesses. However, Fitch recognizes Limited's brands are a destination in their respective categories, and Fitch expects same store sales performance to improve as the economy recovers.

Historically, Limited has achieved double-digit operating margins except for 2007 when operating margin decreased to 8.7% as a result of deleveraging of expenses on weak same store sales and operational issues at its new distribution center. Management expects the margins to improve in 2008 as the new distribution center continues to show operational improvements. In addition, Fitch expects the company will generate positive free cash flow as a result of its operational initiatives, including a new supply chain system at BBW, better inventory management, cost reductions and reduced capital expenditures.

The ratings also consider Limited's weaker than historical credit metrics due to the combination of the company's 2007 recapitalization, which resulted in $1.25 billion of additional debt, and a weaker sales environment for apparel and personal care products in the second half of 2007. These factors caused Limited's latest twelve months (LTM) leverage ratio (adjusted debt/EBITDAR) to increase to 4.2 times (x) from 3.2x in 2006. LTM EBITDAR coverage of interest and rent expense decreased to 2.4x from 2.9x in 2006. Fitch expects 2008 leverage and coverage ratios to remain around the same levels. In addition, the company has a track record of shareholder-friendly activities as excess cash flow had been directed to share repurchases historically. Fitch expects this trend will continue.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The ratings above have been initiated by Fitch as a service to investors.

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