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What This Activist Investor Wants to Happen at Chico’s

Chico’s FAS has a target on its back.

James A. Mitarotonda, chairman, president and CEO of activist investor Barington Capital Group, outlined suggestions for how the women’s specialty retailer could stand to improve, despite previous talks with Chico’s board chair Bonnie Brooks and CEO Molly Langenstein.

Though Barington sees promise in Langenstein’s “digital-led retailing” plan and credits the retailer for enhancing merchandise quality, it still is not only pushing for new board members but also wants Chico’s to seriously examine its strategic options, Mitarotonda wrote in a letter to Brooks Monday.

For its part, Chico’s responded to the overture by saying it remains in ongoing dialogue with shareholders including Barington, and “appreciates the input it receives.”

“The company is making tremendous progress in its turnaround strategy to become a digital-first, customer-led company,” the retailer, which owns the White House Black Market (WHBM) and Soma intimates brands, in addition to its eponymous Chico’s label, said in a statement Monday afternoon. “This work, which commenced in the third quarter of 2019, was showing significant traction prior to the pandemic. In addition, actions taken over the last 18 months to reduce costs and strengthen the company’s balance sheet provide a strong financial foundation to invest and grow for the foreseeable future.”

Chico’s reports first quarter 2021 results on Tuesday and hosts an annual shareholders’ meeting on June 24.

So what exactly does Barington want?

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The activist investor is hoping a board shakeup could revitalize the Chico’s and WHBM brands, whose so-called underperformance is overshadowing Soma’s contributions, Mitarotonda wrote, crediting a compelling product line and inclusive messaging for the innerwear brand’s success. Based on peer valuations, Mitarotonda believes Soma’s value could exceed the company’s worth of an estimated $640 million, pointing to ThirdLove’s $750 million valuation, and Rihanna’s billion-dollar Savage x Fenty startup—two upstarts backed by L Catterton.

An investor in L Brands, The Children’s Place, The Jones Group, Warnaco, Collective Brands and Steve Madden, Barington became a Chico’s shareholder in 2015 just after Shelley Broader, who was replaced four years later, was appointed CEO. Barington sold its stock position in 2016 but kept tabs on the company, subsequently purchasing a 2 percent Chico’s stake. Barington pegged Chico’s and WHBM’s combined fiscal 2020 revenue at about $1 billion, suggesting both brands maintain a strong customer following.

Mitarotonda wrote in his letter that new board directors could enhance expertise in the areas of digital commerce, merchandising and marketing, and that Chico’s also should improve the “ethnic, racial and gender diversity of the board.”

Mitarotonda blamed board stagnation for the company’s underperformance, stating that “all directors need to think and act like owners.”

Earlier this year, Macellum Capital Management CEO, Jonathan Duskin, speaking on a Retail Marketing Society (RMS) virtual panel, similarly took up the topic of board refreshment. After the investor pressured Kohl’s to remake its board, on April 14, the retailer said it would have two Macellum-nominated independent directors—Margaret Jenkins and Thomas Kingsbury—join the board after the chain’s annual meeting on May 12. Former Lululemon CEO Christine Day, a third independent director named by Kohl’s and agreed to by the investor group, also joined the board.

During the RMS talk, Duskin blamed retailers for “self-inflicted” problems, but said well-managed boards are populated with experts who can help addresses these challenges.

“A lot of board members hold onto their seats perhaps past their time. The easiest thing a board can do is refresh themselves,” he said, citing Kohl’s and Bed Bath & Beyond (BBB) as examples. Macellum agitated for change at BBB, leading to four new directors and former Target chief merchant Mark Tritton arriving as the home chain’s new president and CEO. Two months after his debut, Tritton cleared the deck and transformed the executive team.

In April, several of Tritton’s initiatives powered the company to a fourth-quarter profit, representing its third consecutive quarter of comparable sales and profit growth. While much work remains to be done, the company seems to have found its path forward.