NEW YORK, United States — After weeks of speculation, Sycamore Partners announced Thursday that it will acquire the challenged Victoria’s Secret lingerie brand from L Brands in a deal that values the company at about $955 million. L Brands Chairman and Chief Executive Leslie Wexner will step down, but remain on the board as chairman emeritus.
Sycamore Partners has agreed to acquire 55 percent of the lingerie giant, while public company L Brands retains 45 percent, including its Pink sub-brand.
In an email to employees sent on Thursday morning laying out details of the plan, Wexner, mired in recent months by a New York Times investigation into a "culture of misogyny" at the company and declining sales at Victoria's Secret, explained his reasoning for stepping down. "I think about the endless possibilities ahead for this company. And I’ve thought about where I fit in the picture," he said. "In keeping with this same thoughtful examination, I have decided that now is the right time to pass the reins to new leadership."
Whether or not Sycamore is the answer to Victoria's Secret's myriad challenges — antiquated company culture, disconnection with the consumer, over-storing — remains to be seen. Private equity firms have a track record of wreaking havoc on the retailers they acquire by saddling them with debt, charging them management fees and pushing them to cut costs. (See Sears and Toys R Us as examples.) Often, these retailers file for bankruptcy while private equity firms turn a profit by selling off valuable parts or by forcing retailers to take on more debt to pay off investors. These tactics have been particularly damaging for industries in transition, like mall apparel brands.
Sycamore is no stranger to these tactics. The firm is known for its ruthless approach to its leveraged buyouts, which have often led to the firm separating companies like Staples and Hot Topic into different pieces and selling the most valuable ones, while draining whatever remains of most of its value, as in the case of Nine West Holdings. These deals have often angered bondholders as Sycamore got hefty payouts.
The firm is likely to bring a new slate of executives to Victoria’s Secret to separate it from its maligned corporate culture, and implement aggressive cost-cutting strategies. It may also expand the brand further into adjacent categories, like activewear and swimwear, to drive top-line growth.
But Victoria’s Secret will be a new challenge for Sycamore in several key ways. For one, the company has not just fallen out of favour with customers, but it has a tarnished public reputation that will take time to correct.
However, it is also still the market leader in lingerie, where no other single player rivals it in terms of reach.
Women still seek Victoria Secret products; [they] just would prefer the brand to speak to who they are today.
“The big opportunity for Sycamore is to restore [Victoria’s Secret] to its leadership position [by] speaking to women with a current 2020 voice,” said William Susman, managing director of retail advisory and investment firm Threadstone Advisors. “Women still seek Victoria Secret products; [they] just would prefer the brand to speak to who they are today."
Wexner, now 82, acquired Victoria’s Secret when it was a small chain of stores in California for $1 million in 1982. The company grew rapidly as a mall staple and alternative to the dowdy department store lingerie floor, and at its peak in 2016 generated $7.8 billion in annual sales in North America.
In recent years, the lingerie brand has struggled due to internal and external challenges: the brand failed to adapt to changing consumer preferences as mall traffic declined. The company was also scrutinised for Wexner’s close ties to Jeffrey Epstein, the late New York financier charged with sex trafficking minors before his death in 2019. The New York Times reported in February that Victoria’s Secret had a history of “bullying and harassment of employees and models.”
Despite these problems, Victoria’s Secret is a large business (approximately $7 billion in annual revenue — roughly $4 billion from Victoria’s Secret, $2 billion from youth-brand Pink and $1 billion from Victoria’s Secret beauty) facing few competitors at the same scale (the brand owns 1,230 stores globally). Unlike other challenged apparel categories, lingerie is a business that can count on people still buying even as trends evolve.
“It’s very difficult to change a culture from within,” said Howard Meitiner, managing director at investment bank Carl Marks Advisors. “When you have a successful foundation that at one point dominated the lingerie and intimates field, you have something you can rebuild.”
It’s very difficult to change a culture from within.
