Victoria's Secret Fashion Show 2018

The language of the big break-up has come to fashion.

Matter-of-fact statements about growing apart and brave rationales about how two parties that were once so close should split suddenly seem to be everywhere.

VF Corp. started it in August when it decided to consciously uncouple,  move to Denver and continue to oversee the dynamic Vans, The North Face and Timberland while setting up a separate company, Kontoor, to house the more-staid Lee and Wrangler denim brands. Gap Inc. followed last week, revealing plans to separate the still very promising discount player Old Navy from the much more mixed Gap, Athleta, Banana Republic, Intermix and Hill City.

Robert Fisher, Gap’s chairman, said, “It’s clear that Old Navy’s business model and customers have increasingly diverged from our specialty brands over time, and each company now requires a different strategy to thrive moving forward.”

Now Barington Capital Group, an activist investing firm led by James Mitarotonda, is pushing for L Brands Inc. to separate the long-suffering Victoria’s Secret from Bath & Body Works, which is going from strength to strength.

The big problem is one of perspective.

Investors know how to get behind a growth story and they know, sort of, how to discount the risks and opportunities of a turnaround — but trying to do both at once is tricky and tends to depress a stock price.

So gains on Wall Street can be made just by framing the investment story in a different way.

While VF’s stock has fallen about 10 percent since its announcement, Gap’s shares shot up by as much as 24 percent just after the retailer laid out plans to split in two.

Mitarotonda, for one, thinks the picture at L Brands will be clearer if Bath & Body Works and Victoria’s Secret are separated.

“Unfortunately, the market does not appear to be ascribing appropriate value to the solid financial performance of Bath & Body Works, most likely because it is being overshadowed by the struggles at the company’s more visible Victoria’s Secret segment,” said Mitarotonda in a letter to L Brands chief executive officer Leslie Wexner, which was revealed Tuesday.

“We believe that Victoria’s Secret has failed to evolve with the times and, as a result, its brand is losing touch with its customers,” he said. “Victoria’s Secret’s brand image is starting to appear to many as being outdated and even a bit ‘tone deaf’ by failing to be aligned with women’s evolving attitudes toward beauty, diversity and inclusion.”

L Brands responded that it has been working with financial advisers and “made significant changes in its business to focus resources on core categories to enhance performance and accelerate growth.” The company pointed to the closure of Henri Bendel, the sale of La Senza and moves to cut its dividend in half and bring in Tory Burch’s John Mehas to lead Victoria’s Secret.

While L Brands wrestles with its activist, the market is left to wonder about this renewed interest in spin-offs, which can both give wings to the stronger party and leave the weaker half to struggle.

In addition to the investment rationale, experts said there are good operational reasons to separate.

“It does work,” said Shyam Gidumal, leader of EY’s consumer products and retail segment for the Northeast, of spin-offs. “It oftentimes is much more than just good company, bad company.”

Gidumal said the various components of an umbrella company might have very different needs, but share a similar approach. So a brand on the rise might be entertaining partners in fancy hotels while another part of the organization is sharing motel rooms as they tighten belts to pull through a rough patch. Likewise, one division might have the cash to build new capabilities in-house, while another is running leaner and looking to outsource.

“If you do it well, your messaging becomes very clear,” Gidumal said of corporate separations. “What you’re trying to accomplish is to get your messaging to your employee base clear, to get your messaging to your customer base clear and to get your investment requirements focused.”

The move toward spin-offs now is an interesting one because it runs counter to trends seen elsewhere in the market, particularly in higher-end luxury, where the brand houses are only getting bigger as they seek to gain the scale necessary to compete.

Spin-offs could be a sign of just how segmented the market has become and how different, for instance, Old Navy’s business is from Gap’s.

“It’s definitely a very stressful, competitive retail dynamic that’s playing out,” said Murali Gokki, a managing director in AlixPartners’ retail practice.

Portfolio companies come together because each brand under the umbrella benefits from or offers something to its corporate sibling. Gokki said the question is now whether those synergies still exist as the various businesses evolve.

“If you do find the models have diverged, companies should be thinking about potential spin-offs,” he said.

And given the turmoil that can come from breakups, it’s something everyone who works in fashion should be thinking about, too.

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