Activist BBRC slams Victoria's Secret board for low returns

Victoria's Secret, the world-famous lingerie retailer, is engaged in «systematic value destruction,» alleges a letter from activist investor and shareholder, BBRC International PTE Limited, of Australia. The stock, against this backdrop, dropped more than 2% yesterday, June 10.

Since Victoria's Secret went public in July 2021, its shareholders have seen «dismal total returns,» according to the letter from BBRC, which owns a 12.9% stake in the lingerie retailer. 

Over that period, nearly four years, total shareholder returns came to minus 64.1%, lagging the S&P Composite 1500 Specialty Retail index by 93.4 percentage points, BBRC argues.

BBRC asks: «What specific metrics convince the Board that it possesses the competence to turn around what appears to be systematic value destruction – and why shouldn’t stockholders demand an immediate reconstitution of the Board?» The activist investor «urged» the company to address the issues cited in the letter during today's first-quarter earnings call. 

Following publication of the BBRC letter, Victoria's Secret shares fell 2.3% yesterday to $22.20 per share. They have pared some of those losses this morning, having gained 1.1% as of this writing. 

«Catastrophic» capital misallocation: The board is said to have carried out untimely share buybacks totaling $625 million and failed to generate material returns from the $591 million acquisition of lingerie brand Adore Me in 2023. This all resulted in the «destruction» of $1.2 billion in market value, BBRC claims. 

Lack of accountability: The board, the letter says, never took responsibility for its «failed» initiatives, including the buybacks and the Adore Me deal.

Insufficient board independence: One of the nominees for the board, David McCreight, is said to have «clear conflicts» with CEO Hillary Supe given his previous supervisory relationship with her at retailer Urban Outfitters.

«Excessive» chair tenure: Chair Donna James, who oversees cybersecurity as part of her role on the audit committee, has remained in her post after a cyber attack on May 26 that forced the company to shut down its online store and internal systems for four days. It also delayed the publication of the first-quarter financials, Victoria's Secret has stated. They are due today. 

On May 20, the retailer's board approved a temporary «poison pill.» This was in response to BBRC's increasing equity stake in the company. It had long been a passive investor, but since March it had been building up its stake, while it had been in violation of U.S. antitrust law for three years before this because of its stock purchases, Victoria's Secret claimed. BBRC was also said to have recently launched a new business in the same niche as Victoria's Secret, described as a «global lingerie, sleepwear, and beauty brand.»

The poison pill works like this: The company will issue one right for each share of common stock, which will initially trade with the company’s common stock and become exercisable if any individual or group acquires a 15% stake (or 20% for certain passive investors). If the rights become exercisable, right holders, barring the triggering person, can purchase shares at a 50% discount or exchange each right for one share of common stock, the company explained. 

Victoria's Secret stock is up 21% over the last 12 months but is off 46% year to date.

The company has five «hold» recommendations from Wall Street coverage analysts, according to MarketWatch. Another three rate the stock a «buy,» and the same number have it as a «sell.» The average target price is $22.64, implying upside of just 2% versus the last close.

The last time the company reported was for the full-year fiscal 2024. It posted a 1% increase in net sales to $6.2 billion, while net income came in up 51% at $165 million. Investors were not impressed: The day after the earnings, Victoria's Secret shares dropped 2.3%.