Third Point could see big returns from small changes at Bath & Body Works

Business: Bath & Body Works is a specialty retailer of home fragrance, body care, soaps and sanitizer products. In August 2021, Bath & Body Works (formerly known as L Brands) completed the separation of its Victoria’s Secret business.

Stock Market Value: $9.2B ($40.31 per share)

Percentage Ownership: 6.02%

Average Cost: $38.16

Activist Commentary: Third Point is a multistrategy hedge fund founded by Dan Loeb that selectively takes activist positions. Loeb is one of the true pioneers in the field of shareholder activism and definitely one of a handful of activists who shaped what has become modern day shareholder activism. He invented the poison pen letter in a time when a poison pen was often necessary, and as times have changed, he has transitioned from the poison pen to the power of the argument. Third Point has amicably gotten board representation at companies like Baxter and Disney, but also will not hesitate to launch a proxy fight if they are being ignored.

Third Point expressed its concern with Bath & Body Works’ executive compensation structure, noting that excessive awards have been made that are disconnected to important performance metrics. Additionally, Third Point expressed its concerns with the company’s financial discipline, investor communication, and board composition, but noted that Bath & Body Works can resolve many of its issues through board refreshment. Finally, Third Point noted that if no satisfactory resolution is reached, it reserves the right to seek changes in board composition and/or take other measures at or before its next annual meeting.

BBWI is a solid company and brand that has a long history of good performance and years of delivering 20%+ operating margins. During the Covid pandemic, the company gained customers and did well, but this year the tides have turned. The company has been in a leadership transition phase, and is facing a tough macroeconomic environment and made a series of execution missteps.

On May 12, Andrew Meslow stepped down as CEO and board chair Sarah Nash was appointed as interim CEO. On Aug. 15, Chris Cramer resigned from the COO role and the company announced that it would not fill the position.

Nash was awarded an astronomical $18 million compensation to serve as interim CEO despite her having been paid $700,000 annually to serve as chair. The president’s salary was increased by 15% to $1 million and the company signed retention agreements with the president, CFO and head of human resources where they were paid an additional combined $4.2 million in equity. This is what Third Point was talking about in its 13D filing when it said it is concerned about executive compensation and excessive awards being made.

To put it into context, one of BBWI’s larger peers, Ulta Beauty, pays its CEO $8.5 million and its highest paid nonemployee director $300,312.

On top of the leadership issues, the company bought back $1.3 billion in stock at about $49 per share prior to making multiple cuts in earnings guidance, which then sent the stock to $30 per share. And through this all, the company could have been communicating better to the market, as it does not even have an internal investor relations executive, which is unusual for a company of this size — particularly one whose stock price is struggling.

On a positive note, on Dec. 1, Gina Boswell took over as the new CEO, after what seemed to be a comprehensive search to find a qualified executive.

However, the missteps since the company spun off Victoria’s Secret on Aug. 3, 2021, have clearly indicated that management needs better counsel from the board and members with experience in capital allocation, executive compensation, market communication; who will hold management accountable. I am not sure I have seen a board that needed shareholder representation more than this one. The good news is that this is a good company with a strong brand that under the right leadership will generate shareholder value.

Third Point is not coming in here to make drastic changes and they certainly are not targeting a new CEO who appears to be qualified for the position. On the contrary, they are looking for board refreshment to support the new CEO and put her in the best position to succeed.

The only negative to Boswell is that she has never been a public company CEO before. That is alright, it just means that it is even more important to have a strong board to advise and support her. That means a board that can guide capital allocation decisions, such as buying back shares at thoughtful prices; that has experience with investors and communicating with the market; and will be diligent about paying management fairly but not excessively. There is not a lot of change that is needed here, just continued refreshment of the board with experienced retail and personal care executives and directors with financial expertise.

At this juncture, we would expect Third Point to seek board representation, support the new CEO and encourage hiring an IR person. We would love to see an industry director and a Third Point person added to the board, but we would not consider it a failure if Third Point decides not to take a board seat in deference to other qualified new directors.

Third Point is known by many for confrontational activism and poison pen letters, but that is the Third Point of 15 years ago. The modern day Third Point succeeds at its activism through the power of argument and respect. So, we would expect this to end amicably. However, Third Point can still fight a proxy fight if necessary and they are as good as anyone at it. If pushed to the edge, we do not expect them to cave. The director nomination window opens on Feb. 11, 2023, so we have a couple of months to see how this plays out.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving ESG practices of portfolio companies.