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Sycamore-Victoria’s Secret Deal in Jeopardy, L Brands Falls

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L Brands (NYSE:LB) stock fell by as much as 20.7% during the trading session on April 22. Ultimately, the stock closed down by 15.5% to $10.19 on Wednesday. Sycamore Partners announced its plan to scrap its deal with Victoria’s Secret.

L Brands stock is trading at a discount of 63.6% from the 52-week high of $28.02. The stock is also trading at a premium of 27.4% from the 52-week low of $8.00. L Brands stock has fallen by over 43% this year as of Wednesday. In comparison, the S&P 500 Index has fallen by 13.4% during the same period. The stock has fallen by around 61.5% in the past year. At Wednesday’s closing price, the stock’s market value was $2.8 billion. L Brands’ market value was $6.3 billion on February 26 when the company reported its fourth-quarter results.

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Victoria’s Secret deal

On Wednesday, L Brands received notice from Sycamore Partners that it plans to terminate the deal to buy Victoria’s Secret. On February 20, Sycamore decided to buy a 55% stake in the brand for $525 million. L Brands planned to retain the remaining stake in the brand. The deal included the Victoria’s Secret lingerie business, Victoria’s Secret Beauty, and the PINK brand. According to the terms of the deal, Victoria’s Secret had an enterprise value of $1.1 billion. The companies planned to close the deal in the second quarter.

However, Sycamore Partners decided to call off the transaction. The firm claimed that L Brands violated the terms of the deal. According to Sycamore Partners, the lingerie brand has shut down over 1,000 stores in the US. The firm also said that L Brands furloughed many workers and skipped the April rent payment. Sycamore Partners stated in its filing, cited in a Reuters report, that L Brands closed most of the Victoria’s Secret and PINK stores globally without its permission. In addition to the employee furlough, L Brands also slashed the compensation of many of its senior staff. However, the Victoria’s Secret brand’s owner will challenge the lawsuit. The company doesn’t think that Sycamore Partners’ claims are valid. The company took various steps in response to the coronavirus outbreak.

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What’s in store for L Brands now?

Notably, L Brands stock has been underperforming for the past few quarters due to its Victoria’s Secret brand. While Victoria’s Secret lingerie grapples with lower sales, the Bath & Body Works brand has been successful. In the fourth quarter, Victoria’s Secret’s same-store sales fell by 10%. In contrast, the Bath & Body Works division reported same-store sales growth of 10%.

Victoria’s Secret, which was once an iconic lingerie brand and known for high-end marketing, started declining due to a shift in consumer preferences and growing competition. Customers gradually opted for comfortable intimate apparel by American Eagle Outfitters’ (NYSE:AEO) Aerie brand and ThirdLove. In March 2019, activist investor Barington Capital Group suggested that the company should take measures to revamp the brand. In early January 2020, a Bank of America analyst also suggested some measures to improve the business. However, L Brands wanted to sell Victoria’s Secret to sharpen its focus on the Bath & Body Works brand and generate cash. The divestment of Victoria’s Secret was the only hope for L Brands to boost its profits.

Sycamore Partners’ move puts L Brands in a tight spot. If Sycamore decides to walk away from the deal, L Brands wouldn’t be able to find any other suitor for its brand amid the current coronavirus crisis. Even if a potential buyer shows interest, they would bid a lower value for the brand, according to analysts cited in a Bloomberg report. In such a scenario, the company might have to retain its brand and revamp it as a last resort.

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