Photos: Victoria’s Secret; Pink
What does private equity ownership hold for Victoria’s Secret?
L Brands and Sycamore Partners announced yesterday a deal for the private equity firm to take a 55 percent stake in Victoria’s Secret and its Pink brand. The question many are asking is whether the deal, when completed, will represent a new start for the struggling retail chain or mark the beginning of the end for the business?
The deal between Sycamore, which specializes in retail and consumer brand investments, and L Brands has been reportedly valued at $525 million. Leslie Wexner, founder, CEO and chairman of L Brands, will vacate those positions to become chairman emeritus of L Brands when the deal between the parties is complete.
The lingerie chain has struggled in recent years as consumers shifted their purchases to brands that offered a wider range of size options and more inclusive marketing messages. Victoria’s Secret posted a 12 percent decline in same-store sales including online during the recent Christmas selling season. While it remains the largest player in the lingerie category with annual sales of around $7 billion, Victoria’s Secret has experienced declines for three consecutive years.
“We have long had great respect and admiration for L Brands and its success in building a world-class portfolio of lingerie and beauty brands,” said Stefan Kaluzny, managing director of Sycamore Partners, in a statement. “With unmatched global brand awareness and customer loyalty, we believe there is a significant opportunity to reinvigorate growth and improve the profitability of Victoria’s Secret.”
Sycamore’s other investments include Aeropostale, Belk, Coldwater Creek, Dollar Express, The Limited, Staples, Talbot and Torrid. The firm’s methods have not always worked to the advantage of the companies it has acquired. Sycamore has faced criticism, as have many of its private equity brethren, for loading up companies it acquires with unsustainable debt levels while it sells off assets to maximize the return on its investments.
- L Brands Announces Transformative Transaction With Sycamore Partners to Drive Shareholder Value – L Brands, Inc.
- L Brands Reports Holiday 2019 Sales and Updates Fourth Quarter Earnings Guidance – L Brands, Inc.
- Victoria’s Secret’s New Owner Has a History With Troubled Brands – Business of Fashion
- New Victoria’s Secret Owner, Sycamore Partners, Has a Storied History in Footwear: 4 Things to Know – Footwear News/Yahoo Finance
- Victoria’s Secret to go private in a deal that values the once-powerful lingerie brand at $1.1 billion – CNBC
- Les Wexner Gives Up Control of Victoria’s Secret – The Wall Street Journal
- Investments – Sycamore Partners
- Sexy isn’t selling anymore for Victoria’s Secret – RetailWire
- Can Victoria’s Secret recover from its founder’s past relationship with Jeffrey Epstein? – RetailWire
- Has Victoria’s Secret become a casualty of the #MeToo movement? – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: What do you think Sycamore Partners will do with its controlling interest in the Victoria’s Secret and Pink brands acquired from L Brands? What role do you expect L Brands to play with its remaining 45 percent stake in the business?
Poll
BrainTrust
Lisa Goller
B2B Content Strategist
Lee Peterson
EVP Thought Leadership, Marketing, WD Partners
The future very much depends on the actions of Sycamore Partners. If they opt to make sensible changes and bring Victoria’s Secret into line with the needs and desires of modern consumers then they have a good chance of getting the business back on track. However, if they load the company up with debt and/or take a leaf out of the Les Wexner playbook – which essentially involves doing nothing – then they are on a path to failure. For all its troubles, Victoria’s Secret remains a sizeable business, but no one should be under any illusions about the fact that their market is now more competitive and sensitive and that they desperately need to respond to such shifts.
Victoria’s Secret threw in a white flag. They don’t know what to do and were sold for pennies on the dollar. How anyone thinks private equity, which is known to extract value and slash costs, is a good thing is beyond me. My guess is they will go even more promotional like Abercrombie & Fitch and Gap have done and close stores in an attempt to stop the bleeding.
L Brands was the powerhouse in the ’80s, developing whole wings of malls with unique stores. Unfortunately, times have changed for those brands and others like Gap; even more so for Victoria’s Secret’s hypersexualized eye-candy for men. The customer has moved on. It is a longshot that this partnership will reinvigorate the brand.
PE firms have a bad reputation for focusing excessively on leverage, short-term profitability and cost cutting. But the encouraging news is that Sycamore’s focus area is retail and consumer brands. And at least initially the new entity will not be taking on any more debt than they already have. So there is a decent chance that this transaction will be good for Victoria’s Secret.
The “bad reputation” is well earned.
The most important thing that Sycamore’s new management can do is to put the brand under a microscope. Part of the problem with Victoria’s Secret is its inability to evolve with consumer tastes. There is still a place for “sex appeal” in a lingerie specialty store, but not at the expense of more size selection, more sport-inspired product and a more inclusive brand image.
