(Bloomberg Opinion) -- L Brands Inc. is emerging as one of the companies most damaged by the MeToo era.
The Wall Street Journal reported on Wednesday that billionaire Leslie Wexner, the founder of the retail group, was in discussions to step aside as chief executive. At the same time, the company is exploring alternatives for Victoria’s Secret — its once prized and now struggling lingerie chain — including a full or partial sale, the Journal said.
Both are key moments for L Brands. Wexner, the longest-serving CEO in the S&P 500 Index, built up the company over decades, but had drawn attention for his association with the late financier Jeffery Epstein, who died while under arrest facing sex-trafficking charges. Meanwhile, Victoria’s Secret’s oversexed image looks incongruous against the new mood in fashion and luxury. Famed for its opulent catwalk shows, the chain canceled the event last year, and analysts at Jefferies said recently that the brand was becoming “irrelevant.”
Victoria’s Secret certainly is in need of a radical revamp; the group has already begun this process, introducing new products, and updating its marketing. But these moves haven’t yet paid off. L Brands reported disappointing holiday sales, and cut its profit guidance, with same-store sales at Victoria’s Secret falling 12% in November and December.
A more far-reaching overhaul for Victoria’s Secret is necessary, aligning its lingerie more closely with changing consumer tastes, emphasizing inclusivity and different body shapes, which could help it attract a younger customer. Athletic wear and beauty also offer more opportunities. But it also needs to cut back on discounting and likely close a large swath of its 1,200 stores. These steps are painful, and would better much better carried out in the private sector, away from the scrutiny of quarterly earnings.
It’s hard to put a value on the business. It had sales $7.4 billion in 2019. But Jamie Merriman, analyst at Bernstein, said that profitability is close to zero. Consequently, she ascribes no value to the business. Any potential buyer will need to invest significantly as well as bear the cost of store closures. Debt will also need to be apportioned, which could affect a new owner’s ability to borrow.
So L Brands won’t be able to count on a big pay-day from ridding itself of what was once a coveted brand. It should benefit, however, from being able to concentrate on Bath & Body Works, which is thriving and could deliver more value to shareholders. Merriman estimates Bath & Body Works could command an enterprise value of $11.4 billion, based on a valuation assumption of nine times earnings before interest and tax. Subtracting debt of $4.7 billion, would give an equity value of $6.7 billion, above L Brands’ $5.7 billion market value as of the close of trading Tuesday. This helps explain why L Brands’ shares surged 13 percent on the news in early trading Wednesday.
But investors should be wary on two counts. First, Victoria’s Secret wouldn’t be an easy deal for private equity, given the scale of the challenges. Second, investors should be mindful of the situation at Gap Inc., which intended to split into two companies, one containing its namesake brand and the other the faster-growing Old Navy. It ended up ditching this plan after Old Navy’s comparable sales growth weakened and it faced high costs related to establishing the brand as a stand-alone company. L Brands could come under similar pressures if Bath & Body Works were to lose momentum.
Victoria’s Secret clearly needs a new angel. Finding one might be too much of a miracle to pull off.
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Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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