Parent company L Brands’s deal to sell a 55-percent stake of the Victoria’s Secret lingerie and beauty divisions, along with the Pink business, to private equity firm Sycamore Partners was expected to close in 2020’s second quarter. But as the economy slows to a near standstill amid the coronavirus pandemic, retail and fashion brands have been some of the hardest hit sectors.
In its annual report filed with the Securities and Exchange Commission Monday, the company offered a list of risks to its business, including that the deal might not close or that the company might not obtain the necessary regulatory approvals.
“[There are] difficulties arising from the business uncertainties and contractual restrictions while the VS transaction is pending,” the company said.
L Brands, which also owns the Bath & Body Works brand, announced a planned sale of the majority stake of Victoria’s Secret to private equity firm Sycamore for $525 million in February.
Annual reports nearly always include a long lost of risks facing the company, but many of them that usually seem far-fetched are hitting closer to home.
And the reasoning that the deal was based on, might not ultimately hold up to COVID-19.
L Brands warned: “Assuming the VS Transaction is completed, there can be no assurance that we will be able to realize the anticipated value and benefits therefrom, and the VS transaction may adversely affect our business. The proposed transaction will result in a smaller, less diversified and more narrowly focused business than before the VS Transaction, which makes us more vulnerable to changing market and economic conditions.”
The deal was meant to help unlock value of its most lucrative brand, Bath & Body Works, which would then become a stand-alone firm.
The transaction was also a way to help clean up Victoria’s Secret’s image. The intimates business has been widely criticized over the last 18 months for the brand’s failure to adapt to changing market conditions, L Brands’ founder Leslie H. Wexner’s relationship with Jeffrey Epstein and alleged sexual harassment within the company.
Wexner, executive chairman and chief executive officer of L Brands, said he would step down from his role of chairman to chairman emeritus once the deal was complete. Earlier this month, the company named Sarah E. Nash, who joined the L Brands board in May 2019, as L Brands’s new chairperson. She would step into the role once the sale was complete. Having a woman leading the company was another significant attempt to improve the company’s overall image.
“Our ability to maintain our reputation is critical to our brand images,” the company said in its annual report. “Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and integrity. Any negative publicity, including information publicized through traditional or social media platforms and similar venues such as blogs, web sites and other forums, may affect our reputation and brand and, consequently, reduce demand for our merchandise, even if such publicity is unverified or inaccurate.”
The lingerie brand, while still the leader in women’s intimate apparel, has gone from owning 32 percent of the market in 2015, to just 24 percent in 2018. As of February, L Brands’ shares have fallen more than 80 percent since its peak in October 2015. Since then, the stock has fallen even further amid the coronavirus pandemic. Shares of L Brands are down more than 41 percent in the last month. The Dow Jones Industrial Average has fallen 13.5 percent in the same period.
The Sycamore deal was perhaps the last lifeline for the long-struggling lingerie brand.
But L Brands, along with the rest of the world, was not anticipating a global health crisis. The coronavirus pandemic has caused economies across the globe to grind to a halt since it first appeared in Wuhan, China, in late 2019.
L Brands was just one of many retailers forced to close its U.S. brick-and-mortar locations earlier this month in an effort to prevent the further spread of the virus.
The company’s large retail fleet — 1,053 Victoria’s Secret’s stores in the U.S. and 1,637 Bath & Body Works locations in the U.S. as of Feb. 1 — gives it a lot of exposure to the shutdown.
“Part of our future growth is significantly dependent on our ability to operate stores in desirable locations with capital investment and lease costs providing the opportunity to earn a reasonable return,” according to the 10-K filing. “We cannot be sure as to when or whether such desirable locations will become available at reasonable costs. Some of our store locations require significant upfront capital investment and have material lease commitments.”
While the company originally said it would close stores through March 29, it extended the closures on Friday.
“As the situation continues to evolve rapidly, we are not currently able to predict the timing of store reopenings,” the company said in a statement.
Victoria’s Secret also briefly closed down its e-commerce shop, but has since reopened. Then on Sunday, President Donald Trump extended the nation’s social distancing until at least April 30.
“To the extent the impact of the coronavirus continues or worsens, we may have difficulty obtaining the materials necessary for the manufacturing of our products, factories which produce our products may remain closed for sustained periods of time, and industry-wide shipment of products may be negatively impacted,” the company said. “Further, if the impact of the coronavirus continues or worsens, consumer behavior may be altered for an extended period of time which would impact our cash and liquidity and financial condition.”
To help reduce losses, L Brands said all in-store associates and anyone not supporting the online businesses would be furloughed starting April 5, until further notice. “As circumstances change, we will make every effort to bring these associates back to work as soon as possible,” the company wrote in a statement Friday. “Furloughed associates will also be able to apply for unemployment benefits, if eligible.”
The retailer borrowed $950 million from a revolving credit facility earlier this month. It will also suspend its quarterly cash dividend, beginning in the second quarter of 2020, reduce capital spend, postpone employee raises and temporarily reduce base pay for senior-level associates by 20 percent. In addition, the cash compensation of Wexner and other board members have been suspended.
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