Victoria’s Secret Loses an Angel, Needs a Miracle

(Bloomberg Opinion) -- Victoria's Secret may have ditched its opulent fashion show, but its parent L Brands Inc. can't get rid of the troubled lingerie retailer quite so easily.

The retailing group said late Monday that it had reached an agreement with Sycamore Partners to terminate a transaction that would have seen the private equity firm acquire 55% of Victoria's Secret for $525 million, taking it largely off L Brands' hands. Sycamore had struck the deal in February, heralding the end of an era for the once-revered retailer. But last month it sought to terminate the arrangement and filed a complaint in the Delaware Chancery Court alleging that actions taken, such as furloughing staff and failing to pay rent amid closures forced by the coronavirus pandemic, had reduced the value of its prospective purchase. 

L Brands described the move at the time as “invalid” and said it would seek to enforce the agreement, so its standing down now is an about-turn. Renegotiating the transaction at a lower price would have been preferable to an outright end to deal hopes, but at least the sorry affair is now over. However opportunistic Sycamore's suit, fighting it would have been expensive and time-consuming. L Brands can now move on, without significant outlay and too much dirty lingerie aired in public. 

Even so, the outcome is far from ideal. Sycamore and L Brands — it would have retained a minority stake — would have had a tough enough time turning around Victoria's Secret even before Covid-19 forced chains to close swaths of stores and decimated consumer confidence. Now L Brands must do it alone, in the full glare of investors and against a much worsened retail backdrop.

Victoria's Secret was already suffering from sliding sales and an outdated image. Its sexy aesthetic is increasingly out of sync with consumer tastes, while it now must contend with a raft of competitors serving them better with a broader range of styles and suited to different body shapes.

The chain's sales were $6.8 billion in the year ended Feb. 1. This year, with the pandemic wreaking havoc on the industry, both sales and profits at Victoria's Secret will no doubt take a hit. For L Brands as a whole, Poonam Goyal, analyst at Bloomberg Intelligence, estimates that sales could be down between 32% and 69% in 2020.

L Brands still wants Victoria's Secret to be a stand-alone company so it can concentrate on the more successful Bath & Body Works. With a separation, the group may be hoping to attract another buyer, but the fact that the Sycamore deal valued a division with close to $7 billion of sales at an enterprise value of just $1.1 billion, the acquirer's subsequent attempts to extricate itself, and the dismal retail environment all make that unlikely for now.

With no buyer forthcoming, the top priority will be to reinvigorate Victoria's Secret's image. A store footprint of about 1,100 locations in North America also needs to be tackled. The large-scale and permanent shutterings that L Brands has avoided up to now look unavoidable.

These undertakings will be expensive, and L Brands already has long-term borrowings of about $5.5 billion. The sale  — even at a lower price — would have helped to reduce this. The group also retains Victoria's Secret's store lease obligations, which analysts at Bernstein estimate at about $2.5 billion. There are no bond maturities this year, which is helpful, but some $450 million is due in about a year's time.

And L Brands needs to improve Victoria's Secret while keeping Bath & Body Works flourishing. That chain may have enjoyed a boost to sales of items such as hand sanitizer, but it won't have escaped the effects of store closures. And, as I have noted, it will take some time for consumers to return to malls. 

All that's as tricky as strutting a catwalk in towering heels and adorned with giant feather wings.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

©2020 Bloomberg L.P.