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After Deal, Can Victoria’s Secret Be Turned Around?

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Kellie Ell
·10 min read
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Victoria’s Secret has been sold — and now the question is whether it can stem its slide.

At least for now, Wall Street continues to have its doubts. Shares of L Brands Inc. closed down 3.6 percent Thursday to $23.42 each, and are down roughly 13-and-a-half percent year-over-year — or more than 75 percent since the company’s peak in October 2015.

Things might be easier once the retailer becomes part of Sycamore Partners’ portfolio and out of the spotlight of the Street. Victoria’s Secret’s parent L Brands said Thursday it had sold 55 percent of the intimates giant to Sycamore for $525 million. L Brands will retain a 45 percent stake in the innerwear giant, which Sycamore valued overall at $1.1 billion. The deal, which is expected to close in the second quarter, includes the Pink brand, as well as the beauty and lingerie divisions of the business. L Brands’ remaining operation, Bath & Body Works, will become a stand-alone public firm.

As part of the shift, Leslie H. Wexner, L Brand’s chairman and chief executive officer, is stepping aside to become chairman emeritus of the company he founded 57 years ago. Nick Coe, the current ceo 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 in his or her post. There is also no word yet on who the new L Brands chairman will be.

The company said it intends to use the proceeds from the transaction, along with about $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 off-loading the brand for its remaining profits. Rather, its interests lie in returning a once-valuable 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.”

Wexner added that the new structure will allow Bath & Body Works — which represents the majority of L Brands’ 2019 consolidated operating income and almost all of last year’s gains — to continue to grow. Along with the news of the sale, L Brands also released earnings estimates ahead of Feb. 26’s release. For the 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.

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.”

Stefan Kaluzny, managing director of Sycamore Partners, said following the deal: “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. 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.”

But just what the new strategies are remain unclear. 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.”

However, 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.

Some critics say 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,” said Howard Meitiner, managing director at Carl Marks Advisors. “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 Beyoncé 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 reenvisioning 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.”

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 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 VS fashion show and even hiring Victoria’s Secret’s first plus-size model.

The sale 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.

Interestingly, L Brands has also followed almost all of Barington’s advice to date 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.”

In addition, in the sale to Sycamore, L Brands has also agreed to refresh its board. 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.

But even with all the change taking place at Victoria’s Secret in the last year, no one could argue its force. The retailer 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,” Meitiner said. “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 reintroduce themselves to this whole sector of the market because they’re known. And they have the revenue to invest.”

In the meantime, Wall Street has been growing increasingly impatient with turnaround plans that are taking longer than originally anticipated.

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.”

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