My position on this has changed substantially after having done a little more research. I think that there is some much deeper cause for concern with VS, and having reviewed the Barington letter, I'm even more concerned about the pressures on them to do the absolute incorrect thing to try and right the ship.
I'm going to give Barginton the benefit of the doubt and assume that they're motivation is simple: they want BBW split off, and want to capture a quick gain on the re-rating. I'm going to assume everything else they say about fixing VS is just mumbling bullshit to insulate them from charges that they have no idea about the market and are just pushing for some quick financial engineering profits. Because what they propose is asinine delusional bullshit. But it's the sort of bullshit that might get Mister Barington a guest slot on CNBC, so maybe there's that incentive too.
Anyway, that's enough making fun of Barington. Here's my current thinking on the company:
1. Victoria's Secret has had problems for quite a while. There would have been clear internal signs (visible to management) as far back as 2012, maybe even a bit earlier. Given this fact, we're forced to confront two possibilities: either they were completely oblivious to what should have been obvious to them for several years, or they have spent the past 7 years actually trying (and failing) to remedy the problems. Neither of these is particularly bullish, I think management is a huge huge problem here.
2. I oversimplified the competitive threat to VS when I said that they were explicitly counter-programming. They are, but this is a branding exercise that is happening in conjunction with genuine structural changes in the industry that VS has betrayed no awareness of. The CEO of the company is an 80 year old dude, and I sincerely think the burden is now on him and his entire team to demonstrate that they should be considered credible here.
3. On credibility, they were proudly boasting about their dividend increases as recently as a few months before completely slashing their dividend. Maybe this is the sort of embarassing thing I tend to fixate on irrationally, but to me it's consistent with the broader theme that I've been developing in my research: that this management team absolutely has to go.
4. Similar sign of no long-term strategy: exiting swimwear and re-entering swimwear a year later, and in each case boasting about how the decision demonstrated their strategic dynamism. Self-explanatory.
5. They have spent years touting their highly rational and lucrative store capex. They claim IRRs > 20% for capex. They've been making the claim for five years. Over that five years they've done $3B in capex. The return from the past five years of capex alone should be about $600 million. What was the net income for the entire company this year? About $600 million. Weird!
That said, Barington's letter demonstrates zero understanding of the actual structural issues here (no, it's not a failure to be "inclusive"), and I'm also skeptical about the economics of separating the two businesses. I've no experience here, but it seems to me that having VS and BBW implicitly coalition-bargain for deals with real estate owners provides some strategic value, and I also imagine there is some supplier/best practices sharing along their overlapping product lines. Finally, since the target demographic for VS and BBW overlaps almost perfectly, there's a nice delusion-challenging control dynamic in the fact that you have another store in almost every mall where theres a VS; in other words you should be much more empowered to dismiss excuses for poor performance at the individual store level, since you have another store targetting the exact same demo in the exact same geography with the exact same income one story above. They don't seem to have taken advantage of this intel advantage, but it's there for anybody who isn't stupid.
The basic underlying claim of Barington seems true: BBW is being seriously undervalued because of the VS issues, and VS is seriously underperforming relative to their potential. The problem is that I don't see current management as solving either problem, and I don't see Barginton as a savior either.
But I will continue doing the very hard work of researching this extensively, because I feel like I owe a debt to this great board.
