How activist Barington can collaborate with Victoria’s Secret to improve value

Company: Victoria's Secret & Co (VSCO)

Business: Victoria's Secret & Co. is a specialty retailer of women's apparel and beauty products marketed under the Victoria's Secret, Pink and Adore Me brand names. Victoria's Secret brand offers intimate apparel, casual sleepwear, swim, lounge and sport, as well as fragrances and body care. Pink is a lifestyle brand for young women providing variety of collections and heritage pieces, including intimate apparel, loungewear, activewear, accessories, beauty and more. Adore Me is a direct-to-consumer lingerie and apparel brand that is focused on serving women of all sizes and budgets.

Stock Market Value: $1.5B ($18.83 per share)

Activist: Barington Capital

Ownership: > 1%

Average Cost: n/a

Activist Commentary: Barington was founded in 1992 by James A. Mitarotonda as a boutique, full-service investment bank to serve the needs of emerging growth and smaller capitalization companies. The success of the firm and its investments led to the wind-down of the investment bank and the launch of an activist hedge fund in 2000. In its history, Barington has taken material action at 38 other companies and has averaged a 38.18% return on these investments versus 14.74% for the Russell 2000 over the same period.

What's happening

Barington is advocating for Victoria's Secret to (i) replace at least a majority, if not all, of the board with directors who have proven experience in brand revitalization, operational execution, international expansion and shareholder value creation (six of the nine current directors have been on the board since its public listing); (ii) have the reconstituted board consider whether CEO Hillary Super has the experience and strategic clarity necessary to engineer a turnaround; (iii) dedicate additional focus to its core brand; (iv) accelerate growth in digital and international markets; and (v) streamline the operating model eliminating underperforming and distracting initiatives.

Behind the scenes

Victoria's Secret & Co. (“VSCO”) is a specialty retailer of lingerie, clothing and beauty products through its flagship Victoria's Secret brand, Pink and Adore Me. The company began trading on the New York Stock Exchange in summer 2021 following a spin-off from L Brands (which is now Bath & Body Works). The company's nearly four-year stint in the public markets has been marked by difficulties. Trading at an all-time high of roughly $76 per share not long after its debut, shares have fallen more than 75% to around $18 per share.

Investor BBRC International PTE Limited converted from a 13G to a 13D in February 2024 and built its position to nearly 13% as VSCO shares continued to tumble. Earlier this month, BBRC sent a letter to Victoria's Secret Chair Donna James in which it lambasted the board for its history of value destruction. BBRC's letter is short on support and detail and long on allegation, negativity and second guessing with the benefit of hindsight. The only suggestion the investor makes states the obvious: “constructing a confidence-inspiring Board and generating positive financial returns to drive value creation.” Thankfully for Victoria's Secret and its shareholders, a more constructive and experienced activist showed up: Barington Capital.

On June 16, Barington sent a letter to the board of VSCO notifying the company of its more than 1% position. Then in its very next paragraph, Barington uses words like “constructively,” “collaboratively” and “helpful.” The firm does not just claim to have industry experience, but cites its engagement with L Brands, the former parent company of VSCO, which led to an increase in the stock price by 221.5% during its tenure as an advisor to the board of directors. Like BBRC, Barington criticizes the company's dismal underperformance, trailing its peers by 47.4 percentage points since its IPO. But while BBRC was content with just being critical, Barington specifically identifies several reasons for the underperformance such as declining revenue, shrinking gross margins, growing inventory, high senior management turnover, a lack of marketing and merchandising focus and an apparent failure to articulate or execute a compelling brand vision. Had Barington just left it there, the firm would have been more helpful than BBRC. However, as a responsible and experienced shareholder activist, Barington takes it to the next integral step – suggestions on a path forward. Specifically, Barington recommended that Victoria's Secret: (i) replace at least a majority, if not all, of the board with directors who have proven experience in brand revitalization, operational execution, international expansion and shareholder value creation (six of the nine current directors have been on the board since its public listing); (ii) have the reconstituted board consider whether CEO Hillary Super has the experience and strategic clarity necessary to engineer a turnaround; (iii) dedicate additional focus to its core brand; (iv) accelerate growth in digital and international markets; and (v) streamline the operating model eliminating underperforming and distracting initiatives.

Barington is no stranger to VSCO. In fact, the firm was a vocal proponent of the spin in a previous 2019 campaign at L Brands. At the time, Barington recommended that the company take swift action to improve the performance of VSCO by correcting merchandising mistakes and launching a strategic review to unlock value through a separation of VSCO from Bath & Body Works. The two parties eventually entered into an agreement pursuant to which L Brands appointed Barington as a special advisor to the company, and Barington agreed to withdraw its proposed nominees to the board. Ultimately, VSCO was spun and Barington generated a return of over 221.5% during its tenure as an advisor to the board.

Barington may not be a household name in the investor world like many activists, but it has as much experience as any activist today. The firm's activism dates back to 2000, and much of it was focused on the retail sector, targeting companies like Hanesbrands, Chico's FAS and Dillard's. Of its 46 campaigns, 19 have been at consumer discretionary companies, at which the firm has had an average return of 13.86% versus 8.56% for the Russell 2000 over the same period. Barington does not like spending what it takes to win a proxy fight, preferring to gain representation through settlements. Its recent proxy fight and loss at Matthews International was evidence of this, but also showed that Barington is still willing to take a proxy fight to the distance. Barington is not likely to go through that again so soon, but given its experience in this industry and at Victoria's Secret (two of the current directors, including Chair Donna James, were directors when Barington successfully collaboratively engaged in 2019), we would expect that the firm would have a good opportunity to work constructively and amicably with the board to create shareholder value.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.