In early March, activist investor Barington Capital Group called for big changes at L Brands (NYSE:LB), the struggling parent company of Victoria's Secret and Bath & Body Works. Barington asked L Brands to fix Victoria's Secret by "correcting past merchandising mistakes" and communicating an "up-to-date brand image that resonates with today's consumers."

Barington also suggested that L Brands should split its brands through a spinoff of Victoria's Secret or an IPO for Bath & Body Works. The hedge fund also wanted to "improve the composition" of its board of directors, which it claimed "lack(s) the independence and diversity needed to effectively oversee and advise management."

Victoria Sport athleisure apparel.

Image source: Victoria's Secret.

However, Barington recently backed down after working out a deal with L Brands. L Brands named Barington as its "special advisor" privy to non-public information, and Barington agreed to vote for the retailer's three independent board nominees. L Brands also agreed to declassify its board and put all members up for reelection in 2021. The SEC filing didn't discuss any plans to spin off Victoria's Secret or Bath & Body Works.

This deal reduces the near-term pressure on L Brands, but it doesn't really address Barington's concerns and the retailer's ongoing problems.

What happened to L Brands?

L Brands lost nearly 70% of its market value over the past three years. Victoria's Secret's growth decelerated due to sluggish mall traffic, outdated and oversexed ad campaigns, and competition from rivals like American Eagle Outfitters (NYSE:AEO) Aerie. A PR blunder last year regarding the exclusion of transgender and plus-size models exacerbated the pain.

Bath & Body Works fared better, but its decent growth couldn't fully offset Victoria's Secret's failures. Here's how the two brands fared over the past year :

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Q1 2018

Q2 2018

Q3 2018

Q4 2018

Victoria's Secret

1%

(1%)

(2%)

(3%)

Bath & Body Works

8%

10%

13%

12%

Total

3%

(3%)

4%

3%

Comps growth, stores plus direct sales. Source: L Brands quarterly reports.

Victoria's Secret is still struggling under its new CEO, John Mehas, who took the job in late 2018. Mehas' plans for a turnaround include closing stores, curbing promotions, launching more innovative products, relaunching the Victoria's Secret website, growing its beauty products business, expanding Victoria Sport's athleisure offerings, and bringing back swimwear, which the company discontinued in 2016.

Victoria's Secret skincare products.

Image source: Victoria's Secret.

However, none of these efforts seem to address the growth of Aerie, which posted its 17th straight quarter of double-digit comps growth last quarter. Aerie's marketing campaigns branded the company as the "anti-Victoria's Secret" with body-positive ads featuring models of all shapes and sizes. Meanwhile, the annual Victoria's Secret Fashion Show only attracted 3.3 million viewers last year, down from five million viewers in 2017 and 6.7 million viewers in 2016.

Victoria's Secret clearly needs to rethink its marketing and branding strategies to win back shoppers. Splitting Victoria's Secret and Bath & Body Works is an interesting idea, but most investors would likely want to own the latter instead of the former.

Meanwhile, Bath & Body Works' decelerating comps growth in the fourth quarter indicates that L Brands can't keep relying on the brand to offset the weakness of Victoria's Secret. The company's annual gross margin also fell from 39.3% in 2017 to 37% in 2018, which suggests that it relied on markdowns to boost its sales.

No sign of a turnaround yet

L Brands trades at just 10 times forward earnings and still pays a forward dividend yield of 4.4%, even after it cut its payout in half last year. That low valuation and high yield might set a floor under the stock, but investors shouldn't expect it to recover anytime soon.

The company's adjusted earnings fell 12% in 2018 (although 2017 included an extra week), and it anticipates a 4% to 22% decline this year. That's a dismal forecast compared to peers like AEO, which is expected to post 8% earnings growth this year as it expands Aerie into more markets.

Barington made good points in its initial letter, but L Brands seems to have merely kicked the can down the road. Mehas might eventually unveil bold turnaround plans in store for Victoria's Secret, but I wouldn't touch L Brands' stock until I see some real improvements.