L Brands is moving closer to selling off a majority of Victoria’s Secret, but many questions remain.
These include whether the leadership team will remain as is at Victoria’s Secret — including John Mehas, chief executive officer of Victoria’s Secret lingerie; Amy Hauk, ceo of Pink, and Greg Unis, ceo of Victoria’s Secret Beauty; what changes, if any, will be made to the innerwear retailer’s product assortment and marketing, and what new blood will replace L Brands Inc. founder and executive chairman Leslie H. Wexner as he readies to step aside to the chairman emeritus role.
“The [Victoria’s Secret] business has gone through a very challenging period financially,” Stuart Burgdoerfer, chief financial officer and executive vice president of L Brands, said on the company’s Thursday morning conference call with analysts. “The results of the brand, including the financial results, have been challenged and that pattern continued in 2019 and is projected to continue certainly for a portion of 2020.
“At this time, we felt it was important to have the value of Bath & Body Works realized in the marketplace, to have new input and ownership perspective through a private format,” Burgdoerfer continued. “And we believe that those results had the potential to deliver a lot of value to shareholders. Arguably they already have delivered value to shareholders if one looks at the share price move between early January and what has happened since then.”
In the last month, L Brands’ stock has risen more than 12 percent. In addition, a handful of banks updated their ratings — to new, more positive outlooks — on L Brands’ shares after news began swirling last month that the parent company was considering a sale of Victoria’s Secret in an effort to curb losses.
“Management appears to have homed in on walking away from unprofitable VS Lingerie sales, a shrink-to-grow strategy we have been advocating for years,” Simeon Siegel, retail analyst at BMO Capital Markets, wrote in a note.
Earlier this month, L Brands revealed plans to sell a 55 percent stake of the struggling lingerie brand, including the Pink division and both Victoria’s Secret lingerie and Victoria’s Secret Beauty, to private equity firm Sycamore Partners for $525 million. That means L Brands will retain 45 percent of the business in the deal, which is set to close in 2020’s second quarter. Bath & Body Works will become a stand-alone public firm.
“With respect to the potential of the business and how we thought about it, we felt strongly about retaining a stake [in Victoria’s Secret],” Burgdoerfer said. “This is an iconic brand with very strong positions. And with new leadership and new perspective coming from Sycamore, who has a lot of experience in the retail sector, as you know, we believe that this business can be stabilized and turned around and that significant value can be created.
“And there’s a lot of upside in just doing the math of what [the Victoria’s Secret] business could be worth,” he continued. “If we all thought about what this business was worth five or six years ago…there’s a heck of a lot of upside that potentially could be very, very significant. If you just went back and did math off of what the business had done at its peak. If you even took half of that in terms of its potential, the upside is very significant. It’s a terrific business.”
In fact, the Victoria’s Secret business sold more than $7 billion worth of lingerie last year and is still the market-share leader in women’s intimate apparel, both in the U.S. and globally. But sales have been declining since 2017. In 2018, the lingerie giant had 24 percent of the U.S. women’s intimates apparel market, down from 32 percent three years earlier, according to market research firm Euromonitor International.
Still, Victoria’s Secret is not the business it once was, and L Brands keeps writing down its value. The retailer’s profits last year were significantly reduced by a onetime, pretax impairment charge of $725 million related to Victoria’s Secret goodwill and store-related assets.
Meanwhile, the fourth quarter’s results showed ongoing struggles. Victoria’s Secret sales fell to $1.64 billion during the fourth quarter, down from $1.84 billion a year earlier. Full-year 2019 sales also fell, to $5.1 billion, compared with $5.5 billion the prior year.
But Siegel pointed out that while sales were down, “merchandise margin was up meaningfully. VS continued to pull back on promotional activity in bras.”
Even so, Burgdoerfer said the company anticipates losses in the Victoria’s Secret lingerie business to continue for at least the first half of 2020.
The company has employed a number of tactics over the last 18 months to turn the lingerie business around, but none of them seemed to be working — at least not fast enough to tame investor fears.
Shares of L Brand are down more than 20 percent year-over-year — or more than 75 percent since the company’s October 2015 peak. Last year activist investor group Barington Capital began pressuring the firm to spin off the Victoria’s Secret business, allowing the more lucrative brand, Bath & Body Works, to stand alone on the public market.
“We agree the math on a stand-alone [Bath & Body Works] suggests value unlock,” Kate Fitzsimons, an analyst at RBC Capital Markets wrote in a February note. “One could argue that a [Victoria’s Secret] turnaround would best be executed away from the public eye, that [Bath & Body Works] would benefit from increased focus to maintain its growth and that [L Brands] should de-risk its balance sheet. Given value-generating actions already having been executed including the La Senza sale and Henri Bendel closure, we believe this was one of the few value-generative actions left.”
Her firm reiterated its “perform” rating on the stock and set a new, higher, price target of $24 a share.
“With the news behind us and with [Bath & Body Works] now fully the equity driver behind [L Brands] shares (rather than [Victoria’s Secret]), we expect valuation to be the key debate on BBW/LB shares,” Fitzsimons wrote.
As Wexner transitions to chairman emeritus and remains on the board, a successor for him as chairman has not yet been named. (Nick Coe, the current ceo of Bath & Body Works, will be elevated to vice chairman of Bath & Body Works Brand Strategy and New Ventures once the transaction in complete.)
Many retail experts say it will take a fresh set of eyes to turn the company around.
“It’s always more difficult to re-brand from within,” said Howard Meitiner, managing director of Carl Marks Advisors. “The problem with many lingerie and retail companies is that they stay fixed to the original concept that made them successful and they’re not nimble enough to respond to changes that happen in the market. Left within the culture that it was founded, it’s going to be much more difficult for Victoria’s Secret to reinvent itself and to build on what is still a very substantial base of revenues.”
Either way, both L Brands and Victoria’s Secret have been in need of a makeover for some time. Wexner’s relationship with Jeffrey Epstein, the convicted sex offender who handled Wexner’s personal fortune for years, did little to help the brand’s image. Neither did the alleged sexual harassment within Victoria’s Secret.
The lingerie brand has also been facing continued pressure to evolve its marketing strategies. Victoria’s Secret’s ceo Mehas — who was not on Thursday morning’s conference call — told analysts during last fall’s Investor Update Day at the L Brands’ Columbus, Ohio headquarters, that more changes were coming.
On Thursday morning’s conference call, Burgdoerfer said more changes are coming.
“Things as fundamental as the opportunities around marketing, or the growth in the core category of bras, for Victoria’s Secret Lingerie, or for that matter, Pink, those strategies will continue,” he said. “I think, in some respects, we might see differences in execution, if you will, in terms of how those opportunities are pursued.”