Beauty & Wellness Briefing: Why it’s worth paying attention to the Bath & Body Works proxy battle

If you’re like me, your knowledge of proxy battles and activist investors — formerly referred to as “corporate raiders” — are limited to the second season of HBO’s “Succession” and Richard Gere in “Pretty Woman.” But aside from making a good dramatic storyline, there are real-world implications. Especially right now in struggling sectors like retail. Case in point: Bath & Body Works has recently made headlines for its impending proxy battle with hedge fund Third Point.

Third Point first disclosed a stake of more than 6% in Bath & Body Works in December. It previously highlighted executive compensation as an issue it had with the company. The activist noted that Bath & Body Works paid interim CEO Sarah Nash some $18 million for less than a year’s worth of work. Gina Boswell took the helm in December after a search that lasted about a year. Third Point is also critical of what it views as poor capital allocation at Bath & Body Works, including an ill-timed share buyback last year and the decision to make Nash the interim CEO due to a lack of experience in the beauty and personal care sector.

“It’s a perfect storm for activist investing this year. Poor returns over the prior year make investors unhappy, and this is especially the case for retail,” said Austin Starkweather, a finance professor at the Darla Moore School of Business at University of South Carolina. Compared to Nov. 2021 when stocks were rising, the SPDR Retail ETF is down about 35%. Companies like Stitch Fix, Sally Beauty Holdings, Nordstrom and Dillard’s are part of the index fund. In contrast, the S&P 500 is down approximately 15% since its Nov. 2021 high.

On Wednesday, Feb. 22, the day before its fourth-quarter and year-end earnings call, Bath & Body Works published a response to Third Point’s intent to nominate directors, which is an early sign of an impending proxy battle. The company commented: “We value the perspectives of all Bath & Body Works shareholders and are open to opportunities that support our commitment to drive value creation and strong operating performance. It is unfortunate that Third Point has chosen to announce its intent to pursue a costly public proxy fight despite the Board’s good faith engagement efforts over the past several months.”

Third Point has not publicly determined which directors it will aim to replace at the annual meeting expected this spring. The window for nominating candidates to the Bath & Body Works board opened on Feb. 11 and closes March 13. Third Point did not respond to a request for comment.

On Thursday, Feb. 23, Bath & Body Works’ report showed that it had beaten analysts’ forecasts on the top and bottom lines in its fiscal fourth quarter, yet it saw a decline of 5% year-over-year net sales to $2.89 billion for the fourth quarter, which ended Jan. 28. Net income was $428.2 million, compared to $592.6 million last year. The company was formed in August 2021, when the former L Brands split into two entities: Victoria’s Secret and Bath & Body Works.

Gina Boswell, CEO of Bath & Body Works, said on the earnings call, “The team delivered better-than-expected earnings results despite a challenging macroeconomic environment, which is a testament to the strengths of this organization. Our customer base responded well to our holiday season, in part powered by our loyalty program, which now exceeds 33 million members. In addition, we continued to be disciplined in our expense and inventory management.”

This situation with Bath & Body Works does not exist in a vacuum, and retail may be particularly vulnerable as the sector is underperforming amid macroeconomic conditions like inflation. Nordstrom was also caught in the fray in early February when it was revealed that investor Ryan Cohen was building a large stake in the retailer with plans to push it to shake up its board as its performance lags behind rivals. The upscale retailer previously fended off another activist investor in 2022 through the use of a poison pill. “Poison pill” is a phrase that has been tossed around in recent months, and refers to a shareholder plan enacted when a large stake has been purchased without board approval. The plans calls for releasing new shares to existing shareholders at a steep discount, making it harder and more expensive for an activist to scoop up enough equity to be a threat. Kohl’s also faced down an activist investor in 2022, succumbing to a poison pill that allowed it to quash a proxy battle.

Poor stock performance has helped drive up the volume of activists, as such investors look for opportunities to push for change at underperforming companies. There were 135 activist campaigns in the U.S. in 2022, a 41% jump from the prior year, according to data compiled by Lazard Capital Markets Advisory Group and cited by Wall Street Journal.

