Consumer

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Shareholder activism may indeed have reached a peak

The latest example of overcrowding is happening over at women's clothing retailer Chico's FAS, whose shares barely flinched on Tuesday after Barington Capital Group started a proxy fight with it. Wall Street's nonchalance comes even as "friendly" activist Blue Harbour Group, which began pushing for changes at Chico's back in September 2013, has pared its stake to 3.1 percent.

Barington, which began investing in Chico's in December 2013 and now has a stake of 1.4 percent, started talking with management this March. It wants the company to spend less on corporate, advertising and other selling, general and administrative expenses. Doing so, Barington claims, could more than double earnings per share in three years. Chico's efforts to cut $15 million annually from its marketing budget isn't enough, according to Barington, which believes more can be done without sacrificing sales growth. 

Lofty Goals
With certain expense reductions, activist shareholder Barington Capital believes Chico's EPS can more than double within three years to what would be a record
Source: Bloomberg
*2019 reflects Barington's expectations that EPS can more than double if Chico's cuts expenses as suggested

The activist has nominated two independent directors to the board and wants Chico's to execute better at its three businesses -- Chico's, Soma and White House Black Market -- and improve executive pay practices and corporate governance.

But it's not clear that Barington can propel returns at the $1.5 billion company. After all, Blue Harbour has already been prodding -- albeit behind closed doors, given its aim to be collaborative, rather than combative, with management. Apart from some share buybacks, those efforts -- which likely involved encouraging Chico's to consider a sale -- haven't borne fruit. Private equity firm Sycamore Partners abandoned its pursuit to buy the retailer not once but twice last year. (Another shot at a takeover isn't entirely out of the question. Chico's, which is relatively debt-free, has seen its enterprise value to Ebitda multiple tumble to 4.8 from roughly 9.1 over the past two years.)

Balancing Act
Chico's FAS anticipates opening 25 stores while closing 50 in fiscal 2016. Blue Harbour in 2013 called for expansion in store numbers.
Source: Bloomberg Intelligence
*Number of store locations includes international franchise locations

Chico's, under the leadership of a relatively new CEO, is nominating two independent directors of its own choosing. But frustrated shareholders who have suffered a 35 percent share slide over the past 12 months may be inclined to side with Barington's picks at next month's annual meeting. 

Rag Trade
The retailer's shares have had a rough ride despite the presence of an activist investor.
Source: Bloomberg

Even then, investors shouldn't be surprised if Chico's doesn't achieve Barington's outsize goals. The slimmed-down company, which recently sold non-core catalog retailer Boston Proper to private equity firm Brentwood Associates, faces an uphill battle to maintain margins while spending less on luring fickle shoppers in an increasingly competitive marketplace.  

Thursday's first-quarter earnings release should provide a sense of how these efforts are progressing. But any missteps now or later could leave investors, including Barington and Blue Harbour, holding the bag.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net