Victoria’s Secret Ends Tie-Up With Sycamore As Coronavirus Deepens Go-Alone Woes

Victoria’s Secret parent L Brands
LB
has ended a tie-up plan with private equity firm Sycamore Partners, threatening to derail the turnaround plan of the largest U.S. lingerie chain that was already struggling to reclaim its sexy even before the coronavirus pandemic. 

L Brands said late Monday that it and Sycamore have decided to end an agreement struck only in February for the private equity firm to acquire a 55% stake of Victoria’s Secret. The decision came after Sycamore in April first sued L Brands seeking to terminate the deal, reportedly arguing Victoria’s Secret’s coronavirus-led decision to shut stores and stop paying its rent has violated the terms of the deal. L Brands had followed with its own counter suit at the time. 

With the ending of the proposed marriage, L Brands said it’s taking steps to ready Victoria’s Secret and its Pink business as a separate and standalone company while its better-performing and profitable Bath & Body Works chain will be run as a “pure-play public company.”

L Brands, whose stock has tumbled to $12 at Monday’s close from a peak of near $100 just over four years ago because of declining fortunes at Victoria’s Secret, slumped another 14% in after-hours trading. 

Why? Ending the deal is one thing, getting Victoria’s Secret losing relevance with today’s consumers back on track is another. Sycamore, with an investment history in retailers from Staples to Talbots, was what L Brands long-time chairman and CEO Leslie Wexner, who’s stepping down, described at the time of the deal in February as a party that would “bring a fresh perspective and greater focus to” Victoria’s Secret. Wexner said at the time that Sycamore offered “the best path to restoring these (Victoria’s Secret) businesses to their historic levels of profitability and growth.”

Proving that the business will suddenly have a magic new plan that it couldn’t come up with before is a tall order, not to mention the coronavirus pandemic has dramatically rewritten the consumer spending and confidence outlook. As grocery and online retailers have benefited from consumers stocking up on essential items, U.S. clothing retailers’ March month-over-month sales tumbled 51%, the worst of any retail sector, Commerce Department has reported. 

Victoria’s Secret rival J. Crew on Monday filed for bankruptcy protection with department stores including J.C. Penney and Neiman Marcus also said to be eying Chapter 11 protection.

In another telling sign of the malaise facing fashion retailers even as the U.S. economy gradually reopens, in about a half-mile stretch on Broadway Ave. in New York’s trendy SoHo section housing many chain stores from Victoria’s Secret to J.Crew’s Madewell chain, I recently counted well over 20 store lease signs.

“Coronavirus will result in accelerated Darwinism for retail and apparel sector,” credit agency Moody’s
MCO
said in a May 1 report, adding default rates will “surge” this year among retailers and clothiers with below-investment grade credit rating. 

L Brands said Monday it will continue to cut costs, including slashing its capital spending by more than half, halting dividend payment and suspending rent payments, to ensure liquidity. Last week it converted a $950 million revolving cash credit line it withdrew in March into an asset-backed loan. The company said it has over $900 million in cash at the end of April. 

Any continued performance decline will only squeeze its liquidity. Consider this, L Brands, thanks to another slide in demand at Victoria’s Secret, saw its operating income plunge by about $1 billion to $258.4 million in the year that ended Feb. 1 as losses at Victoria’s Secret more than offset the profit made by Bath & Body Works. 

“We believe the termination of the transaction could add liquidity and solvency risks to shares of L Brands,” said Wedbush analyst Jen Redding in a recent report. 

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