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L Brands' ties to Jeffrey Epstein aren't its only troubles as stock loses a third of its value this year

Key Points
  • Shares of L Brands are down nearly 35% since January.
  • Victoria's Secret has lost touch with many female shoppers, and some worry its Bath & Body Works store may run out of steam.
  • In August, L Brands CEO Les Wexner alleged in a letter he wrote to his charitable foundation that accused child sex trafficker Jeffrey Epstein had misappropriated more than $46 million of his personal fortune.
  • In July, L Brands disclosed it had hired outside counsel to review the company's relationship with Epstein.
A woman walks past a Victoria's Secret store at Huaihai Road in Shanghai, China.
VCG | Getty Images

It's been quite the year for L Brands.

Sales continued to decline at its prized Victoria's Secret stores. It faced an activist campaign that led to a board shakeup. Then came unwanted attention for its ties to accused child sex trafficker Jeffrey Epstein. That relationship is under review by the company. But this week the focus will be on longtime Chairman and CEO Les Wexner at the company's investor day.

Wexner, along with a number of L Brands executives, including its heads of Bath & Body Works, Pink and Victoria's Secret will take the stage Tuesday at the Hilton Columbus at Easton to give an update on the state of the company's business.

Shares of L Brands are down nearly 35% since the start of the year. Over the past three years, its shares have fallen cumulatively nearly 40%, while shares of the S&P 500 have grown nearly 11%, according to Factset.

Last quarter, the company reported same-store sales that fell 1%, worse than expected growth of 0.3%. Its marquee store, Victoria's Secret, has lost touch with women who are eschewing its sexy lacy brand for more comfortable styles. Its Bath & Body Works store has helped drive the company's growth, but there are some concerns that engine may slow.

Bath & Body Works now comprises 35% of L Brands' sales, up from 27% five years ago, according to Factset.

Turnaround plans

L Brands is making efforts to revive Victoria's Secret's performance. It is closing 53 Victoria's Secret stores, and replacing the brand's marketing chief after a decades-long stint, along with the heads of Victoria's Secret and its younger Pink brand.

L Brands has said it is "rethinking" its annual Victoria's Secret fashion show. The annual event has drawn fewer viewers in recent years to watch its "Angels" strut down the catwalk. Wexner has said network television is no longer the "right fit" for the event, and some have suggested the company may opt to stream the event instead.

It's also looking to improve its Victoria's Secret's merchandise, differentiating more clearly between its cheaper youth-focused line Pink, and more adult Victoria's Secret, as well as moderate discounts across the board. In March, it reentered the swimsuit category after pulling out of the business in 2016. The move cost it $500 million in annual sales.

"Time will tell whether or not this strategy will be successful, but this will be the new leadership's opportunity to make the case that this will work when past attempts have not," wrote Jamie Merriman at Bernstein.

Its Bath & Body Works chain, meantime has been performing stronger, despite challenges facing mall-based retailers. But some analysts, including those at Jefferies, worry what challenges lie ahead for the brand as sales of highly profitable candles slow and margins fall.

"A declining Bath & Body Works scenario is not contemplated at all by the Street so beware," the firm's analysts recently cautioned investors.

The company has told investors to expect 2019 full-year adjusted expecting earnings per share in a range of $2.30 to $2.60.

Board in the spotlight

Another question that may, or may not, be answered in Columbus is what will happen to L Brands' board, including Wexner, after a year with unprecedented disruption. The 81-year-old retail tycoon has been on the board of the company he founded for more than five decades.

For much of that time, according to a letter delivered earlier this year by hedge fund by Barington Capital, he surrounded himself with a board that lacked the "independence necessary to perform its oversight functions on behalf of shareholders." The firm, in the March letter, pointed out the ties that many of its directors have to the Columbus, Ohio, community, while also calling into question its stock performance and calling for a split of the Victoria's Secret and Bath & Body Works brands.

"Lengthy director tenure and social and business ties with the CEO can compromise a director's independence and weaken board oversight and decision-making ... it is unclear that the Board as currently comprised has the independence to effectively oversee you as Chief Executive Officer," wrote Barington CEO James A. Mitarotonda.

L Brands board members include Wexner's wife, Abigail, 57. Robert H. Schottenstein, 66, and Stephen D. Steinour, 60, are directors for both L Brands and the Wexner Medical Center. Dr. E. Gordon Gee, 75, was president of Ohio State University, in addition to guiding a number of other universities.

In April, L Brands reached a truce with Barington that later added two independent directors to the company: Anne Sheehan, chair of the Securities and Exchange Commission's investor advisory committee, and Sarah Nash, CEO of Novagard Solutions.

But the agreement came before new revelations pertaining to Wexner's ties to Epstein surfaced. As a result, Wexner's 56-year tenure at the company's board and the board's ability to independently oversee him, is once again front of mind.

In July, L Brands disclosed it had hired outside counsel to review the company's relationship with Epstein. L Brands has said it cut ties with Epstein nearly 12 years ago and called his alleged crimes "abhorrent." According to later reports, Epstein had attempted to be part of the recruitment for Victoria's Secret lingerie models.

In a letter he wrote to to his charitable foundation in August, Wexner alleged that Epstein had misappropriated more than $46 million of his personal fortune. Wexner said he learned that money was missing only after he decided in 2007 to sever his relationship with Epstein, after Epstein was placed under investigation for alleged sexual misconduct with young girls in Florida. Wexner and his legal team have been providing documents to federal investigators that he believes demonstrate "all sorts of irregularities and theft."

Epstein died by suicide last month while in jail facing federal sex-trafficking charges.

Epstein's connections with a number of high profile executives have emerged in recent months. MIT Media Lab director Joichi Ito resigned on Saturday following a public outcry over his financial ties to Epstein. Ito also resigned from the boards of three organizations: the MacArthur Foundation, the John S. and James L. Knight Foundation and The New York Times.

Wexner, who did not speak during the company's most recent earnings call with investors, is expected to take the stage first on Tuesday.

—CNBC's Brian Schwartz contributed to this report.

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