This Analyst Says Covid-19 May Give L Brands a Fresh Start

(Bloomberg) -- The Covid-19 economic lockdown may actually be a blessing in the long run for Victoria's Secret, according to BMO Capital analyst Simeon Siegel.

Sentiment around the company is largely negative following the cancelation of a deal for Sycamore Partners to take over the lingerie brand from parent L Brands Inc. Wedbush's Jennifer Redding said the derailed transaction is “a bitter pill to swallow” for L Brands, which has been unable to revive the brand in recent years and has a heavy load of debt.

But Siegel says the lockdown, which caused L Brands to close its more than 1,000 U.S. locations and furlough the majority of its 88,000 store associates, actually gives the retailer a chance to come out of the crisis “smaller and healthier.”

“The reality is a Covid-19-related revenue decline may actually provide management a very unique opportunity to re-evaluate all aspects of the brand,” Siegel said. This could include how many stores it operates, how often it offers discounts and advertising.

While the outbreak has drastically changed consumers' spending away from discretionary goods, its peers like Aerie and Savage X Fenty are in the same tough spot, so management can use it as an opportunity to rethink the business.

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Still, it won't be an easy path. The retailer has to take a fresh look at its problems, like declining market share and an outdated image, that it had struggled to overcome even before the pandemic sparked a lockdown. With consumer preferences shifting toward comfortable undergarments, the company still has to retool its lineup of products.

Changes at the top, which will go into effect starting May 14, may bring some new perspectives. As longtime leader Leslie Wexner steps back to become chairman emeritus, Andrew Meslow, who currently runs L Brands' more successful Bath & Body Works chain, will take the reins of the parent company as chief executive officer. Meslow will also join the board, which will be chaired by Sarah Nash. Chief Financial Officer Stuart Burgdoerfer will be interim CEO of Victoria's Secret.

They'll have to evaluate Victoria's Secret fleet of stores. The lingerie brand closed dozens of locations last year, and with the pandemic expected to accelerate a broad retrenching of the retail industry, the company could find new life with a smaller footprint, Siegel said.

Bath & Body Works, which will become a standalone company, may see its pre-Covid-19 sales growth continue after the lockdown lifts, he said.

“With the Sycamore news extinguished, noise will dissipate,” Siegel said, and “it will become harder to ignore” the company's value.

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