(Bloomberg Opinion) -- Victoria’s Secret has finally found its angel.
Parent L Brands Inc. said on Thursday that it would sell a controlling stake in Victoria’s Secret to private equity firm Sycamore Partners in a deal that values the lingerie brand at an enterprise value of $1.1 billion.
It’s the end of an era in more ways than one. L Brands is giving up control of its prized asset, once famous for its opulent catwalk shows. Leslie Wexner will also step down as chairman and chief executive officer of the group. He is the longest-serving CEO in the S&P 500 Index but had drawn attention for his association with the late financier Jeffrey Epstein.
Under the terms of the deal, Sycamore would acquire 55% of the Victoria’s Secret for $525 million, with L Brands retaining 45% of the separate company, which will also contain the younger Pink division.
The transaction values Victoria’s Secret’s total enterprise value at 0.15 times its $7.4 billion of sales in the year to February 2019. That is well below the average of 1.3 times for apparel deals in the last three years, according to Bloomberg data. Shares of L Brands dropped nearly 7 percent when the market opened Thursday morning.
The valuation reflects the fact that Victoria’s Secret is expected make little or no operating profit in the year ended Jan. 31, compared with $1.4 billion in fiscal 2016.
That underlines just how badly the brand has been hurt by many consumers turning their backs on sexy lingerie, preferring more casual and functional underwear and brands that are more inclusive of different body shapes. Comparable sales fell a worse-than-expected 12% in November and December.
The new majority owner will need to invest heavily in revamping Victoria’s Secret’s image and will also need to close a swath of its about 1,200 stores. Although L Brand has tweaked its portfolio, it has resisted the large-scale culling favored by many rivals.
But there is potential for a revitalized chain. For all its challenges, Victoria’s Secret remains America’s biggest lingerie retailer by market share, according to Bloomberg Intelligence. There are more opportunities in beauty and fragrance, not to mention athletic apparel.
A full sale would have been cleaner than a partial one and more helpful to L Brands’ roughly $4 billion of net debt. But retaining a minority stake allows it to share in any potential upside. What’s more, its continued presence should help prevent Victoria’s Secret from alienating its core customers as it rejuvenates. This is a delicate balance that must be managed. But the new owner must also have the freedom to make the necessary but painful changes. At least it will be able to do so away from the scrutiny of quarterly earnings.
In the meantime, the deal will leave L Brands focused on Bath & Body Works, the seller of candles, home fragrances and body care products, which has been thriving.
Assuming roughly $1 billion of value from the transaction and Bernstein’s estimate of Bath & Body Works’ enterprise value of $11.4 billion, after subtracting the net debt, the equity would be worth about $8 billion, ahead of the market capitalization of $6.8 billion as of Wednesday’s close. The shares have risen about 35% so far this year.
But there is a risk that Bath & Body Works won’t be able to sustain its stellar sales growth, given that its 1,700 stores are not immune from the pressures on malls. At least without the drain of Victoria’s Secret, L Brands should have more capacity to ensure this division doesn’t lose its eucalyptus-scented way.
To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net
This column does not necessarily reflect the opinion of 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.
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