Limited Has a New Look and Novell Gets Ahead by Networking

Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

LIMITED (LTD)

Jim: Let’s begin with this women’s apparel retailer, Mike, a company started in 1963 by a law school dropout named Leslie Wexner, who still runs the place.

Mike: And among other things, the Limited Inc. made Frederick’s of Hollywood’s wares socially acceptable, wouldn’t you say?

Jim: How so?

Mike: Because one of its major holdings is Victoria’s Secret, which is now to Main Street what Frederick’s is to Hollywood and Vine.

Jim: Right, as a seller of women’s lingerie. But back when Wexner started the company in Columbus, Ohio, he called it the Limited because it had a narrow line of young women’s clothing. The company grew to encompass several brands of stores.

Mike: And Wexner’s reputation as a master marketer grew right along with it.

Jim: So now the Limited includes not only stores of that name, but also Limited Too, Express, Lane Bryant, Henri Bendel and Structure, among others. Together they have about 3,440 outlets. That’s not all. In 1995, Wexner spun off the Victoria’s Secret and Bath & Body Works chains into a new publicly held company, Intimate Brands Inc., which also trades on the Big Board under the symbol IBI. But the Limited still owns 83% or so of Intimate Brands.

Mike: Despite all that expansion, the Limited recently had been easier to get your hands around with every passing quarter, because its numbers were getting smaller.

Jim: You mean profit and margins, and that’s so typical of the faddish rag trade. For most of the 1990s, Wexner and the Limited lost their touch. The company’s stock became a terrible laggard just as rivals such as Gap Inc. were soaring. In fact, I believe that if Wexner weren’t the company’s founder, its board would have canned him long ago. Consider this: In 1990, the stock traded as high as $25 and change. Seven years later, its high was . . . $25 and change.

Mike: But it’s come back recently.

Jim: Correct. Since last August, the Limited has more than doubled in price, to the mid-$40s, or 26 times its expected 1999 earnings per share.

Mike: So once again we’re confronted with what seems to be a persistent question in this column, which is whether a company has hit bottom or is still on a slippery slope.

Jim: In other words, whether or not it’s a screaming bargain.

Mike: Exactly.

Jim: Well, first let’s talk about one of the big knocks against the Limited, which is that the company has had too many brands of stores selling merchandise that’s too similar so they end up cannibalizing each other in an industry that already has ferocious competition.

Mike: It’s true. Management has begun to address this by closing under-performing stores and changing the mix of apparel in its remaining outlets . . .

Jim: . . . to clarify each brand’s identity.

Mike: Correct.

Jim: The Limited itself is a good example. This outfit used to carry pretty stodgy clothes, often aimed at career women, but step inside one today and you’ll see lots of contemporary, casual apparel for younger women. Don’t get me wrong, I’m not putting one of those fashions or their customers above the other. But it’s paying off for the Limited.

Mike: Plus, the Limited got rid of its big stake in the upscale apparel chain Abercrombie & Fitch, a smart move since one might argue that the Limited’s ownership of that chain was a bad idea to begin with. And they’re at it again. On Monday, the company said it’s also going to spin off Limited Too, which caters to preteen girls.

Jim: That’s not all. The Limited also said its first-quarter earnings will be much higher than forecast and that it’s going to buy back up to 15 million of its own shares. Let’s also point out that the Limited’s decision to keep majority ownership of Intimate Brands has turned out to be a smart move, because IBI is surging, with its stock up 60% over the last 12 months.

Mike: Which helped light the fuse under the Limited’s stock. But the Limited itself is posting sterling sales numbers too.

Jim: No question. In this year’s first quarter, its same-store sales--those of stores open at least a year--surged 16% from a year earlier, or twice the industry average.

Mike: They were comparable to the numbers at Gap, which is the right chain to emulate--and that certainly accounts for much of the earnings gain the company reported Monday.

Jim: I think we’re reaching the same conclusion here. I’d buy this stock. It’s finally dawned on Wexner and the Limited that dramatic changes were needed, and now those changes are being made. Even with its run-up in price, the Limited to me is still a bargain.

Mike: I agree. This outfit looks to have hit bottom. Management has finally heard the wake-up call that’s been sounding for years, it’s intent on turning things around and I believe it has the skills to do it.

NOVELL (NOVL)

Mike: OK, Jim, let’s move from fishnet stockings, so to speak, to a net of an entirely different kind.

Jim: That being Novell.

Mike: Right, and here’s yet another company whose future was in serious question not long ago. There were doubts about management, its business plan, its products. But I think most of those questions have been put to rest. Novell is on the rebound and I’d buy its stock.

Jim: I’m not sure that all of its questions have been put to rest, but otherwise I agree with you. So, why don’t you explain in plain English what Novell does?

Mike: In a nutshell, Novell’s most important business is selling software and services to manage large-scale internal computer networks, such as those you’d find in big corporations.

Jim: And lately, linking those networks to the Internet.

Mike: To Novell’s credit, it’s concentrating on its core business at the expense of dabbling in others. That’s wise because linking corporate networks is a business with tons of competition. Yet Novell has really staked out its ground in this area called network management.

Jim: Which is getting ever more complicated and hard to manage.

Mike: And that puts a real premium on the skills of the system operators who manage these corporations’ computer networks. When they need help, more and more often they turn to Novell.

Jim: Now, back in the early 1990s, Novell and its stock were highfliers. Then the likes of Microsoft and IBM started giving Novell fits. This company went into an ugly slide. The stock, which reached the low $30s in 1992, sank all the way to 6 bucks by 1997.

Mike: But then came a key event to turn things around--a change in management.

Jim: Exactly. Novell hired Eric Schmidt, an executive at Sun Microsystems.

Mike: I should note, to put in a pitch for my favorite group of engineers, that Schmidt’s background included a stint at the computer lab known as Xerox PARC.

Jim: The subject of your new book.

Mike: Not only that, but Novell’s original technology came from Xerox too. Anyway, Schmidt had his hands full when he got this job, but he’s proved to be an excellent manager. He deftly cut costs, pared Novell’s product line, and he’s pushing products out the door that work.

Jim: He’s also traveled thousands of miles reassuring Novell’s customers, of which there are many.

Mike: Another notable fact about Novell is that it’s taking on Microsoft and it’s in a very good position to win. If you know anything about Microsoft, you know that one of the big raps on that company is that it has a habit of putting out a product that’s inadequate and then taking its time to fix the bugs.

Jim: There’s a luxury few others have.

Mike: The product, in this case, is the operating system called Windows NT, which is designed to run on networked computers. If you work at a big company, your desktop computer may be running not Windows 95 or ‘98, but Windows NT.

Jim: So what’s the problem?

Mike: The key question about Windows NT is whether it will “scale up.” In other words, whether it really works very well when those networks get bigger. Novell at first tried to compete directly with Windows NT, but it changed course and now presents itself as a solution for managing Windows NT systems. In fact, their catch phrase is “We make NT run better.” And that’s been a great success.

Jim: Certainly Wall Street likes the changes. Novell’s stock has roared back and now trades in the low $20s, giving it a multiple of about 46 to this year’s expected earnings. But I think the stock is going much higher. Novell now has nice momentum, stronger management and products people want. And don’t forget Novell’s huge installed base of existing customers that aren’t eager to change vendors if they can avoid it.

Mike: Right. In other words, it’s got a sizable piece of a pie that is expanding, and it’s got every chance of expanding its share of that pie.

*

Write or e-mail with a stock you would like to see discussed in this column. Times staff writer James Peltz ([email protected]) covers the markets and corporate financial trends. Times staff writer Michael Hiltzik ([email protected]) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.