Parent company L Brands sold 55 percent of the intimates giant to Sycamore Partners for $525 million. The deal, which is expected to close in 2020’s second quarter, includes the Pink brand, as well as the lingerie and beauty divisions of the business. Victoria’s Secret will become a private company, while L Brands’ remaining operation, Bath & Body Works, will become a stand-alone public firm.
“Today is the beginning of an important new chapter in the evolution of the enterprise,” Leslie H. Wexner, founder of L Brands, wrote in a letter sent out to L Brands associates Thursday morning. “As I’ve said before, retail is a business of change. And we have seen our business evolve and take new paths many times before. I have decided that now is the right time to pass the reins to new leadership.”
Allan Tessler, lead independent board director of L Brands, said the board considered a number of options before deciding on the current strategy.
“As the board and its advisers explored these potential alternatives, we received valuable input from a number of shareholders, and we greatly appreciate their support,” Tessler said in a statement. “We are confident that this transformative transaction is the best path forward to strengthen our iconic brands and deliver enhanced value to all L Brands shareholders.”
Following the transaction, Wexner — the founder and chairman of L Brands who has come under fire over the last 18 months for Victoria’s Secret failure to adapt to changing market conditions, his relationship with Jeffrey Epstein and alleged sexual harassment at the company — will transition from chairman and chief executive officer of L Brands to chairman emeritus of the company he founded 57 years ago. Nick Coe, the current chief executive officer of Bath & Body Works, has been named vice chairman of Bath & Body Works Brand Strategy and New Ventures, while Andrew Meslow, Bath & Body Works’ chief operating officer, has been elevated to ceo of the business.
The company would not comment on Victoria’s Secret’s current leadership team, including John Mehas, ceo of Victoria’s Secret lingerie, Amy Hauk, ceo of Pink and Greg Unis, ceo of Victoria’s Secret Beauty, and whether each will continue his or her post.
In addition, L Brands will retain a 45 percent stake in Victoria’s Secret, which Sycamore valued at $1.1 billion. The company said it intends to use the proceeds from the transaction, along with approximately $500 million in excess balance sheet cash, to reduce debt. Moody’s vice president Christina Boni estimated that the deal will decrease L Brands’ debt by as much as $1 billion. But the remaining stake in Victoria’s Secret also signals that L Brands was not interested in simply offloading the brand for its remaining profits. But rather, returning a once-value company to its former glory.
“We believe partnering with Sycamore is the best way to return the Victoria’s Secret business to historic levels of profitability,” Wexner said. “The separation of Victoria’s Secret Lingerie, Victoria’s Secret Beauty and Pink into a privately held company provides the best path to restoring these businesses to their historic levels of profitability and growth. Sycamore, which has deep experience in the retail industry and a superior track record of success, will bring a fresh perspective and greater focus to the business. We believe that, as a private company, Victoria’s Secret will be better able to focus on longer-term results. We are pleased that, by retaining a significant ownership stake, our shareholders will have the ability to meaningfully participate in the upside potential of these iconic brands.”
L Brands stock tumbled immediately after the market opened Thursday morning, following the news, closing down 3.6 percent to $23.42 a share. The announcement also included estimated sales results for L Brands’ fourth quarter. The company is expecting a 10 percent comparable sales decline in the Victoria’s Secret business, while the Bath & Body Works business will likely have gains of 10 percent. The company officially reports earnings on Feb. 26.
Wexner added that the new structure will allow Bath & Body Works — which represents the vast majority of 2019 consolidated operating income and almost all of last year’s gains — to continue to grow.
“We have long had great respect and admiration for L Brands and its success in building a world-class portfolio of lingerie and beauty brands,” said Stefan Kaluzny, managing director of Sycamore Partners. “With unmatched global brand awareness and customer loyalty, we believe there is a significant opportunity to reinvigorate growth and improve the profitability of Victoria’s Secret. We look forward to partnering with the leadership team to pursue these objectives.”
News began whirling around the struggling lingerie brand in January that it was looking for a new home. At the time, company representatives said they “would not comment on such rumors.”
But eliminating Victoria’s Secret from the L Brands portfolio seemed imminent. Sales have been declining at Victoria’s Secret since 2017 and selling the business was perhaps the quickest way to curb losses.
The sale also comes as the agreement between activist investor Barington Capital and L Brands is set to expire. Last year, Barington began putting pressure on L Brands to revamp its operations, particularly at Victoria’s Secret. (Barington owned 617,800 shares of L Brands, or roughly 0.2 percent, of the firm as of September.) A compromise was reached with Barington becoming an adviser. But according to the terms of the new deal with Sycamore, L Brands has extended its agreement with Barington for another 12 months.
In addition, L Brands has also agreed to a board refresh. Three board members — Allan Tessler, Gordon Gee and Raymond Zimmerman — will retire from the board at the annual shareholders meeting this April. Meslow of Bath & Body Works will join the board at the close of the transaction.
Meanwhile, some critics say the standards set by Victoria’s Secret are no longer desirable.