Co-founded in 2011 by Stefan Kaluzny and Peter Morrow, Sycamore raised its third fund at $4.75 billion in July 2018 and reportedly has around $10 billion in assets under management. The firm has counted former Coach Chief Executive Lew Frankfort as an advisor since 2015 and hired Goldman Sachs’ consumer retail head Rob Sweeney, who led IPOs for Lululemon and Under Armour in his former role, in 2019. Sycamore made headlines in 2019 when it received a $1 billion payout after refinancing of office supplies company Staples.
Here’s how Sycamore has approached its other retail acquisitions in the apparel and footwear markets:
Victoria’s Secret isn’t the only Wexner business in Sycamore’s portfolio. When the mall apparel market first showed signs of slowing down, Wexner sold a majority stake in mall chain The Limited (which he founded in 1963) in 2007 to private equity firm Sun Capital, which a decade later closed all its stores and filed for bankruptcy protection. Sycamore acquired The Limited at auction for $26.8 million a month later, and now the brand is essentially a private label brand for one of Sycamore’s other assets, the Southern US department store Belk.
In 2011, Sycamore acquired a majority stake in the apparel part of L Brands-owned sourcing company, Mast Global, and acquired the rest of it in 2015. During this transaction, the intimate apparel and beauty products sourcing division remained owned by L Brands, which by that point was focused on Victoria’s Secret and Bath & Body Works. Sycamore retailers typically work with MGF Sourcing, in another example of how Sycamore wrings the most out of its acquisitions. Torrid, for example, more than doubled its purchases from MGF between 2014 and 2016.
Sycamore acquired Belk from the namesake family for $3 billion in 2015. The chain was founded in 1888 and is known in the south of the US, with headquarters in Charlotte, North Carolina. It counts close to 300 stores in 16 states, with a focus on smaller cities. Two years after the acquisition, Belk announced that it would invest $40 million in store remodelling and open new locations. In 2019, it hired New York advertising agency Mcgarrybowen for a branding upgrade. But Belk has also cut staff, laying off around 60 full-time employees in 2018 and another 80 corporate positions in 2020.
Sycamore’s $1.2 billion acquisition of Jones Group in 2014 turned into a dramatic series of events that exemplifies the firm’s aggressive approach.
The company restructured the group and sold it for parts: footwear brand Stuart Weitzman went to Tapestry (then Coach Inc.) for $530 million in 2015; Kurt Geiger went to European private equity firm Cinven for an undisclosed amount in 2015; Easy Spirit to Marc Fisher for undisclosed amount in 2017; after shutting down Jones New York, Sycamore sold it to Authentic Brands Group in 2015; Brian Atwood was sold to Steve Madden in 2015.
The brands that remained, including Nine West and Anne Klein, were restructured under a newly named corporate umbrella, Nine West Holdings, which filed for bankruptcy protection in 2018 with about $1.6 billion in debt. Nine West Holdings bondholders objected, arguing in court that Sycamore stripped the company of its valuable assets and left it to wither and die, and that Sycamore threatened to end the relationship between Nine West and Belk, a major retailer for the footwear brand.
In the end, a settlement was reached that saw Sycamore pay $125 million to creditors and the company taken over by another private equity firm after Nine West and Bandolino were sold to ABG for $340 million.
Sycamore acquired the apparel chain in 2012 for $193 million, and it is considered one of its success stories. The firm sold $145 million worth of its credit card receivables, and Talbots has cut costs and changed suppliers, working more with Sycamore’s MGF Sourcing, according to WSJ.
Sycamore took Hot Topic, the mall go-to for emo-music fans, off the public market for $600 million in 2013, and then spun off its sub-brand Torrid, which focuses on plus-size apparel for young women, in 2015. Two years later, it submitted plans to take Torrid public, seeking to raise up to $100 million and reporting annual revenues were up 188 percent between 2016 and 2014, though Torrid was operating at a loss. The IPO plans were withdrawn in 2019, with reports blaming an unfavourable environment for retailers on the public market. In 2017, Hot Topic bondholders sued Sycamore for selling Torrid to itself at what they alleged was a fraction of its market value. Meanwhile, Hot Topic appears to be stable, operating about 15 more stores in 2019 than it did five years prior.