However, proxy battles are often lost by activists, per data from Insightia. Of the 17 proxy contests to go to a vote at U.S.-based companies in 2022, only four resulted in activists winning at least one board seat. Separately, Insightia also posited that Helen of Troy, the owner of Drybar consumer products and licensor of Revlon hot tools, could be a potential activist target in 2023.

But just because a proxy battle does not come to a vote does not mean that companies targeted do not change course to mitigate a negative outcome. Bath & Body Works has already adopted measures like expanding its board by two seats, including Lucy Brady who was proposed by Third Point. Additionally, the company said on its earnings call it is undertaking an enterprise-wide effort to reduce expenses and improve operating efficiency in the business. It is targeting $200 million of annual cost savings, with over half of those savings contemplated in its 2023 outlook, primarily impacting the second half of the year. This year, Bath & Body Works plans to close 50 mall locations and open 90 off-mall spots, which are essentially strip-mall stores. It already opened 95 new off-mall North American stores in 2022. Several studies support the idea that threatened or aborted proxy fights better serve shareholders than fights to the finish.

“The ability to provide products that customers love with a powerful in-store experience should enable the brand to succeed in a variety of retail formats, whether that be in indoor malls, outdoor lifestyle centers or even strip centers,” said Ethan Chernofsky, svp of marketing at retailer foot traffic company Placer.ai. “The diversity should also be buoyed by shifts in migration patterns that privilege opportunities in newer regions and suburban areas.”

Comparatively, at the time of its proxy fight, Kohl’s amplified the Sephora shop-in-shop business, with plans to grow it to $2 billion by 2025, representing roughly 10% of Kohl’s expected revenue that year. It is also announced plans to open 100 new smaller-format stores between 2022 and 2026.

Starkweather said there are further possible company actions to either mollify Third Point or as the result of a successful proxy battle. That could include additional store closures, layoffs, selling off of company assets or other long-term changes to the business. On Monday, Bath & Body Works published another statement addressed to shareholders regarding its plans to “transform the company into a leading global omnichannel” company. The letter detailed that between May 2020 and Feb. 2023, the company has delivered shareholder returns of 416%, outperforming retail peers. Further, Bath & Body Works has welcomed Third Point’s recommendations and feedback, but will not “accede” to the “ultimatum” from Third Point to appoint Munib Islam, a former employee and protégé of Third Point’s billionaire owner Daniel Loeb. According to Bath & Body Works, Islam served as a managing partner of LTS One Capital Management LP, which then accumulated a stake in Bath & Body Works. During a meeting with company management in June 2022, Islam expressed an interest in joining the board but was not offered a seat. Instead, he sold down LTS’s position in the company and “shopped his investment thesis to his old boss,” Dan Loeb, who then bought a stake in Bath & Body Works, the letter said.

Per the letter, the Board concluded that a CFO of a major public company would bring more relevant capital allocation and financial experience to the board than Islam. “Simply put, it is cronyism at its worst,” the letter said.

“Proxy battles are waged for a reason. The people who are [waging] a battle think they can increase the value of their shares by doing so; they want management to take a particular action,” said James Angel, a finance professor at the McDonough School of Business at Georgetown University. “[What Third Point] has put forth sounds like pretty generic stuff. What does Third Point think will lead to better performance? I’m sure they have specific ideas.”

Following the merry-go-round of tit-for-tat public letters, the initial big steps in a proxy battle would be for either side to reach out to Bath & Body Works’ major shareholders, such as Vanguard or BlackRock, to persuade them or assure support. Activist investors often also create websites to house their communications, plans and presentations for other investors to view. Both sides will engage with communications teams and proxy specialists. All in all, it can be an expensive endeavor costing millions of dollars on both sides, not to mention the incumbent management team’s time and focus diverted from the core business. Nadya Malenko, a finance professor at the Michigan Ross School of Business at University of Michigan, said a new dynamic to proxy battles is the introduction of universal proxy cards in 2022, which lowers the barrier for activist investors. It allows shareholders to vote for each board member individually, rather than as a whole, likely allowing activist investors to seat their chosen candidates on a board more easily.

“[Proxy battles] are always fun to watch,” said Angel. “Get out the popcorn, roll up a chair, pop-open a few beers and enjoy the show.”

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