Please ensure Javascript is enabled for purposes of website accessibility

Does a Possible End to the Victoria’s Secret Sale Mean Doom for L Brands?

By Adria Cimino - Apr 28, 2020 at 9:55AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

L Brands’ recovery may be in jeopardy if the company is unable to sell its embattled lingerie chain.

The situation is once again looking grim for L Brands (BBWI 1.91%). After reaching a deal in February to sell 55% of Victoria's Secret to private equity firm Sycamore Partners, news came out last week that Sycamore wants to end the agreement. Investors had been counting on the $525 million deal to help drive recovery of the multi-brand retailer.

On April 22, Sycamore Partners filed a lawsuit in Delaware seeking a declaratory judgment that its move to end the Victoria's Secret agreement with L Brands is valid. According to press reports, Sycamore says store closures and a halt to rent payments in April related to the coronavirus pandemic breach terms of the deal. L Brands said it would fight the lawsuit, enforce its contractual rights, and work to close the planned transaction.

If Sycamore succeeds in ending the agreement, the questions surrounding L Brands may be more about survival than recovery. Let's take a closer look at why this is such big trouble for L Brands.

Pink, blue, green, and white lace panties are displayed in a store drawer.

Image source: Getty Images.

A struggling brand hit hard by the coronavirus fallout

Victoria's Secret, once a star in the world of lingerie, has grappled with declining sales in recent years as a new generation of shoppers turned away from the glamorous image and opted for alternative brands that focused more on comfort and emphasized inclusivity in their marketing. For 2019, L Brands reported impairment charges of more than $725 million linked to Victoria's Secret goodwill and assets. The brand's North America sales dropped 8% to $6.8 billion, and it recorded an operating loss of $616 million.

The bright spot for L Brands has been its bath and skincare products chain. Bath & Body Works reported record results in 2019, with sales climbing 12% to $5.2 billion and operating income increasing 11%. Still, Victoria's Secret's troubles have hurt overall earnings at L Brands. The company posted a net loss last year, compared with a profit a year earlier, and operating income sank to $258 million from more than $1.2 billion.

According to the sales agreement, L Brands would retain 45% percent of Victoria's Secret and use proceeds from the deal to pay down debt. The idea was for Sycamore to turn things around at Victoria's Secret, so that L Brands could focus on recovery and maintaining momentum at Bath & Body Works.

Before the transaction could move forward, the coronavirus outbreak hit. In recent weeks, L Brands has temporarily closed stores in the U.S. and Canada, drawn down $950 million from its revolving credit facility, suspended its quarterly dividend, cut pay for senior vice presidents, and furloughed workers. The company said it has sufficient current liquidity, with more than $2 billion in cash.

According to court filings, the deal did have provisions that allow for the possibility of an event like the pandemic to trigger a “material adverse effect” clause. Wording like this is typically included in deals to allow a buyer the chance to renegotiate if extraordinary events have a financial impact on the business up for sale. So the deal is likely to be different even if Sycamore is required to go through with it.

What does all of this mean for L Brands' recovery?

Even if the deal with Sycamore was completed, I wasn't bullish on L Brands or the potential for buying its stock. Without Victoria's Secret, L Brands is really just Bath & Body Works. Though growth has been strong at the soap and skincare products retailer, I'm not convinced it is enough to drive solid, long-term growth. That said, the brand sale scenario was better than the previous situation.

If and when this coronavirus pandemic finally runs its course, L Brands will exit the crisis with a weakened financial situation. There are going to be significant lost sales, rising inventory levels, and costs related to store shutdowns. Add to that the cost and complexity of a legal battle with Sycamore and the financial picture is dim.

If Sycamore prevails, the presence of Victoria's Secret would make a possible recovery much more difficult and expensive. And the chances of finding another buyer for a struggling retail chain seem unlikely in the current environment. Shares in this consumer discretionary retailer have lost about 50% of their value since their peak shortly after the Sycamore deal was announced. Considering the current news, I wouldn't buy them right now at any price.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bath & Body Works, Inc. Stock Quote
Bath & Body Works, Inc.
BBWI
$39.99 (1.91%) $0.75

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
389%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.