“I’ve seen and watched the evolution of the stores at Victoria’s Secret,” said Helena Kaylin, who worked in research and development, product innovation at Victoria’s Secret back in 2004. “Sort of the golden age of Victoria’s Secret,” she said.
“It’s difficult, because I go to the stores now and I’ve seen this move to, you know, the quality of the fabrics there is not great,” added Kaylin, who recently founded her own intimates brand, MINDD Bras.
Still others say the lingerie brand has fallen out of touch with consumer preferences as shoppers shift toward brands that promote comfort and inclusion.
Heidi Zak, cofounder and co-ceo of lingerie start-up ThirdLove, the brand that famously aired its beef with Victoria’s Secret in the public eye, said the sale of Victoria’s Secret “is a positive step for our industry, which was historically dominated by unrealistic ideals and images of what femininity and sexy should be. Over the last several years, we’ve seen inclusion become table stakes for most modern brands.”
But Wexner was not going to relinquish control of the company he built and presided over for more than five decades without a fight.
“Victoria’s Secret was Wexner’s baby, there’s no doubt about that,” said Craig Johnson, founder and president of Customer Growth Partners, a retail and consumer consulting firm. “But the world has changed.”
That explains why, in an attempt to stay relevant, Victoria’s Secret has employed a number of tricks over the last year to reduce losses and perhaps regain customers — such as reintroducing swimwear on the web site, selling smaller intimates brand La Senza and closing Henri Bendel, canceling the annual fashion show and even hiring Victoria’s Secret first plus-size model.
L Brands has also followed almost all of Barington’s advice on how to improve the business, such as finding new leadership outside of Wexner and updating the board.
“We have significant concerns regarding the composition of the L Brands board,” read a March 2019 letter from Barington to Wexner.
“We believe that the lack of director independence and diversity on the L Brands board has hindered its ability to effectively oversee and advise management,” the letter from the activist investors read and went on to point out that the majority of board members have strong ties to either Wexner, his wife Abigail or the Columbus, Ohio, community. In addition, as of 2018, the board’s median age was 71 and nine out of the 12 members were men.
“The board would be greatly enhanced if the board looked outside of its members’ personal and professional networks to identify new director candidates,” the letter said. “In a room where everyone has different points of view and there is a greater opportunity for cross-pollination of ideas, there are fewer unspoken assumptions, less ‘group think’ and a greater likelihood of innovation.”
But even with all the change taking place at Victoria’s Secret in the last year, no one could argue its force. The lingerie business is still the market share leader in women’s intimate apparel, both in the U.S. and internationally — 24 percent of the U.S. market in 2018, down from 32 percent three years earlier, according to market research firm Euromonitor International. Victoria’s Secret alone had more than $7.3 billion in revenues for the 12 months ending in February 2019. That’s in addition to L Brands other lucrative businesses.
“Victoria’s Secret is still a valuable brand,” said Howard Meitiner, managing director at Carl Marks Advisors. “One should not write off a brand like this. When you own 24 percent of a market, you’ve got the base there to rebuild. They have the opportunity to re-introduce themselves to this whole sector of the market because they’re known. And they have the revenue to invest.”
Even so, many argue that it is going to take a new pair of eyes — among many other changes — to turn things around.
“Change and disruption are much more difficult to achieve from within,” Meitiner said. “It’s much more difficult for people within the company to reimagine the concept, because you have people within these companies who were authors of the construct that [currently] exists. It’s much more difficult to be self-critical than it is for new owners to come in and take a fresh look and give management an unencumbered view of how the company needs to change relative to the competition.”
He added that the transformation is going to have to be significant. “They’re not going to be able to get where they need to get incrementally,” Meitiner said. “They have to start with a whole new revisioning. It isn’t easy, which is why they need help. And it’s not going to be done overnight.”
Those changes include reexamining the cost structure, reevaluating the store fleet, updating the merchandise assortment and fixing the marketing and branding of the company’s image. Victoria’s Secret could also work with celebrities or well-known influencers to gain new followers. “It’s too late to have one with Beyonce or Rihanna,” Meitiner said. “But why wouldn’t they do other strategic partnerships?
“The thing about turnarounds in general is that when you’re trying to do a revisioning of a company or a transformation it is an organization-wide effort,” Meitiner continued. “It’s not just a c-suite thing. It’s every part of the business.”
In the meantime, Wall Street has also been growing increasingly impatient with turnaround plans that are taking longer than originally anticipated.
Shares of L Brands are down more than 9 percent year-over-year — or down nearly 75 percent since the company’s peak in October 2015.
The new owners then have their work cut out for them — and it’s something that might best be done out of the glare of the public eye. Going private allows Victoria’s Secret to restructure without investors and competitors watching.
“As a public company, we are held to different standards for communicating,” Wexner said.
But, he added, “I think about the endless possibilities ahead for this company.”
Former Victoria’s Secret executive Kaylin said the good news is that “there’s still a lot of opportunity for them to figure that all out. Because they are such a dominant player and I think there are still a lot of people in the United States who love and trust them, especially in some of these smaller towns in the U.S. It’s the one place that they can go and find bras.”