By  on May 16, 2007

It's the end of an era for Leslie H. Wexner and the business he founded 24 years ago.

The $11 billion Limited Brands Inc. has decided to sell off 67 percent of Express to Golden Gate Capital, a private equity firm, for $548 million, while retaining 33 percent.

In addition, the company will explore options for the Limited Stores division, including possibly selling it off.

"These changes are born of a careful, and I believe thoughtful, strategy shift, and are undertaken to increase value and improve performance and opportunity for growth for all businesses involved," Wexner, the chairman and chief executive officer of Limited Brands, said on a recorded message. "Over the last decade, we have changed a lot and evolved, putting greater emphasis on personal care, intimate apparel and beauty."

Golden Gate has about 100 transactions to its name, manages $3.4 billion in funds and has been active in the specialty apparel and direct marketing areas. The portfolio company, Catalog Holdings, has annual revenues of $1.1 billion across 13 titles, including Newport News, Spiegel and Eyecare Centers of America. It's also active in electronics, software, media and financial services.

The restructuring of Limited Brands is a culmination of almost a decade of steamrolling ahead with its Victoria's Secret and Bath & Body Works divisions, while largely stagnating on the apparel side, which analysts believe has been a drag on Limited Brands' stock. Ironically, shares dropped $1.23 Tuesday to $26.18 on the New York Stock Exchange, and has a 52-week range of $23.54 to $32.60.

The downsizing also reflects recent difficulties being experienced by an older generation of apparel specialty chains, including Gap, Ann Taylor, Pacific Sunwear and Talbots, that seem to be losing market share to Abercrombie & Fitch, American Eagle Outfitters and J. Crew, as well as department and discount stores that have been beefing up private label fashion offerings such as Target, Kohl's and J.C. Penney.

Wexner founded his empire in 1963 with some borrowed money and a single fashion store called Limited in Columbus, Ohio. In two decades, the business became a specialty store powerhouse, and for awhile, the envy of the industry. It was known for fast turns and rapid interpretations of trendy European fashions that were on the selling floors for the masses within a few weeks after the runway shows.While largely throwing in the towel on apparel, Limited officials said they still want to be part of at least Express, and would retain two seats on the chain's board, but would no longer operate the business. The company expects that aftertax cash proceeds from the Express deal will approximate $425 million, subject to any post-closing adjustment, and that the transaction will close by July 6. The 631-unit chain generated $1.7 billion in sales last year.

Limited Brands, known for its savvy restructurings, has established a pattern of selling off majority stakes in businesses, including Abercrombie & Fitch, and retaining a minority stake in them for awhile. The company said there's no timetable for determining the fate of the 253-unit, $493 million Limited division. Funds generated through the Express and Limited transactions will be reinvested in the corporation's higher return businesses, as well as for dividends and possibly share repurchases.

"Our strategic agenda focuses on growth in the intimate apparel and personal care and beauty segments of our business," Wexner said in a statement. "The new ownership structure for Express will provide it with the resources, leadership focus and capital to maximize its potential. Consistent with our past practices, we intend to return excess cash to shareholders. We will also engage in a complete review of our SG&A expenses with a view to a resizing and realignment that is appropriate for the size and complexity of our new enterprise structure."

He said Express has shown progress and improved performance over the last year and a half. "We continue to believe in Express and its potential. In fact, we structured this transaction specifically to continue to participate in the growth of Express through our 33 percent ownership."

Jay Margolis will continue as ceo of Express, which will remain based in Columbus. Other management and associates are also expected to remain, Limited Brands said.

Meanwhile, the company lowered its earnings expectations for this year.

For the first quarter, the company now sees earnings of 12 to 14 cents, versus earlier guidance of 25 to 28 cents, and 25 cents last year. Lower-than-anticipated sales and merchandise margins at each of its brands were cited, particularly disappointing bra launches at Victoria's Secret.The company also expects "a challenging second quarter," especially at Victoria's Secret, and estimated 2007 second-quarter earnings per share at 20 to 24 cents, compared with 28 cents per share last year.

Full-year estimates are now at $1.55 to $1.65, versus the prior guidance of $1.75 to $1.90. The estimates do not include any impact from the Express transaction or potential options for Limited Stores.

Martyn Redgrave, executive vice president and chief administrative officer, said more than 70 percent of Limited Brands' revenues are derived from intimate apparel, beauty and personal care, and that based on its sale of 67 percent of Express for $548 million, the chain has an enterprise value of $778 million. The $548 million includes $431 million in cash and a $117 million debt-financed dividend from Express.

"We believe Express' total future value is actually greater than $778 million because we will continue to participate in the growth of the business through our 33 percent ownership interest," Redgrave said. "We have retained an ownership interest because we are encouraged by the progress and improved performance of Express and we continue to believe in its continued growth."

Bank of America Securities has been Limited's financial adviser for Limited and Express.

In his message, Wexner chose to emphasize growth initiatives, rather than the downsizing of his apparel business. Among the efforts he cited were:

-- Expanding the average size of Victoria's Secret stores by roughly 50 percent over the next five years; with 8 to 10 percent square-foot growth annually. The brand has a presence in apparel, including sportswear and jeans.
-- Growing the Victoria's Secret sport, accessories and swimwear brand extensions, which are in the "early stages" of development, Wexner said.

-- Beginning to look at the potential for Bath & Body Works to expand internationally.

Wexner also said the Bigelow, White Barn and Henri Bendel brands have "abundant opportunities to grow and incubate new concepts that have scale."

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