Breaking Up L Brands

CNBC reported this week that hedge fund Barington Capital has called for a break-up of L Brands, the parent company of Victoria's Secret as well as Bath and Body Works. James Mitarotonda of Barington Capital called upon the company to address the poor performance of the Victoria's Secret business.   He noted, "We believe that the declining performance of Victoria's Secret is primarily due to merchandising missteps and the failure to maintain a compelling brand image that resonates with its target consumers."   Mitarotonda pointed out that, in contrast, Bath and Body Works has performed exceptionally well in recent years.  Therefore, he would like L Brands to split into two separate firms.  He argued that investors are not placing "appropriate value" on Bath and Body Works because of the struggles at the Victoria's Secret business.   The proposal comes on the heels of news earlier this week that Target plans to unveil several lines of lingerie and sleepwear to compete with Victoria's Secret.  The once-mighty retailer appears to be receiving pressure on multiple fronts.  

I find the development quite interesting given that one of my MBA student teams performed a strategic analysis of L Brands last semester. They offered a highly critical examination of the Victoria's Secret strategy, arguing the brand requires a significant overhaul.  They pointed that management had  lost touch with key consumer trends.   Their analysis, frankly, is as thorough and insight as the critique put forth by Barington Capital.  I'm a proud professor!  

One should note that the proposed break-up, in and of itself, won't fix these branding and merchandising issues at Victoria's Secrete.  Simply breaking up without addressing the competitive positioning problems will not magically unlock value in the long run.   Moreover, the key question that needs to be asked about the strategy is whether there are substantial synergies between the two chains.  If there are, then breaking up will actually destroy some value.   On the other hand, if limited economies of scope exist, then a strong case can be made for addressing the Barington Capital proposal.   From afar, I don't see a compelling case for synergies that require these two firms to stay together.   Simply sharing corporate services is not a strong enough rationale for keeping the two units in one corporation.   The firm's products are rather distinct.  They don't share many suppliers.  They do share customers, but do the two companies use a wealth of common customer data to enhance each business?    It's hard to know from the outside.   Without some signficant revenue enhancement or cost reduction from collaboration between the two units, the case for a break-up appears compelling.  It will be interesting to see management's response, given that they have not been shy about divestitures in the past.