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2 More Hurdles Standing in the Way of L Brands Shedding Victoria's Secret

By James Brumley - Feb 3, 2020 at 8:55AM

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Even if a buyer is willing, the retail conglomerate's debt load and liabilities are muddying matters.

Although parent company L Brands (BBWI -5.10%) has yet to confirm it, the working theory that it's considering a sale of its Victoria's Secret arm remains the market's assumption. A "person familiar with the matter" intimated the possibility to Bloomberg on Wednesday of last week.

The prospect is far from guaranteed, however. L Brands may be looking to sell Victoria's Secret, but that doesn't inherently mean a suitor is willing to buy it -- at least not at a palatable price. The lingerie brand's same-store sales have been shrinking for a long while now, and full-year operating profits are frequently flirting with nil. Any organization that acquires it will be taking on a sizable repair project.

The impasses to a sale go well beyond slumping sales, however. While news of the sale and the corresponding exit of CEO (and founder) Leslie Wexner have dominated the headlines since Bloomberg introduced the idea, a couple of other headaches are waiting in the wings. Both raise questions of how fiscal responsibility might be divvied up.

a Victoria's Secret storefront is shown

Image source: L Brands

1. La Senza's Unpaid Bills

Some L Brands shareholders will remember the company sold off its smaller lingerie store chain La Senza in early 2019 to private equity firm Regent. Though the fiscal details of the deal were never disclosed, it looked like a relatively straightforward transaction rooted in L Brands' desire to focus on fewer but bigger brands.

There was a curious quirk included within the terms of the deal, however, according to La Senza inventory supplier MGF. It says L Brands was to guarantee payment on $20 million worth of inventory delivered to La Senza between the middle of 2019 and May of this year.

As of its latest tally, MGF reports it has not been paid for $42 million worth of inventory it's supplied for La Senza. It's unclear to what extent L Brands may be held liable for that figure.

La Senza, for the record, was already losing money when Regent bought it, logging an operating loss on the order of $40 million the year before the deal was made. It's unlikely the retailer in just one year has swung back to a profitability that would allow it to pay all of its bills.

Were it just a few million dollars' worth of inventory, it would be an annoyance, but not necessarily a dealbreaker. But it's not just a $20 million check L Brands may have to write: the company's recent SEC filings also indicate it's guaranteed lease payments of now up to $44 million to keep La Senza stores open. The last of those leases expires in 2028. The potential hiccup is how might the total $64 million liability be divvied up when one of the two big divisions of L Brands can't actually afford to pay La Senza's unpaid bills either.

For perspective, L Brands has recorded an operating profit of $1.3 billion on sales of $13.1 billion for the past four reported quarters, though only $267 million of that operating profit came from Victoria's Secret.

2. Divvying up debt

In that same vein, Jefferies analysts highlight another matter that will surely surface, should divestiture whispers become reality. From the Jefferies analysis: "We see a heavy debt load creating a large obstacle for investors that seek a split of Bath & Body Works and Victoria's Secret." The heavy debt load in question stands at just under $5.5 billion worth of long-term liabilities, per L Brands' most recent SEC filing.

There is no solution the parent and the suitor and shareholders are likely to agree on. Technically speaking, Victoria's Secret is the bigger unit as measured by sales, accounting for 56% of 2018's total top line of $13.2 billion. But, as measured by profits, Bath & Body Works is the workhorse, contributing 75% of 2018's operating income of $1.44 billion.

The suitor will argue it's doing L Brands a favor already by taking Victoria's Secret off of its hands, and shouldn't be saddled with much (if any) debt. L Brands will argue Victoria's Secret offers the most potential, and should at least take a fair share of that debt load with it.

It's possible the debt matter could be so unresolvable, one or both of the parties at the table decides to walk away.

Buckle up, or hunker down -- your choice

Of course, making bets on buyouts or divestitures is a bad idea, so for bystanders, these two additional wrenches will mean little. Most investors are already on the sidelines, uncertain of L Brands' future with or without a split of the company's brands.

But for the shareholders hoping a sale of Victoria's Secret would serve as a graceful exit of another soured consumer goods name, don't hold your breath. This story is apt to get messier before the dust finally settles.

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