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

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

A shopper browses a Bath & Body Works store in Las Vegas, Nevada, on Sunday, November 7, 2021.

Bridget Bennett | Bloomberg | Getty Images

Company: Bath & Body Works (BBWI)

Business: Bath and body works is a specialist dealer for room fragrances, body care, soaps and disinfection products. In August 2021, Bath & Body Works (formerly known as L Brands) completed the separation of its Victoria’s Secret business.

market value: $9.2 billion ($40.31 per share)

Activist: Third point

Percentage ownership: 6.02%

average cost: $38.16

Activist Comment: Third Point is a multi-strategy hedge fund founded by Dan Loeb that takes selective activist positions. Loeb is one of the true pioneers in the field of shareholder activism and definitely one of a handful of activists who have shaped shareholder activism today. He invented the poison pen letter at a time when a poison pen was often necessary, and over time he has progressed from poison pen to the power of argument. Third Point has amicably secured board representation at companies like Baxter and disney, but will also not hesitate to start a proxy fight if ignored.

What’s happening?

Backstage

BBWI is a solid company and brand with a long history of performing well and delivering operating margins in excess of 20% over the years. During the Covid pandemic, the company gained customers and did well, but this year the tide has turned. The company has been in a period of leadership transition and faces a difficult macro environment and has committed a number of execution missteps.

On May 12, Andrew Meslow resigned as CEO and Executive Chair Sarah Nash was appointed interim CEO. On August 15, Chris Cramer resigned from his position as COO and the company announced that it would not be filling the position.

Nash was awarded an astronomical compensation of $18 million to serve as interim CEO, despite being paid $700,000 annually as chair. The president’s salary was increased by 15% to $1 million, and the company signed commitment agreements with the president, CFO and chief human resources officer, paying them an additional $4.2 million in equity. That’s what Third Point talked about in its 13D filing, when it said it was concerned about executive compensation and excessive bonuses.

To put it in context, one of BBWI’s larger colleagues, Ultimate beautypays its CEO $8.5 million and its highest-paid non-employee director $300,312.

Adding to the governance issues, the company repurchased $1.3 billion of stock at about $49 per share before making several earnings guidance cuts, which then sent the stock down to $30 per share. And through all of that, the company could have communicated better with the market since it doesn’t even have an in-house investor relations manager, which is unusual for a company of its size — especially one whose share price is struggling.

On a positive note, Gina Boswell took over as the new CEO on December 1 after what appeared to be an extensive search for a qualified executive.

However, the missteps since Victoria’s Secret’s demerger on August 3, 2021 have clearly demonstrated that management needs better guidance from the board and members experienced in capital allocation, executive compensation and market communications; who will hold management accountable. I’m not sure I’ve seen a board that needed more shareholder representation than this one. The good news is that this is a good company with a strong brand that, with the right leadership, will generate shareholder value.

Third Point isn’t coming in here to make drastic changes, and they certainly aren’t targeting a new CEO who seems qualified for the position. On the contrary, they are looking for a refresher on the board to support the new CEO and put her in the best position to thrive.

The only negative thing about Boswell is that she’s never been CEO of a public company. That’s fine, it just means it’s even more important to have a strong board to advise and support them. That means a board that can guide capital allocation decisions, such as: B. the repurchase of shares at reasonable prices; has experience with investors and communicating with the market; and will be careful to pay management fairly but not excessively. Not many changes are required here, just a continual refreshment of the Board of Directors with experienced retail and personal care executives, as well as directors with financial expertise.

At this point, we expect Third Point to seek representation on the board, support the new CEO, and encourage the hiring of an IR associate. We would like to add an industry director and an individual from Third Point to the board, but we would not consider it a failure if Third Point decides not to serve on the board out of consideration for other qualified new directors.

Third Point is known to many for confrontational activism and poison pen letters, but this is Third Point from 15 years ago. The modern third point achieves its activism through the power of argument and respect. So we would expect this to end amicably. However, Third Point can still put up a proxy fight when needed, and they’re as good at it as anyone. If they are marginalized, we don’t expect them to back down. The director nomination window opens on February 11, 2023, so we’ve got a few months to see how that pans 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 13D activist assets. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving portfolio companies’ ESG practices.