Investor group Barington demands change from Chico’s FAS, citing underperforming stock

Investment firm Barington Capital Group wants the Fort Myers-based company to change the…

Investor group Barington demands change from Chico's FAS, citing underperforming stock 1

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The founders of Chico’s are selling their Fort Myers estate: Take a walk through

The founders of Chico’s are selling their Fort Myers estate: Take a walk through

Andrea Melendez, Fort Myers News-Press

An activist investment firm is pushing for change at Chico’s FAS.

On Monday, Barington Capital Group LP, representing a group with a roughly 2% stake in Chico’s, sent a demand letter to the executive chairwoman of the company’s board, asking its leadership to “take a range of measures to improve long-term shareholder value.”

Those measures include:

  • Refreshing the board with directors who have relevant expertise in digital and women’s fashion specialty retailing
  • Expanding financial disclosure for each of the company’s brands
  • Maximizing operating performance by driving digital investments and maintaining cost discipline
  • Exploring strategic alternatives for the company and its brands

Fort Myers-based Chico’s FAS has three primary brands for women: Chico’s and White House Black Market, offering fashion clothing, and Soma, selling intimate apparel and loungewear.

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Chico’s FAS board needs ‘refresh’

Barington blames the retailer’s stock underperformance primarily on its board, suggesting it needs a “refresh.”

Chico’s shares were trading at $5.70 late Monday afternoon, rising about 32 cents after Barington made its letter and recommendations public. The company’s stock price is up from $1.68, nearly 240%, since the beginning of the year. However, the stock is trading a little lower than what it was at the beginning of 2019.

Chico’s had not responded to requests for comment by deadline.

The investment firm states: “We believe change is needed at the Chico’s board.”

Barington wants the publicly-traded company to change the makeup of its board by:  

  • Adding directors with relevant experience in the areas of digital commerce, merchandising and marketing and women’s fashion specialty retail
  • Bringing on directors who further improve the the board’s ethnic, racial and gender diversity

“As the company’s customer base changes and likely becomes more diverse, we believe it is critical for the board to have voices that reflect the merchandising needs of these new customers. We also believe this step reflects good corporate governance,” Barington stated.

Even more importantly, the investment firm said the directors “need to think and act like owners.”

“Given the company’s weak long-term share price performance, we believe it is critical for the board to have directors that truly represent the best interests of shareholders,” Barington’s letter said.

The investment firm wants to see three long-tenured directors step down: John J. Mahoney, David F. Walker and Stephen E. Watson, who it blames for a “significant destruction in long-term shareholder value.”

By the way: Chico’s net sales drop 27% in fourth quarter; Soma brand digital sales rise 72%

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Barington said it’s “not convinced” that the board’s newest director, Kevin Mansell, who spent 35 years at big-box retailer Kohl’s, “brings the right expertise to the board.”

“Even more troubling is the fact that Mr. Mansell and Mr. Watson have a long history together,” the investment firm stated.

Mansell served as chairman, president and CEO of Kohl’s from 2009 to 2018, while Watson served as the lead independent diretor for the big-box retailer from 2006 to 2020.

The election of the Chico’s FAS board of directors is scheduled for June 24, as part of the annual meeting.

On the disclosure front, Barington wants the company to “provide full-segment detail for its brands, including gross profit,operating income, depreciation and amortization and capital expenditures.”

“We believe the added disclosure will help investors to better assess the financial performance and relative valuation of each brand,” the investment firm stated.

Is Soma intimates carrying overall value of Chico’s FAS brands?

The firm believes the “operating struggles” at Chico’s and White House Black Market, have “long overshadowed the positive contributions from Soma.”

Barington acknowledged Soma has been “performing strongly due to its compelling product assortments and inclusive message.”

Based on that strong performance and peer valuations, Barington concludes Soma could actually exceed the entire company’s current enterprise value – or total value – estimated at about $640 million.

Enterprise value is based on the value of a company’s common shares, along with several other factors, such as the amount of debt and worth of preferred stock.

Barington estimates Soma’s value at anywhere from $351 million on the low end to more than $1 billion on the high end.

The investment firm encourages the retailer to “continuously strive to improve operating results,” firstly through the development of “outstanding product that reflects the aspirations and needs of each brand’s customers.”

Secondly, Chico’s FAS must also “incorporate digital engagement to drive customer interaction and excitement,” Barington stated.

Additionally, the investment firm recommends that the retailer’s board work with its financial adviser to “consider a range of strategic alternatives for the company and each of its brands.”

“We would expect the board to evaluate all alternatives that will unlock the tremendous value we see in the Soma brand,” Barington stated.

Barington pleased with new CEO Molly Langenstein

The investment firm said if the retailer follows its list of recommendations, “it will create substantial long-term value for shareholders.”

Barington said it “sees promise in the new CEO’s operating plan, which is driven by digital-led retailing and improvements to merchandise quality.”

The investment firm said it’s pleased with Molly Langenstein’s involvement with the retailer, first as president of the apparel group in August 2019 and now as president and CEO since last April.

“We believe Ms. Langenstein is returning each brand to its roots by building merchandise assortments around quality fabric, fit and fashion. We know from our history with Chico’s that these merchandising elements are critical to its loyal customer base,” Barington stated.

Further, the investment firm said it expects a return in profitability by fiscal 2021, “given the sizable cost reductions enacted by management last year.”

Chico’s slashed its costs to survive after the coronavirus pandemic hit more than a year ago. That included 200-250 job cuts at the corporate offices.

Barington credited the company for taking some “bold steps to reduce costs,” which included improving sourcing, cutting selling, general and administrative expenses, shrinking inventory and closing underperforming locations.

This isn’t the first time Barington has demanded change at Chico’s FAS.

In 2015, Barington became a shareholder of Chico’s, based on what it described as “years of poor share price performance.”

As it’s doing now, the firm made suggestions for actions the retailer should take to improve its performance, but the company rejected Barington’s involvement.

Barington then launched a proxy fight for board seats, to make sure its voice was heard, but later dropped the effort, when it was encouraged to wait out changes that were already underway under former CEO Shelley Broader.

The investment firm wasn’t happy with Broader, and wanted her out sooner rather than later.

The board and others agreed Broader should get more time.

After dropping its proxy contest on July 15, 2016, Barington sold its stock.

In early 2019, Broader was replaced as CEO, but Barington said it came too late after she’d overseen a “highly ineffective plan.”

“The company’s shares have continued to exhibit poor long-term performance,” the investment firm stated.

The demand letter came a day before Chico’s first-quarter earnings announcement, scheduled for Tuesday morning.


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