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L Brands Stock Falls on Termination of Victoria's Secret Deal

Zacks Equity Research

Shares of L Brands, Inc. LB declined more than 14% during the after-market trading session on May 4. The stock nosedived following the company’s announcement that it has terminated the Victoria’s Secret deal with Sycamore Partners, which otherwise would have provided the latter a controlling stake in the lingerie brand.

In the month of February, L Brands had signed a deal with Sycamore Partners to sell 55% of stake in Victoria Secret for $525 million. The remaining stake was to be retained by L Brands. The net proceeds from this deal would have been utilized to lower debt. Also, the deal would have allowed the company to focus on its core brand — Bath & Body Works.

Sycamore Partners issued a notice on Apr 22, 2020 purporting to cancel the agreement. Per media reports, this move came after L Brands closed stores, furloughed employees, and failed to pay rent, in response to the coronavirus outbreak. Sycamore Partners argued that such actions have an adverse impact on the company’s value. The private equity firm alleged that L Brands violated the conditions of the deal, which said that the company would "conduct the business in the ordinary course consistent with past practice”, per sources.


 

Nonetheless, L Brands informed about the future strategy and stated that it is better for the company and shareholders to address the ongoing issues instead of “engaging in costly and distracting litigation to force a partnership with Sycamore.” Talking about the strategy, management intends to make Bath & Body Works chain a “pure-play public company” and Victoria’s Secret, “a separate, standalone company.”

Bath & Body Works has been the company’s bright spot, which contributed more than 46% to fourth-quarter fiscal 2019 net sales. Notably, the brand’s total sales were up 11% in the last reported quarter, with 10% rise in comparable sales and 5% improvement in comparable store sales. The segment benefited from growth across main categories body care, home fragrance and soaps.

Meanwhile, L Brands’ Victoria Secret business has long been ailing with fading popularity among customers. Further, the company is struggling to make a comeback in the wake of rising competition from intimate apparel brands like ThirdLove and Aerie. We note that L Brands had earlier taken measures to improve brand performance by introducing merchandise and marketing strategy. However, these measures have failed to generate the desired results. In the last reported quarter, comparable sales at Victoria’s Secret brand fell 10%.

Nevertheless, management assured that it will undertake all necessary steps to improve brand performance, contain costs, and enhance liquidity.

Closing Commentary

L Brands is already bearing the brunt of coronavirus outbreak that has led to the complete shutdown of economic activities, and the cancellation of deal with Sycamore Partners has aggravated the problem. Had the deal been materialized, it would have provided some cushion to the company’s financial position. We note that the company is struggling with declining revenues and shrinking margins for a while. Moreover, the company’s high debt level remains a concern.

In the past three months, shares of this Zacks Rank #3 (Hold) company have plummeted roughly 49.8% compared with the industry’s decline of 43.9%.

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