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Will Victoria’s Secret’s Public Debut Drag Sales Out of the Doldrums?

Victoria’s Secret is finally going solo next month.

The lingerie giant is set to separate into an independent, publicly traded company, after which the L Brand Inc. name of its soon-to-be former parent will be relegated to the history books.

VS is slated to separate from Bath & Body Works on Aug. 2. Victoria’s Secret—which includes the Victoria’s Secret Lingerie, Pink and Victoria’s Secret Beauty operations—will be formally known as Victoria’s Secret & Co. In addition, L Brands will change its name to Bath & Body Works Inc. (BBW), reflecting its sole business operation.

Jettisoning VS from L Brands has been a long time in the making, due in large part to lackluster performance at the lingerie stalwart that dragged down its parent’s credit ratings. In April 2019, Moody’s Investors Service cut L Brands’ outlook to “Negative” from “Stable,” blaming 10 quarters of deteriorating operating margins and negative comparable store sales at VS for the downgrade.

Even L Brands’ founder and now chairman emeritus Les Wexner noted at the company’s September 2019 Investor Day presentation that relying on markdowns is one of the “dumbest thing to do,” as well as the biggest cost for retailers. Another self-acknowledged criticism he had for the VS brand was leadership’s lack of curiosity about the brand.

Acknowledging that its halcyon days were firmly in the rearview mirror, the L Brands presentation included the VS team’s plans to fine-tune its product development, hoping that a renewed focus on innovation would cure its woes. In revamping the business, the senior team put forth a new “good, bettter, best strategy” at its core VS brand that also cut the merchandise selection by 50 percent. In addition to an edited mix, the team also pulled back on promotions. The VS Pink team made adjustments as well, making sure it was meeting the needs of a younger consumer and at price points more affordable for the teen and collegiate customer.

But Forrester analyst Sucharita Kodali questions if the changes afoot are too little, too late for a brand that might be “past its peak.” Spinning VS off from its onetime sibling “just makes it harder to hide its numbers,” she suggested. “Maybe they hope there is a nostalgic investor who wants to overpay for it like Toys R Us.

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L Brands in January last year inked a deal with Sycamore Partners to sell a 55 percent stake in VS in a deal valued at $1.1 billion, but then the Covid-19 pandemic hit and the private equity firm elected to walk away. Sales at VS collapsed when nonessential retailers temporarily closed doors on orders from state and local governments trying to curb the spread of the virus. While VS has freestanding locations, the bras-and-panties brand is largely a mall retailer where it has sizable operations. VS ended up shutting 251 locations.

In a regulatory filing last month with the Securities and Exchange Commission last month in preparation for the split, VS listed a target of mid-single digit revenue growth and a “mid-teens” operating income rate over the next three-to-five years. Most recently, first-quarter sales reached $1.55 billion. It still operates 867 stores across the U.S. and Canada, and 520 international franchise locations. Digital represents 43 percent of all sales. The company is also working on a new store concept that calls for smaller, more flexible spaces using a dual-brand layout that includes both VS and Pink merchandise.

The separation will see VS incur up to $1 billion of new debt, with much of the proceeds to be used to make a payment to its former parent as part of the restructuring, which includes pay related fees and expenses. It expects to start public life with a $750 million asset-based revolving facility.

Shares of VS will trade on the New York Stock Exchange, and Victoria’s Secret Martin Waters will assume the role of CEO of the publicly traded firm. Andrew Meslow, the CEO of L Brands, will become CEO of BBW, the renamed entity going forward.

Additional reporting by Jessica Binns.