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L Brands Hit With Questions of Les Wexner Exit, Possible VS Sale

This week, L Brands Inc. is facing speculation over the fate of the Victoria’s Secret brand and whether founder and chief Leslie Wexner will stay or go.

Last month, rumblings indicated that L Brands was considering selling the women’s lingerie brand and that talk has only intensified.

But as the Ohio-based company explores options for the business, it might hold onto the panty brand and stake its hopes on a moonshot turnaround. Adding to the possible changes afoot at L Brands are unconfirmed reports that company chairman and CEO Leslie Wexner might be stepping down as chief executive of the company he founded in 1963. After a 57-year run at the helm, he could stay on as company chairman.

“We would not comment on such rumors,” L Brands said an e-mailed statement.

Victoria’s Secret

Long a favorite with young women, the Victoria’s Secret brand has lost much of its appeal with the today’s millennial and Gen Z shoppers, partly why its once-popular televised runway spectacle has been discontinued. Given declining sales in recent years, and how the business remains challenged, the likelihood of finding a buyer at the right price might not be so easy. The business is still in the early stage of righting the ship, and those efforts might not pan out, despite recent changes at the division’s helm.

Victoria’s Secret Lingerie CEO John Mehas joined last year and Amy Hawk, previously president of merchandising at corporate sibling Bath & Body Works, stepped into her role as president of the brand’s teen line Pink. Though the $3 billion Pink business drives roughly 40 percent Victoria’s Secret’s total volume, the teen-targeting brand has struggled to attract Gen Zers who gravitate to mall competitors like American Eagle Outfitters’ Aerie brand, and the resurrected Gilly Hicks line that Abercrombie & Fitch is rolling out.

And while typical metrics have seen deals at an average of an eight to nine times EBITDA (earnings before interest, taxes, depreciation and amortization) multiple, the lack of visual runway for future growth could find buyers discounting the business down to a three or four times multiple.

The Wall Street Journal first reported on the possibility of a sale of Victoria’s Secret early Wednesday.

Wall Street analysts are mixed about what L Brands’ best course of action might be. While a sale of Victoria’s Secret could unlock share value, because the Bath & Body Works business is in somewhat better shape than its sibling brand, analysts question whether BBW has any room for growth.

If L Brands manages to sell Victoria’s Secret “at a modest” 3 times sales multiple, based on comparable transactions for struggling retailers, there’s a chance shares of L Brands stock could be valued at $33 to $35 per share, Ike Boruchow, analyst at Wells Fargo Securities, said. Shares closed at $20.56 on the Big Board at the end of Tuesday’s trading session, and rose more than 13 percent to the $23 trading range when news of a possible sale broke.

Boruchow believes the BBW business remains one of the strongest concepts in the mall, while Victoria’s Secret’s comparable sales have further decelerated.

Holiday comp sales at Victoria’s Secret, including Pink, fell 12 percent during November and December, while comps at BBW climbed 9 percent.

Wall Street view

Jefferies’ analyst Randal J. Konik believes it could be game over for the Victoria’s Secret brand and isn’t so sure about the outlook for BBW. Earlier this month, he described the Pink brand as “broken,” cautioning that sales drop by half within 12 to 24 months and noting that demand for Victoria’s Secret has virtually disappeared.

On Wednesday, Konik again expressed concern over a split up at L Brands, although noting the possibility of Wexner stepping down from the chief executive role could be a welcome development for the company.

“While we agree that a fresh perspective would likely be a positive in ‘righting the ship,’ we still believe bulls are over-valuing the highly cyclical BBW, and under-appreciating the significant challenges ahead at Victoria’s Secret/Pink–where there would be limited investor appetite,” he said.

Net debt at L Brands after the third quarter “was over $5 billion and cash on the balance sheet was halved year-over-year,” Konik said. “We see a heavy debt load creating a large obstacle for investors that seek a split of Bath & Body Works and Victoria’s Secret.”

As for future growth, especially at the BBW division, Konik sees challenges ahead, given consumers’ current penchant for online shopping.

“The vast majority of BBW and Victoria’s Secret sales are generated in their 1,600 and 1,200 stores, respectively. This means [both] are highly exposed to the structural decline in mall traffic…. We see hundreds of store closures in the future as the company seeks to stem losses, which are unlikely to be offset by gains in online,” Konik said.

The intensified whispers over a sale of Victoria’s Secret surfaced near the end of the one-year agreement with activist investor Barington Capital Group. The activist in March pushed for merchandising changes at Victoria’s Secret and either an initial public offering for the BBW business or a spin-off of Victoria’s Secret, said B. Riley FBR analyst Susan Anderson, who favors a separation. With four seats up for renewal at the annual shareholders’ meeting, there’s a chance that Barington could submit nominees for the open spots, she added.

L Brands subsequently agreed to bring Barington on board as a special advisor, and the activist investor last year went on to vote for the company’s slate of board nominees. Their agreement is due to expire on Feb. 18.

Whether it sells Victoria’s Secret or keeps the former cash cow, L Brands likely will be influenced by what happens next with its Barington agreement, according to Cowen & Co. luxury and retail analyst Oliver Chen.

Victoria’s Secret’s weak fall and holiday performance could end the Barington agreement, and see the business sold in a go-private transaction, Chen said. Opting to renew the agreement could be a “signal that management will continue pursuing a Victoria’s Secret turnaround rather than a spin-off in the near-term,” he said, adding that the rationale would be because both Mehas and Hawk are only “one year into executing their respective turnaround strategies.”

Chen expects a sale would see most of the proceeds going towards debt repayment. He also is analyzing the value of Victoria’s Secret using a 3x multiple.

Executives at Barington could not be reached for comment by press time.

Les Wexner

When Wexner founded the The Limited in 1963, the retailer’s first store was located in the Kingsdale Shopping Center in Columbus, Ohio, according to the company’s website. Now known as L Brands, the company originally went by the name Limited Brands Inc., and Wexner took the firm public in 1969 before adopting its current moniker in 2013. The Limited, once a retail fixture at malls, remains alive online after shutting down all brick-and-mortar stores.

Wexner’s L Brands has made a number of acquisitions and sales over the years and not all are retail concepts. It purchased sourcing arm Mast Global, which it later sold to private equity firm Sycamore Partners. L Brands also sold its intimates brand La Senza–which it acquired in 2007–in 2018.

L Brands acquired Express in 1980, and sold it in 2007. And it bought Lane Bryant in 1982–the same year it acquired Victoria’s Secret–and later sold the plus-size apparel brand in 2001. The Henri Bendel business, which joined the corporate umbrella in 1985, shut down in 2018. Abercrombie was acquired in 1988, with the parent firm completing a partial spin-off through an initial public offering in 1996 before fully spinning it off by 1999–the same year L Brands also spun-off its Limited Too business, a concept that L Brands opened in 1987. The company sold New York & Co. in 2002, and Galyan’s Trading Co.–acquired in 1995–in 2004. Victoria’s Secret launched its sub-brand Pink in 2004.

Through all the changes over 57 years, Wexner has been at the helm, making him the longest-serving CEO of an S&P 500 company. A billionaire who also was a big name in the philanthropy circuit, the one stain on his illustrious retail career is his association with convicted sex offender Jeffrey Epstein. Prior to Epstein’s death in August, Wexner disclosed that Epstein, his former financial advisor, misappropriated vast sums of money from him and his family.

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