(Filed Under wholesale Lingerie News). An activist investor, Barington Capital Group, has been pushing the retailer Chico’s FAS to make several changes including increasing the number of its Soma lingerie stores by as many as 300 (to total close to 600) over the next five years.
Barington, which currently owns about 1.5% of the outstanding common stock of the Chico’s, is also urging shareholders to elect its own chairman, James Mitarotonda, as well as one other retail executive of its own choosing, to the retailer’s board of directors. Chico’s recommends two other executives, with the vote scheduled for later in July.
Other Barington suggestions include “improving merchandising and understanding of the customer at each of” Chico’s brands, which also includes White House Black Market; “repurchasing common stock at current levels;” “improving the company’s executive compensation practices; and “reducing the company’s high overhead and advertising costs by at least $100 million.”
Chico’s has, in sharply worded responses, rejected Barington’s director nominees and many of its other suggestions.
In an extensive June presentation, Barington stated, “We believe Soma is still at an early stage in its growth trajectory with only 291 stores,” adding, “Most intimate brands target younger consumers, while Soma is the only new entrant that focuses on a more mature consumer.” Barington argued that this presents a “large opportunity to convert customers who currently shop in department stores.”
“We believe that Soma needs a larger physical store footprint, in addition to an effective digital commerce presence, as the two work hand-in-hand to help a brand grow its customer base and sales,” Barington continued. “Based on our analysis of publicly available information, we believe that the company should open 200-300 Soma stores over the next five years.”
“We believe that there are many attractive markets where Soma does not have a sufficient physical presence. The company’s management told analysts in 2012 that it believed that Soma could open up to 600 stores. While the company says that it now favors a more “disciplined store growth” strategy, it has not disclosed its revised store growth plans.”
To bolster its argument for Soma opening lingerie stores at a rapid pace, Barington devoted, in its presentation, a page under the headline “Victoria’s Secret Continues to Open More Stores than Soma.”
A close examination of this claim, however, reveals Barinton’s claims to be misleading. We analyzed the annual reports and other SEC filings of both parent companies, L Brands and Chico’s FAS. What makes the comparison easy is that both companies ended each of the pertinent fiscal years on the same dates.
On the page in question, Barington provided a rough bar chart showing comparative store totals for Soma and Victoria’s Secret for each of the four full years 2012 through 2015. Barington stated on the page, “The largest player in the intimate apparel market is Victoria’s Secret, which has 1,118 stores in the United States (nearly 4x as many as Soma) and continues to open new stores which are much larger than Soma stores.” Arrows are included to indicate Victoria’s Secret added stores at a faster rate than Soma over the four years. For its comparison, Barington combined both the store counts for Victoria’s Secret and its sister brand, Pink, which focuses on a younger customer.
According to the annual reports, as of the end of its fiscal year 2011 (January 28, 2012), L Brands reported it was operating a combined 1017 “Victoria’s Secret Stores U.S.” (1002 Victoria’s Secret stores and 15 Pink stores). Thus from the start of fiscal 2012 through the end of fiscal 2015 there was a net combined increase of 101 Victoria’s Secret and Pink stores.
Turning to Soma, Chico’s stated in its annual reports that at the end of fiscal 2011 it was operating 181 Soma stores. By the end of 2015 it was operating 287 stores. Thus a net gain of 106 stores, or 4 more than the net gain in Victoria’s Secret and Pink stores combined.
Even though the Barington chart includes the full year 2012, Victoria’s Secret store numbers actually start to accelerate in fiscal 2013. Measuring from the start of fiscal 2013, when it was operating 985 Victoria’s Secret and 34 Pink stores, through the end of fiscal 2015, the number of net new stores was 99. At Soma there were 209 stores at the end of fiscal 2012 and 287 at the end of fiscal 2015, or a net increase of 78, or 21 less than the combined Victoria’s Secret and Pink numbers.
But there is a big problem with lumping Victoria’s Secret and Pink numbers together, especially when Barington’s aim is to provide advice to Soma’s management. That is because Pink focuses on a younger customer — college-age women — than Victoria’s Secret. And a much younger customer than Soma, which, as Barington itself points out in the presentation, focuses on women who are 35 and older. For a more accurate comparison, Barington should have focused solely on what L Brands has been doing with its Victoria’s Secret stores in the U.S. And that is a very different story.
From the start of fiscal 2012 through the end of fiscal 2015, L Brands increased the net number of Pink stores from 15 to 128, a net gain of 113, while at the same time decreasing the total number of Victoria’s Secret stores in the U.S. from 1002 to 990, a net drop of 12.
All the while Chico’s had net increase of 106 in the number of Soma stores during the same time period. — NM
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