Activist investor Barington Capital is urging L Brands to spin off its struggling Victoria Secret brand, in part to protect its thriving Bath & Body Works brand, which Barington says should be taken public.

In a letter to L Brands CEO Les Wexner, Barington CEO James Mitarotonda says the financial performance of Victoria’s Secret over the past three years has been “concerning,” with its income dropping some $900 million — from $1.4 billion in 2015 to $500 million in 2018. The performance of Bath & Body Works, however, has been “exceptional,” with its income growing from $858 million in 2015 to $1.08 billion in 2018, according to the letter.

L Brands responded to Barington in a brief press release, saying the company is “focused on bringing merchandise to market that aligns with consumer trends around the globe, proactively managing our real estate assets and maintaining a disciplined approach to our cost structure and deployment of capital.”

In his letter, Mitarotonda attributes the declining performance of Victoria’s Secret to merchandising missteps and failing to create a brand image that resonates with its target consumers.

“Unfortunately, the market does not appear to be ascribing appropriate value to the solid financial performance of Bath & Body Works, most likely because it is being overshadowed by the struggles at the company’s more visible Victoria’s Secret segment,” Mitarotonda said in the letter.

To improve Victoria’s Secret’s performance and unlock the value of Bath & Body Works, Mitarotonda recommends that L Brands correct its past merchandising mistakes at Victoria’s Secret and update its brand image to better resonate with consumers. It also recommends that L Brand’s board of directors retain a financial adviser to explore a spinoff of Victoria’s Secret or an initial public offering of Bath & Body Works. Mitarotonda also recommends that L Brands create more director independence and diversity on its board to more effectively oversee and advise management.

In it's press release, L Brands cited significant changes it has made to focus resources on core categories to enhance performance and accelerate growth, including:

  • Closure of Henri Bendel
  • Sale of the La Senza business
  • Reduction of the regular dividend by half
  • Promotion of Amy Hauk to run PINK and the appointment of John Mehas to lead Victoria’s Secret Lingerie
  • New product launches in Lingerie, PINK and Beauty, including a new online Swim assortment in March
  • Disciplined and proactive management of inventory, expenses, real estate and capital structure
  • Heightened focus on the customer and our merchandise assortments at Victoria’s Secret Lingerie and PINK, including a review of all aspects of brand marketing and communications

L Brands, however, did not commit to taking any particular action.