Les Wexner was a retail pioneer but his image of what VS stands for was ironclad — from its location strategy to its overheated marketing tactics to its lack of a value equation. Sycamore needs to take a cold, hard look at Victoria’s Secret; instead of leveraging the assets, first fix the brand.
I doubt if much of Sycamore’s discussion was about putting the brand under a microscope. The first topic was “how much can we borrow and how little of our equity can we put up?” The second topic was “If all goes bad, do our upfront fees and management fees cover any possible loss of equity?”
Victoria’s Secret has been on a downward spiral in the last five+ years for a reason. They’re falling out of touch with consumers, facing macro headwinds and being beaten on quality and often cost by up and coming competitors that have less bureaucracy and overhead in decision making. Going private won’t solve most of those above. I’d be curious if tightening the belt on cost helps them refocus on IT projects that produce high value vs. multi-year protracted implementations that take time and energy to pull-off, often without a sound and clear ROI.
Sycamore Partners will use its controlling interest to invest in rebuilding trust among women. For a Victoria’s Secret turnaround, the firm needs to appeal to female shoppers again by reflecting their needs, including inclusive assortments. Internally, it must create a corporate culture where women feel valued, safe and heard.
The private equity firm represents a fresh start to win women back to the beleaguered lingerie brand. With its minority stake, L Brands will likely stay behind the scenes to ensure business continuity with smooth operations – while staying out of global headlines.
Sycamore has a varied retail portfolio. The question is, what does Victoria’s Secret want to be when it grows up? I can’t see it continuing as a brand that promotes itself through scantily clad women in commercials but I also can’t see it as a budget brand. Some real thought needs to go into the direction – letting it stand as-is will not work.
The landscape is littered with the ashes of retailers that took on private equity to try to salvage their brands, only to have the private equity player walk away with millions, with little positive effect on the brand. This is likely the scenario here. However if Sycamore can bring in management (say an exec from Aerie) that can pivot the brand to serve the needs of today’s women, they may have a chance.
Different types of businesses have different objectives. PE’s objective is to grow profits for their investors and partners. It has nothing to do with growing the business they own. As always, this is a disaster in the making for everyone involved except the PE firms which will rightfully make huge profits on their leverage and fees.
Sycamore Partners has built an impressive portfolio of retail brands, and they have historically helped with turnarounds and transformations, There is hope for a Victoria’s Secret revival and renaissance. It will all come down not only to execution but also a collaborative comeback backed by both Sycamore Partners and the L Brands team.
There is plenty of brand equity to leverage, however, step 1 in parallel with their more inclusive assortment shifts, is to repair the company image and cultivate an environment of inclusivity, openness, and trust. Indeed the marketplace is far more competitive compared to Victoria’s Secret’s glory days. Building trust, transparency and a brand purpose beyond the supermodel shows and advertisements will be a key first step of the process.
Sycamore Partners is likely to close low performing stores, move the uniqueness of the brand from an emphasis on sexiness to fashion, broaden the size selection and worker harder on online sales. Expect L Brands to take on the role of advisor and operate the stores.
Those guys put Staples $1 billion in debt and paid bonuses to execs while sacking 5,000 people and closing hundreds of stores. If I’m at Victoria’s Secret, I’m holding my breath while I finish my resume.
Sycamore is not about growing the brand. It is about repositioning the business, packaging it pretty and selling it to another private equity firm that will really help operating the company or take it public.
Probably nothing good for the employees of Victoria’s Secret. Other than the usual cost cutting and leveraging of the balance sheet, hopefully they can create an online presence that really leverages the brand. Victoria’s Secret should aim to do 50 percent of their business online as a revitalized brand.
I have my doubts that new fiscal discipline can rescue a retail concept that has run its course. The “boudoir” sensibility of Victoria’s Secret has simply lost relevance in today’s marketplace. It will be a huge challenge to try to disassociate the brand from its historical image.
If I were in charge, I’d probably drop the “Secret” from the banner, and try to remake Victoria’s in an entirely new image after extensive consumer preference research.
Despite its retail expertise through acquisitions, the Sycamore organization is financially driven. It’s not about rebuilding the heart and soul of Victoria’s Secret or any of their portfolio companies. It’s about making money. When brand and base coincide, that’s great- but without doubt, the first priority is shareholder value. This may mean turnaround, but it can just as easily turn into liquidation.
I’m just not sure that they’ll be able to do anything more than what Wexner could have pulled off. What it can do is inject additional cash and streamline some inefficiencies (e.g. close underperforming stores and enable a 3rd party RIF). L Brands is now the junior partner in this name brand and will have little say in the outcome. If things go south, they’ll sell off the remaining interest in the brand, a turnaround windfall will be reinvested in other assets — not Victoria’s Secret.
PE firms do whatever is necessary to extract value from their acquisition. They’ll cut costs and close under performing stores, etc.
For starters, Sycamore Partners will do something Victoria’s Secret hasn’t done in several years: require the merchants sell what their customers want to buy.