There was a good case to be made that L Brands (NYSE:LB) could become a growth business once again if it just unloaded the ailing Victoria's Secret lingerie business and focused instead on its candle and hand soap operations.
After thinking it had off-loaded most of that albatross onto private equity firm Sycamore Partners, the coronavirus pandemic erupted, upending its plans and sending the two companies to court over completing the deal.
But L Brands surprised everyone by ending the litigation against Sycamore and allowing the firm to back out of the deal without penalty. In its place, the retailer is substituting a plan to completely spin off Bath & Body Works and turn Victoria's Secret into a viable business again.
Investors are correctly wondering whether this is a positive development for their stock.
On the wrong side of the divide
Bath & Body Works had a growth story it could press. It was putting further distance between itself and shopping malls, which increasingly look like they're a dying venue, and had a strong international expansion strategy it wanted to explore.
Victoria's Secret, along with its sister chains Victoria's Secret Beauty and Pink, seemingly doesn't have the same potential because it is heavily dependent upon mall traffic, which it notes could put it at a competitive disadvantage to rivals that are less reliant upon malls. While more than half of Bath & Body Works stores are not in malls, the lingerie company is almost wholly mall-centric.
That helps explain why Victoria's Secret same-store sales tumbled 10% last year while Bath & Body Works comps were up 10%. Pink's comps were also down by mid-teen percentages, and profit margins eroded.
No longer the beauty queen
L Brands has also done little to change the essential nature of the Victoria's Secret brand, whose alluring models served it well for decades, but no longer have the same cachet for today's lingerie consumer.
That has allowed American Eagle Outfitters (NYSE:AEO) to steal substantial market share with its rival Aerie, which resonates well with teen consumers. Aerie's comps jumped 26% in 2019, following a 23% increase the year before, marking 21 consecutive quarters that the lingerie brand enjoyed double-digit sales growth.
While Aerie does have a significant mall presence, almost half of its stores are stand-alone operations, so its dependence on malls is far less. Those that are mall-based are adjacent to an American Eagle store and thus get support from it.
There is no similar synergy for Victoria's Secret to build upon since it is supposed to be the draw itself.
L Brands hasn't offered much in the way of detail about how it will cure the many ills that surround the brand other than to say it will position Victoria's Secret for long-term health by "continuing to take steps to improve the brands' performance."
That's not much for investors to hang their hats on and is reminiscent of Gap's (NYSE:GPS) plan to spin off its then-successful Old Navy brand as it worked to correct the deficiencies remaining in the legacy Gap and Banana Republic chains. Gap ended up withdrawing its plans to separate Old Navy.
While L Brands also said it is making leadership changes (including CEO Les Wexner stepping down on May 14), his successor, Bath & Body Works CEO Andrew Meslow, now must effect a turnaround without the $525 million cash infusion the Sycamore Partners acquisition would have given it.
More is needed
Simply initiating "proactive measures," as the company says, while "implementing significant cost reduction actions and performance improvements at Victoria's Secret" is not really a plan investors should think will be successful.
L Brands stock has lost nearly 60% of its value from recent highs, and while a beaten-down stock with a clear turnaround plan can be a powerful investment, that doesn't describe what we're seeing here. Investors would do well to stay away.