The suspense is over. After months of speculation, L Brands (NYSE:LB) announced a deal for its embattled lingerie brand, Victoria's Secret, to private equity firm Sycamore Partners. And Les Wexner is stepping down as chairman and CEO of the company.
The market response has been muted. Many investors anticipated such a turn of events, and L Brands stock was already up 35% year to date. Following the announcement, shares traded down 5%. Though the risks linked to reviving Victoria's Secret have been reduced, not to mention the cash proceeds from the deal that will go to paying down debt, major hurdles remain for the company.
The only one left
Remember The Limited women's fashion chain at the mall? That was the first L Brands business, and the company, which went on to change its name from The Limited to L Brands, also acquired and sold various retail chains such as Lane Bryant and Express, to name a few.
But if you're an L Brands investor today, this latest deal means you're no longer invested in a family of brands with risk spread across several different businesses. You are now an investor in Bath & Body Works, which will become a stand-alone company. Sure, it's better to invest in a company with one strong brand than several weak ones, but is Bath & Body Works strong enough on its own to make a good investment?
Bath & Body Works has been the bright spot for L Brands for some time now with consistent annual sales growth since 2010. The chain now generates approximately $5 billion in annual revenue.
Victoria's Secret, once a star among L Brands' fleet, has struggled in recent years as shoppers lost interest in the chain's glamorous image and advertising, instead turning to brands that focus on comfort and inclusivity. In the third quarter, impairment charges related to Victoria's Secret assets resulted in a net loss for L Brands. And comparable sales continued to tumble for the lingerie retailer, down 7%, as Bath & Body Works carried the quarter with 9% growth.
Still, that growth in Bath & Body Works comparable sales is possibly slowing. The chain reported a 13% increase in comps in the first quarter of 2019, but that growth fell to 8% and 9% in the second and third quarters, respectively. L Brands said it expects to announce fourth-quarter comps growth of 10% for Bath & Body Works when it reports earnings on Feb. 26.
A mall-based store
Overall, the primary concern is that Bath & Body Works, like most L Brands businesses of the past, is a mall-based store. Back when malls were booming, that would have been an asset. But these days, as many brick-and-mortar retailers close their doors and shoppers increasingly browse online, a spot in the mall isn't what will attract customers to a store.
Perhaps the biggest question for L Brands is: Where does the company go from here? According to the recent press release, the obvious plan is to make Bath & Body Works "a highly profitable stand-alone public company."
Unfortunately, these days, it seems unlikely that will happen in U.S. shopping malls. Back in 2017, a Credit Suisse report predicted that 20% to 25% of malls would close by 2022. And more recently, retailers such as Macy's and Sephora announced they would expand outside of malls and into smaller neighborhood shopping centers close to where people live and work.
In this deal with Sycamore Partners, L Brands sold a 55% stake in Victoria's Secret for $525 million, while retaining 45% ownership so shareholders can benefit from any upside linked to the recovery of the lingerie chain. If and when Victoria's Secret will recover and add to L Brands' value remains to be seen.
Right now, the decline of the mall and intense competition among retailers, both online and in-store, make it difficult to see how Bath & Body Works can continue to grow long term. Though the sale of Victoria's Secret is a positive development, it's still too early for the long-term investor to dip a toe in this stock with confidence.