A Look At What Sycamore Finds Attractive In Victoria’s Secret

A Look At What Sycamore Finds Attractive In Victoria’s Secret
  • Struggling retailer Victoria's Secret sold a 55% stake of itself.
  • Private equity company Sycamore Partners bought the stake.
  • Sycamore is known for investing in consumer and retailer brands.

L Brands, the parent company of Victoria’s Secret, reached an agreement on Feb. 20 to sell a 55% stake in the high-end lingerie retailer to private equity firm Sycamore Partners.

Sycamore is known for specializing in consumer and retail investments but some investors are questioning the logic behind buying a struggling brand. Off the bat, Sycamore paid a fair price for its stake in L Brands which doesn’t include a debt component.

According to Susan Anderson, an analyst with B Riley FBR, it remains to be seen if Sycamore will actually see a return on investment. She said on a Bloomberg TV interview if Sycamore can turn the brand around it could prove to be a wise investment.

What wouldn’t have necessarily made sense would be for Sycamore to acquire the company outright through leverage. This strategy may no longer be feasible for acquiring retailers, especially those mostly found in malls.

Naturally, L Brands investors would have likely preferred a full separation and this was evident with the stock’s 15% initial reaction to the downside. But as investors started to dig deeper into the deal, it “was a pretty good deal” and a “good first start.”

Still A Market Leader

Bloomberg’s Jordyn Holman added in the interview L Brands continues to hold a sizable market share in the undergarment industry so any commentary the brand is on its deathbed is simply false. Under Sycamore’s majority ownership, the private equity needs to “evolve with the times.”

What Sycamore Brings To The Table

Sycamore already owns a large and diversified set of retailers ranging from department stores, specialty stores, and wholesale brands, according to Forbes. The private equity group is known to specialize in transforming already strong brands with a new strategy that would improve profitability and optimize the core value of the business.

Despite popular belief, private equity firms can’t just expect to slash costs to directly translate to a sustainable profit. Instead, they need to focus on simply managing the business more efficiently. 

In Victoria’s Secret’s case, closing underperforming stores would need to be balanced with investments in product development. Losing customers from closing stores needs to be replaced with gaining customers at operating stores.

At its core, Victoria’s Secret is still a “beloved brand” that can win back the minds of consumers who left the store for alternatives. Doing so would leave the private equity firm with achieving its primary objective of higher gross margins, operating profits, and net profits.

By Jayson Derrick
Jayson Derrick has been writing professionally about stocks since 2011. He is particularly interested in alternative investments, hedge funds, and activist investing. He is a big fan of NHL hockey and lives in Montreal, Canada with his wife and four year old daughter.
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